Notices. Notice
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/register/2007/11/09/07-5602A research copy — for the controlling text, always check the official state or federal source. Not legal advice.
BILLING CODE 6725-01-P FEDERAL RESERVE SYSTEM Proposed Agency Information Collection Activities; Comment Request AGENCY: Board of Governors of the Federal Reserve System. SUMMARY: *Background.* On June 15, 1984, the Office of Management and Budget
(OMB)delegated to the Board of Governors of the Federal Reserve System (Board) its approval authority under the Paperwork Reduction Act (PRA), as per 5 CFR 1320.16, to approve of and assign OMB control numbers to collection of information requests and requirements conducted or sponsored by the Board under conditions set forth in 5 CFR 1320 Appendix A.1. Board-approved collections of information are incorporated into the official OMB inventory of currently approved collections of information. Copies of the Paperwork Reduction Act Submission, supporting statements and approved collection of information instruments are placed into OMB's public docket files. The Federal Reserve may not conduct or sponsor, and the respondent is not required to respond to, an information collection that has been extended, revised, or implemented on or after October 1, 1995, unless it displays a currently valid OMB control number. Request for Comment on Information Collection Proposals The following information collections, which are being handled under this delegated authority, have received initial Board approval and are hereby published for comment. At the end of the comment period, the proposed information collections, along with an analysis of comments and recommendations received, will be submitted to the Board for final approval under OMB delegated authority. Comments are invited on the following: a. Whether the proposed collection of information is necessary for the proper performance of the Federal Reserve's functions; including whether the information has practical utility; b. The accuracy of the Federal Reserve's estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used; c. Ways to enhance the quality, utility, and clarity of the information to be collected; and d. Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology. DATES: Comments must be submitted on or before January 8, 2008. ADDRESSES: You may submit comments, identified by FR Y-9, FR Y-11, FR 2314, FR Y-7N, or FR 2886b by any of the following methods: • *Agency Web Site: http://www.federalreserve.gov.* Follow the instructions for submitting comments at *http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.* • *Federal eRulemaking Portal: http://www.regulations.gov.* Follow the instructions for submitting comments. • *E-mail: regs.comments@federalreserve.gov.* Include docket number in the subject line of the message. • *Fax:* 202/452-3819 or 202/452-3102. • *Mail:* Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. All public comments are available from the Board's Web site at *http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm* as submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room MP-500 of the Board's Martin Building (20th and C Streets, NW.,) between 9 a.m. and 5 p.m. on weekdays. Additionally, commenters should send a copy of their comments to the OMB Desk Officer by mail to the Office of Information and Regulatory Affairs, U.S. Office of Management and Budget, New Executive Office Building, Room 10235, 725 17th Street, NW., Washington, DC 20503 or by fax to 202-395-6974. FOR FURTHER INFORMATION CONTACT: A copy of the PRA OMB submission including the proposed reporting form and instructions, supporting statement, and other documentation will be placed into OMB's public docket files, once approved. These documents will also be made available on the Federal Reserve Board's public Web site at: *http://www.federalreserve.gov/boarddocs/reportforms/review.cfm* or may be requested from the agency clearance officer, whose name appears below. Michelle Shore, Federal Reserve Board Clearance Officer (202-452-3829), Division of Research and Statistics, Board of Governors of the Federal Reserve System, Washington, DC 20551. Telecommunications Device for the Deaf
(TDD)users may contact (202-263-4869), Board of Governors of the Federal Reserve System, Washington, DC 20551. Proposal To Approve Under OMB Delegated Authority the Extension for Three Years, With Revision, of the Following Reports: 1. *Report title:* Financial Statements for Bank Holding Companies. *Agency form number:* FR Y-9C, FR Y-9LP, and FR Y-9SP. *OMB control number:* 7100-0128. *Frequency:* Quarterly and semiannually. *Reporters:* Bank holding companies. *Annual reporting hours:* FR Y-9C: 160,056; FR Y-9LP: 25,662; FR Y-9SP: 47,135. *Estimated average hours per response:* FR Y-9C: 40.50; FR Y-9LP: 5.25; FR Y-9SP: 5.25. *Number of respondents:* FR Y-9C: 988; FR Y-9LP: 1,222; FR Y-9SP: 4,489. *General description of report:* This information collection is mandatory (12 U.S.C. 1844(c)). Confidential treatment is not routinely given to the data in these reports. However, confidential treatment for the reporting information, in whole or in part, can be requested in accordance with the instructions to the form, pursuant to sections (b)(4), (b)(6)and (b)(8) of the Freedom of Information Act (5 U.S.C. 522(b)(4), (b)(6) and (b)(8)). *Abstract:* The FR Y-9C, FR Y-9LP, and FR Y-9SP are standardized financial statements for the consolidated bank holding company
(BHC)and its parent. The FR Y-9 family of reports historically has been, and continues to be, the primary source of financial information on BHCs between on-site inspections. Financial information from these reports is used to detect emerging financial problems, to review performance and conduct pre-inspection analysis, to monitor and evaluate capital adequacy, to evaluate BHC mergers and acquisitions, and to analyze a BHC's overall financial condition to ensure safe and sound operations. The FR Y-9C consists of standardized financial statements similar to the Federal Financial Institutions Examination Council (FFIEC) Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031 & 041; OMB No. 7100-0036) filed by commercial banks. The FR Y-9C collects consolidated data from BHCs. The FR Y-9C is filed by top-tier BHCs with total consolidated assets of $500 million or more. (Under certain circumstances defined in the General Instructions, BHCs under $500 million may be required to file the FR Y-9C.) The FR Y-9LP includes standardized financial statements filed quarterly on a parent company only basis from each BHC that files the FR Y-9C. In addition, for tiered BHCs, a separate FR Y-9LP must be filed for each lower tier BHC. The FR Y-9SP is a parent company only financial statement filed by smaller BHCs. Respondents include BHCs with total consolidated assets of less than $500 million. This form is a simplified or abbreviated version of the more extensive parent company only financial statement for large BHCs (FR Y-9LP). This report is designed to obtain basic balance sheet and income information for the parent company, information on intangible assets, and information on intercompany transactions. *Current actions:* The Federal Reserve proposes to modify information collected on the FR Y-9C to: report interest and fee income on and the quarterly average for 1-4 family residential mortgages and income on and the quarterly average for all other real estate loans separately from income on and the quarterly average for all other loans; add new data items for restructured troubled mortgages and mortgage loans in process of foreclosure; expand the schedule for closed-end 1-4 family residential mortgage banking activity to include originations, purchases, and sales of open-end mortgages as well as closed-end and open-end mortgage loan repurchases and indemnifications during the quarter; modify the trading account definition and enhance information available on instruments accounted for under the fair value option on the loan schedule and the fair value measurements schedule; revise the schedule on trading assets and liabilities; clarify the instructions for reporting credit derivative data in the risk-based capital schedule and make a corresponding change to the schedule itself; modify the threshold for reporting significant items of other noninterest income and expense in the income statement; and revise the instructions for reporting fully insured brokered deposits in the deposit liabilities schedule to conform to the instructions for reporting time deposits in this schedule. The proposed changes would be effective as of March 31, 2008. The Federal Reserve proposes to modify the FR Y-9LP to: collect certain data from all institutions that choose, under generally accepted accounting principles (GAAP), to apply a fair value option to one or more financial instruments and one or more classes of servicing assets and liabilities; add two data items on cash flows related to business acquisitions and divestitures; and combine two cash flow statement items into a single net item. The proposed changes would be effective as of March 31, 2008. The Federal Reserve proposes to modify the FR Y-9SP to also collect certain data from all institutions that choose, under GAAP, to apply a fair value option to one or more financial instruments and one or more classes of servicing assets and liabilities. The proposed changes would be effective as of June 30, 2008. Proposed Revisions Related to Call Report Revisions The Federal Reserve proposes to make the following revisions to the FR Y-9C to parallel proposed changes to the Call Report. BHCs have commented that changes should be made to the FR Y-9C in a manner consistent with changes to the Call Report to reduce reporting burden. Revisions Related to 1-4 Family Residential Mortgage Loans Since year-end 2000, FR Y-9C respondent holdings of 1-4 family residential mortgage loans in domestic offices have increased nearly 118 percent to more than $2.1 trillion. Nearly all of FR Y-9C respondents hold such mortgages. 1-4 family residential mortgages continue to represent the single largest category of loans held by FR Y-9C respondents. As a percentage of total loans and leases, 1-4 family residential mortgages have grown from 26 percent at year-end 2000 to 35 percent at year-end 2006. Similarly, 1-4 family residential mortgages have increased from less than 15 percent of total assets to over 17 percent of total assets during this period. In addition, there has been a growing use of nontraditional residential mortgage products and an increasing number of BHC subsidiaries offering such products. The volume of 1-4 family residential mortgage loans extended to subprime borrowers has increased. At the same time, home prices have stagnated or declined in many areas of the country. The higher concentration of 1-4 family residential mortgages across the industry and the changing risk profile of the loans with which BHCs are associated in some capacity has led the Federal Reserve to evaluate the information they collect about such loans in the FR Y-9C. As a result, the Federal Reserve proposes several reporting changes that are intended to enhance its ability to monitor the nature and extent of BHCs' involvement with 1-4 family residential mortgage loans as originators, holders, sellers, and servicers of such loans. Interest and Fee Income and Quarterly Average At present, BHCs include the total amount of interest and fee income on their loans secured by real estate (in domestic offices) in the income statement (Schedule HI, data item 1.a.(1), Interest and fee income on loans: in domestic offices) and include the quarterly average for these loans (in domestic offices) in the quarterly averages schedule (Schedule HC-K, data item 3, Loans and leases). The Federal Reserve proposes to split these existing income statement and quarterly average items into separate data items for the interest and fee income on and the quarterly averages of, Loans secured by 1-4 family residential properties, All other loans secured by real estate, and All other loans in domestic offices. Restructured Mortgages BHCs currently report information on the amount of loans whose terms have been modified, because of deterioration in the financial condition of the borrower, to provide for a reduction of either interest or principal. When such restructured loans are past due thirty days or more or are in nonaccrual status in relation to their modified terms as of the report date, they are reported in Schedule HC-N, Memorandum item 1. In contrast, when such restructured loans are less than thirty days past due and are not otherwise in nonaccrual status, that is, when they are deemed to be in compliance with their modified terms as discussed in the FR Y-9C reporting instructions, BHCs report the amount of these loans in the loan schedule (Schedule HC-C, Memorandum item 1). However, the instructions advise respondents to exclude restructured loans secured by 1-4 family residential properties from these memoranda items. This exclusion was incorporated into the reporting instructions because the original disclosure requirements for troubled debt restructurings under GAAP provided that creditors need not disclose information on restructured real estate loans secured by 1-4 family residential properties. 1 However, this exemption from disclosure under GAAP has since been eliminated. 2 Accordingly, the Federal Reserve proposes to add a new memorandum item to Schedule HC-C, for Loans secured by 1-4 family residential properties, that have been restructured and are in compliance with their modified terms and a new memorandum item to Schedule HC-N, for restructured Loans secured by 1-4 family residential properties, that are past due 30 days or more or in nonaccrual status. 1 See Financial Accounting Standards Board Statement No. 15, *Accounting by Debtors and Creditors for Troubled Debt Restructurings* , footnote 25. 2 See Financial Accounting Standards Board Statement No. 114, *Accounting by Creditors for Impairment of a Loan* , paragraph 22(f). Mortgages in Foreclosure BHCs currently report data on the amount of loans secured by 1-4 family residential properties that are past due thirty days or more or are in nonaccrual status (Schedule HC-N, data item 1.c) with the amount of foreclosed 1-4 family residential properties held by the BHC included in real estate acquired in satisfaction of debts previously contracted (Schedule HC-M, data item 13.a). However, regardless of whether the BHC owns the loans or services the loans for others, BHCs do not report the volume of 1-4 family residential mortgage loans that are in process of foreclosure. These data are an important indicator of potential additions to the BHC's other real estate owned in the near term. The Federal Reserve proposes to add two new memoranda items for the amount of 1-4 family residential mortgage loans owned by the BHC and serviced by the BHC that are in foreclosure as of the quarter-end report date. Mortgage loans in foreclosure would be defined as those for which the legal process of foreclosure has been initiated, but for which the foreclosure process has not yet been resolved at quarter-end. 3 These memoranda items would be added to the loan schedule (Schedule HC-C) and the servicing, securitization, and asset sale activities schedule (Schedule HC-S), with the carrying amount (before any applicable allowance for loan and leases losses) reported in the former memorandum item and the principal amount reported in the latter memorandum item. Reporting mortgage loans as being in process of foreclosure will not exempt those loans owned by the BHC from being reported as past due or nonaccrual, as appropriate, in Schedule HC-N, and will not exempt those loans serviced by the BHC that are reported in Schedule HC-S, data item 1, from being reported as past due, as appropriate, in that schedule. 3 For BHCs with banks that participate in the Mortgage Bankers Association's
(MBA)National Delinquency Survey, the time at which mortgage loans would become reportable as being in process of foreclosure for FR Y-9C reporting purposes would be the same time at which mortgage loans become reportable as being in “foreclosure inventory” for MBA survey purposes (although the dollar amount of such loans would be reported in the FR Y-9C while the number of such loans are reported for MBA survey purposes). Open-End 1-4 Family Residential Mortgage Banking Activities BHCs with $1 billion or more in total assets and smaller BHCs that meet certain criteria currently provide data on originations, purchases, and sales of closed-end 1-4 family residential mortgage loans during the quarter arising from their mortgage banking activities in Schedule HC-P. These BHCs also report the amount of closed-end 1-4 family residential mortgage loans held for sale at quarter-end as well as the noninterest income for the quarter from the sale, securitization, and servicing of these mortgage loans. Data (other than for noninterest income) are provided separately for first lien and junior lien mortgages in Schedule HC-P. About 450 BHCs complete Schedule HC-P, 110 of which have total assets of less than $1 billion. However, this information does not provide a complete picture of BHCs' mortgage banking activities since it excludes open-end 1-4 family residential mortgages extended under lines of credit. From year-end 2001 to year-end 2006, FR Y-9C respondent holdings of 1-4 family residential mortgage loans extended under lines of credit nearly tripled to about $470 billion. Accordingly, the Federal Reserve proposes to expand the scope of Schedule HC-P to include separate data items for originations, purchases, and sales of open-end 1-4 family residential mortgages during the quarter; the amount of such mortgages held for sale at quarter-end; and noninterest income for the quarter from the sale, securitization, and servicing of open-end residential mortgages. When reporting the originations, purchases, sales, and mortgages held for sale, BHCs would report both the total commitment under the line of credit and the principal amount funded under the line. For BHCs with less than $1 billion in total assets, the criteria used to determine whether Schedule HC-P must be completed would be modified to include both closed-end and open-end 1-4 family residential mortgage bank activities. Mortgage Repurchases and Indemnifications As a result of their 1-4 family residential mortgage banking activities, BHCs may be obligated to repurchase mortgage loans that they have sold or otherwise indemnify the loan purchaser against loss because of borrower defaults, loan defects, other breaches of representations and warranties, or for other reasons, thereby exposing BHCs to additional risk. Such information is not currently captured in Schedule HC-P. Therefore, the Federal Reserve proposes to add four new data items to Schedule HC-P to collect data on mortgage loan repurchases and indemnifications during the quarter. For both closed-end first lien and closed-end junior lien 1-4 family residential mortgages, BHCs would report the principal amount of mortgages repurchased or indemnified. For open-end 1-4 family residential mortgages, BHCs would report both the total commitment under the line of credit and the principal amount funded under the line for mortgages repurchased or indemnified. Trading Assets and Liabilities and Other Assets and Liabilities Accounted for Under a Fair Value Option Reporting of Assets and Liabilities Under the Fair Value Option as Trading On February 15, 2007, the Financial Accounting Standards Board
(FASB)issued Statement No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities* (FAS 159), which is effective for fiscal years beginning after November 15, 2007. Earlier adoption of FAS 159 was permitted as of the beginning of an earlier fiscal year, provided the BHC
(i)also adopts all of the requirements of FASB Statement No. 157, *Fair Value Measurements* (FAS 157) at the early adoption date of FAS 159;
(ii)has not yet issued a financial statement or submitted FR Y-9C data for any period of that fiscal year; and
(iii)satisfies certain other conditions. Thus, a BHC with a calendar-year fiscal year may have voluntarily adopted FAS 159 as of January 1, 2007. Changes in the fair value of financial assets and liabilities to which the fair value option is applied are reported in current earnings as is currently the case for trading assets and liabilities. The Federal Reserve understands that some institutions would like to reclassify certain loans elected to be accounted for under the fair value option as trading assets. The FR Y-9C reporting instructions currently do not specifically allow loans to be reported as trading assets. Under FAS 159, all securities within the scope of FASB Statement No. 115, *Accounting for Certain Investments in Debt and Equity Securities* (FAS 115), that a BHC has elected to report at fair value under a fair value option should be classified as trading securities. Recognizing the provisions of FAS 159, the Federal Reserve proposes the following clarification to the reporting instructions, including the Glossary entry for Trading Account. BHCs may classify assets (other than securities within the scope of FAS 115 for which a fair value option is elected) and liabilities as trading if the BHC applies fair value accounting, with changes in fair value reported in current earnings, *and* manages these assets and liabilities as trading positions, subject to the controls and applicable regulatory guidance related to trading activities. For example, a BHC would generally not classify a loan to which it has applied the fair value option as a trading asset unless the BHC holds the loan, which it manages as a trading position, for one of the following purposes:
(1)For market making activities, including such activities as accumulating loans for sale or securitization,
(2)to benefit from actual or expected price movements, or
(3)to lock in arbitrage profits. Revision of Certain Fair Value Measurement and Fair Value Option Information Effective for the March 31, 2007, reporting date, the Federal Reserve started collecting information on certain assets and liabilities measured at fair value on Schedule HC-Q, Financial Assets and Liabilities Measured at Fair Value. Schedule HC-Q was intended to be consistent with the disclosure and other requirements contained in FAS 157 and FAS 159. Based on the Federal Reserve's review of initial industry practice and inquiries from BHCs, the Federal Reserve has determined that industry practice for preparing and reporting FAS 157 disclosures has evolved differently than the process for the information collected on Schedule HC-Q. This divergence has resulted in unnecessary burden and less transparency for the affected BHCs in two material respects. First, Schedule HC-Q does not allow BHCs to separately identify each of the three levels of fair value measurements prescribed by FAS 157. The Federal Reserve included Level 1 fair value measurements in the total fair value amount in column A of Schedule HC-Q as a means of minimizing reporting burden. However, the omission of a separate column on Schedule HC-Q for Level 1 fair value measurements has increased the time BHC management spends preparing and reviewing Schedule HC-Q because the fair value disclosures on Schedule HC-Q differ from those in the BHCs' other financial statements. Second, Schedule HC-Q does not allow BHCs to separately identify any amounts by which the gross fair values of assets and liabilities reported for Level 2 and 3 fair value measurements included in columns B and C have been offset (netted) in the determination of the total fair value reported on the balance sheet (Schedule HC), which is disclosed in column A of Schedule HC-Q. Based on a review of industry practice, these disclosures are commonly made in the BHCs' other financial statements. To reduce confusion related to the differences in industry practice and the FR Y-9C, the Federal Reserve proposes to add two columns to Schedule HC-Q to allow BHCs to report any netting adjustments and Level 1 fair value measurements separately in a manner consistent with industry practice. The new columns would be captioned column B, Amounts Netted in the Determination of Total Fair Value Reported on Schedule HC, and column C, Level 1 Fair Value Measurements. Existing column B, Level 2 Fair Value Measurements, and column C, Level 3 Fair Value Measurements, of Schedule HC-Q would be recaptioned as columns D and E, respectively. Column A would remain unchanged. The Federal Reserve has also given further consideration to the information that will be necessary to effectively assess the safety and soundness of BHCs that utilize the fair value option pursuant to FAS 159. Based on this assessment, the Federal Reserve proposes to amend certain other FR Y-9C schedules to improve the Federal Reserve's ability to make comparisons between entities that elect a fair value option and those that do not. The primary focus of these proposed changes is to enhance the information provided by BHCs that elect the fair value option for loans. The proposed changes are based on the principal objectives for disclosures and the required disclosures in FAS 159, which were intended to provide “information to enable users to understand the differences between fair value and contractual cash flows” and to provide information “that would have been disclosed if the fair value option had not been elected.” Specifically, the Federal Reserve proposes to add data items to Schedule HC-C, Loans and Leases, to collect data on the loans reported in this schedule that are measured at fair value under a fair value option:
(1)The fair value of such loans measured by major loan category,
(2)the unpaid principal balance of such loans by major loan category, and
(3)the aggregate amount of the difference between the fair value and the unpaid principal balance of such loans that is attributable
(a)to changes in the credit risk of the loan since its origination and
(b)to all other factors. The Federal Reserve seeks public comment on:
(1)The availability of information necessary to separately report the aggregate difference between fair value and the unpaid principal that is attributable to changes in credit risk since origination,
(2)the reliability of estimating the amount attributable to changes in credit risk since origination, and
(3)ways to minimize the burden of collecting information regarding the effect of changes in credit risk on the carrying amount of loans measured at fair value. Because Schedule HC-C provides data on loans held for investment and for sale, the Federal Reserve proposes to add the same data items to Schedule HC-D, Trading Assets and Liabilities, for loans measured at fair value under a fair value option that are designated as held for trading. The Federal Reserve also proposes to add a new data item to Schedule HC-D, Other trading liabilities, in recognition of a BHC's ability to elect to measure certain liabilities at fair value (for example, repurchase agreements) in accordance with FAS 159 and designate them as held for trading. The Federal Reserve proposes to add two data items to Schedule HC-N, Past Due and Nonaccrual Loans, Leases, and Other Assets, to collect data on the fair value and unpaid principal balance of loans measured at fair value under a fair value option that are past due or in nonaccrual status. The data items would follow the existing three column breakdown on Schedule HC-N that BHCs utilize to report all other past due and nonaccrual loans. Since trading assets are not currently reported on Schedule HC-N, the Federal Reserve proposes to add similar data items to Schedule HC-D to collect the total fair value and unpaid principal balance of loans ninety days or more past due that are classified as trading based on the loan's contractual maturity. Finally, the Federal Reserve proposes to add memoranda items to Schedule HI, Income Statement, to collect information on:
(1)Net gains (losses) recognized in earnings on assets that are reported at fair value under a fair value option,
(2)estimated net gains (losses) on loans attributable to changes in instrument-specific credit risk,
(3)net gains (losses) recognized in earnings on liabilities that are reported at fair value under a fair value option, and
(4)estimated net gains (losses) on liabilities attributable to changes in the instrument-specific credit risk. The Federal Reserve seeks public comment on the reliability of estimating the amount of net gains (losses) on loans or liabilities attributable to changes in the instrument-specific credit risk. Other Revisions to Information Collected on Trading Assets and Liabilities Since 2000, the total trading assets reported by FR Y-9C respondents has increased approximately 156 percent to over $1.4 trillion or nearly 11 percent of total industry assets as of March 31, 2007. In terms of concentrations, approximately 41 percent of total trading assets now are either reported in the category of Trading assets held in foreign offices (approximately 27 percent of total trading assets) or Other trading assets in domestic offices (approximately 14 percent of total trading assets). Schedule HC-D, Trading Assets and Liabilities, currently does not provide any specific detail on the trading assets held in foreign offices or other trading assets in domestic offices. This lack of detail limits the Federal Reserve's ability to assess BHC exposures to market, liquidity, credit, operational, and other risks posed by these assets. To appropriately assess the safety and soundness of BHCs with these exposures and BHCs with significant concentrations in trading assets, the Federal Reserve proposes three revisions to Schedule HC-D. First, the Federal Reserve proposes to eliminate the single data item for trading assets in foreign offices and revise the schedule to include separate columns for the consolidated BHC and for domestic offices. This will provide detail on the assets in foreign offices in a manner consistent with disclosures about trading assets throughout the BHC. Second, the Federal Reserve proposes to change the reporting threshold for Schedule HC-D. At present, a BHC must complete Schedule HC-D each quarter during a calendar year if the BHC reported a quarterly average for trading assets of $2 million or more in Schedule HC-K, data item 4.a, for any quarter of the preceding calendar year. As proposed, Schedule HC-D would be completed in any quarter when the quarterly average for trading assets was $2 million or more in Schedule HC-K, data item 4.a, in any of the four preceding quarters. This change will enable the Federal Reserve to more quickly and readily monitor the composition and risk exposures of the trading accounts of BHCs that become more significantly involved in trading activities. During 2006, eighty-nine BHCs reported average trading assets of $2 million or more in any quarter of the year. Third, the Federal Reserve proposes to require BHCs with average trading assets of $1 billion or more in any of the four preceding quarters to provide additional detail on trading assets and liabilities included in the currently collected trading asset and liability categories. These BHCs would provide additional breakouts for asset-backed securities by major category, collateralized debt obligations (both synthetic and non-synthetic), retained interests in securitizations, equity securities (both with and without readily determinable fair values), and loans held pending securitization. In addition, these BHCs would be required to provide a description of and the fair value of any type of trading asset or liability in the Other trading assets and Other trading liabilities categories that is greater than $25,000 and exceeds 25 percent of the amount reported in that trading category. Reporting Credit Derivative Data for Risk-Based Capital Purposes For credit derivative contracts that are covered by the Federal Reserve's risk-based capital standards, the FR Y-9C reporting instructions require BHCs to report these credit derivatives in data item 52, All other off-balance sheet liabilities, of Schedule HC-R, Regulatory Capital, unless the credit derivatives represent recourse arrangements or direct credit substitutes and are reported in one of the preceding data items in the Derivatives and Off-Balance Sheet Items section of the schedule. This reporting approach was developed to enable BHCs that sold credit protection and held the credit derivative to apply a 100-percent risk weight to the notional amount consistent with the risk-based capital treatment of standby letters of credit and guarantees. At present, Schedule HC-R, data item 54, Derivative contracts, specifically excludes credit derivatives and does not include a 100-percent risk weight column because the maximum risk weight on the counterparty credit risk charge for other types of derivatives is 50 percent. However, this reporting approach does not consider that some credit derivative positions are subject to a counterparty credit risk charge, which is calculated for other derivative positions in data item 54, even if the credit derivatives are held by a BHC that is subject to the market risk capital rules. The Federal Reserve also understands that credit derivatives often are included in bilateral netting arrangements. When derivatives are subject to such an arrangement, the instructions to Schedule HC-R, data item 54, permit a BHC to report a net amount representing its exposure to a counterparty for all derivative transactions under the bilateral netting arrangement with that counterparty. However, by instructing a BHC not to report its counterparty credit risk exposure for credit derivatives in Schedule HC-R, data item 54, the Federal Reserve is, in effect, requiring the BHC to separate its exposures resulting from credit derivatives from its net exposure to a counterparty. As a consequence, the BHC is unable to recognize the netting benefit in its risk-based capital calculation. The Federal Reserve proposes to modify the reporting instructions for Schedule HC-R to allow the reporting of the credit equivalent amount of credit derivatives subject to the counterparty credit risk charge in data item 54 of the schedule. In addition, the Federal Reserve proposes to extend the existing 100 percent risk weight column in Schedule RC-R to data item 54. Revision of Reporting Threshold for Other Noninterest Income and Other Noninterest Expense In 2001, the Federal Reserve changed the threshold for reporting detail on the components of Other noninterest income, included in Schedule HI, data item 5.l, and Other noninterest expense, reported in Schedule HI, data item 7.d, to require BHCs to separately disclose on Schedule HI, Memoranda items 6 and 7, the description and amount of any component included in other noninterest income and other noninterest expense that exceeded 1 percent of the sum of interest income and noninterest income. Since that time, the Federal Reserve has monitored BHC disclosures of the types of noninterest income and noninterest expenses in excess of this threshold to assess the safety and soundness considerations associated with the changing sources of these income and expense streams. Based on this review, the Federal Reserve has determined that the current threshold does not provide sufficient information on the sources of BHC noninterest income and noninterest expenses to adequately address their safety and soundness concerns. As a result, the Federal Reserve proposes to change the threshold for reporting detail information on the components of other noninterest income and other noninterest expense. Prior to 2001, BHCs were required to separately disclose the description and amount of any data item included in other noninterest income that exceeded 10 percent of other noninterest income and any data item included in other noninterest expense that exceeded 10 percent of other noninterest expense. The Federal Reserve has determined that thresholds based on a percentage of other noninterest income and other noninterest expense are more relevant criteria for determining when a BHC should provide more detail on the components of other noninterest income or other noninterest expense, respectively. The Federal Reserve proposes to change the threshold to require BHCs to separately disclose the description and amount of any data item included in other noninterest income that exceeds 3 percent of other noninterest income and any data item included in other noninterest expense that exceeds 3 percent of other noninterest expense. This percentage is intended to initially result in a level of disclosure detail that is comparable to the current 1 percent of interest income plus noninterest income threshold. It is also expected to provide more relevant disclosures than the current threshold as the amounts reported in noninterest income and noninterest expense change over time. In addition, based on a review of recent BHC disclosures of components of other noninterest income and other noninterest expense reported in Schedule HI, Memoranda items 6 and 7, the Federal Reserve proposes to add one new preprinted caption for other noninterest income and four new preprinted captions for other noninterest expense to help BHCs comply with the disclosure requirements. As with the existing preprinted captions for other noninterest income and other noninterest expense, BHCs are only required to use these descriptions and provide the amounts for these components when the amounts included in other noninterest income or other noninterest expense exceed the reporting threshold. The new preprinted other noninterest income caption is bank card and credit card interchange fees. The new preprinted noninterest expense captions are accounting and auditing expenses, consulting and advisory expenses, automated teller machine
(ATM)and interchange expenses, and telecommunications expenses. Reporting Brokered Time Deposits Participated Out by the Broker The Federal Reserve revised the instructions for Schedule HC-E, data items 1.d, Time deposits of less than $100,000, 1.e, Total time deposits of $100,000 or more, held in domestic offices of commercial bank subsidiaries, 2.d, Time deposits of less than $100,000 and 2.e., Time deposits of $100,000 or more, held in domestic offices of subsidiary depository institutions other than commercial banks, in March 2007, so that brokered time deposits issued in denominations of $100,000 or more that are participated out by the broker in shares of less than $100,000 would be reported in data items 1.d and 2.d rather than in data items 1.e and 2.e. However, the conforming instructional revision to Schedule HC-E, Memoranda items 1, 2, and 3, was not made to the FR Y-9C for collecting information on maturity breakdowns of brokered deposits and time deposits, which means that these participated brokered time deposits continue to be reported as brokered deposits of greater than $100,000 rather than brokered deposits of less than $100,000. Consistent reporting of these brokered time deposits across these Schedule HC-E memoranda items is needed for purposes of measuring a BHC's non-core liabilities. Therefore, the Federal Reserve proposes to revise Schedule HC-E, Memoranda items 1, 2, and 3, so that brokered time deposits issued in denominations of $100,000 or more that are participated out by the broker in shares of less than $100,000 are reported in Memoranda items 1 and 2 and not reported in Memorandum item 3. FR Y-9LP The Federal Reserve proposes to make the following revisions to the FR Y-9LP effective as of March 31, 2008. These proposed revisions are not related to the revisions proposed to the Call Report. Reporting on Fair Value Measurements and the Use of the Fair Value Option On September 15, 2006, FASB issued FAS 157, which is effective for BHCs and other entities for fiscal years beginning after November 15, 2007. The fair value measurements standard provides guidance on how to measure fair value and describes the type of inputs used to measure fair value based on a three-level hierarchy for all assets and liabilities that are re-measured at fair value on a recurring basis. 4 4 The FASB's three-level fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting BHC has the ability to access at the measurement date (e.g., the FR Y-9LP or FR Y-9SP reporting date). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As previously mentioned, on February 15, 2007, FASB issued FAS 159, which is effective for fiscal years beginning after November 15, 2007. The FASB's Fair Value Option standard allows BHCs and other entities to report certain financial assets and liabilities at fair value with the changes in fair value included in earnings. FAS 159 can be applied on a contract by contract basis. Currently there is no means to determine to what extent the reporting entity is applying this standard and the basis used to value assets and liabilities. Therefore, the Federal Reserve proposes to add two new memoranda items to Schedule PC, Parent Company Only Balance Sheet, and one new memorandum item to Schedule PI, Income Statement, that would be completed by BHCs that have adopted FAS 157 and have elected to account for financial instruments or servicing assets and liabilities on the books of the parent BHC at fair value under a fair value option. The Federal Reserve proposes to add to Schedule PC, Memorandum item 1, Financial assets and liabilities measured at fair value, collecting data in Memoranda items 1.a, Total assets and 1.b, Total liabilities. The Federal Reserve proposes to add to Schedule PI, Memorandum item 5, Net change in fair values of financial instruments accounted for under a fair value option. Revisions Related to the Reporting of Cash Flows The Federal Reserve proposes to add two new data items to Schedule PI-A, Cash Flow Statement, Part II, Cash Flows from Investing Activities for Outlays for business acquisitions and Proceeds from business divestitures. Collection of this information is important for the analysis of the consolidation of the banking industry. Specifically, this information would provide the Federal Reserve a better understanding not only of the effects of mergers of whole entities, but also of acquisitions or disposals of major business operations as part of BHCs' corporate strategies. In addition, BHCs typically provide similar information in public financial statements filed with the Securities and Exchange Commission (SEC). However, such information provided by BHCs in their SEC filings is not standardized across filers, is not necessarily provided by all BHCs involved in acquisitions and divestitures, and is not available from non-public BHCs. Based on industry comment on ways to reduce reporting burden, the Federal Reserve also proposes to combine the reporting of two data items on Schedule PI-A, Part III, Cash Flows from Financing Activities. Data item 1, Proceeds from purchased funds and other short-term borrowings, and data item 2, Repayments of purchased funds and other short-term borrowings, would be combined into a single data item for Net change in purchased funds and other short-term borrowings. The Federal Reserve has determined that collection of these data items on a gross basis is no longer needed. FR Y-9SP The Federal Reserve proposes to make the following revisions to the FR Y-9SP effective as of June 30, 2008. These proposed revisions are not related to the revisions proposed to the Call Report. Reporting on Fair Value Measurements and the Use of the Fair Value Option The Federal Reserve proposes to add two new memoranda items to Schedule SC, Balance Sheet, and one new memorandum item to Schedule SI, Income Statement, that would be completed by BHCs that have adopted FAS 157 and have elected to account for financial instruments or servicing assets and liabilities on the books of the parent BHC at fair value under a fair value option. The Federal Reserve proposes to add to Schedule SC, Memorandum item 3, Financial assets and liabilities measured at fair value, collecting data in Memoranda items 3.a, Total assets, and 3.b, Total liabilities. The Federal Reserve proposes to add to Schedule SI, Memorandum item 4, Net change in fair values of financial instruments accounted for under a fair value option. 2. *Report title:* Financial Statements for Nonbank Subsidiaries of U.S. Bank Holding Companies. *Agency form number:* FR Y-11 and FR Y-11S *OMB control number:* 7100-0244 *Frequency:* Quarterly and annually. *Reporters:* Bank holding companies. *Annual reporting hours:* FR Y-11 (quarterly): 10,752; FR Y-11 (annual): 1,402; FR Y-11S (annual): 471. *Estimated average hours per response:* FR Y-11 (quarterly): 6.40; FR Y-11 (annual): 6.40; FR Y-11S (annual): 1.0. *Number of respondents:* FR Y-11 (quarterly): 420; FR Y-11 (annual): 219; FR Y-11S (annual): 471. *General description of report:* This information collection is mandatory (12 U.S.C. 1844(c)). Confidential treatment is not routinely given to the data in these reports. However, confidential treatment for the reporting information, in whole or in part, can be requested in accordance with the instructions to the form, pursuant to sections (b)(4), (b)(6)and (b)(8) of the Freedom of Information Act [5 U.S.C. 522(b)(4), (b)(6) and (b)(8)]. *Abstract:* The FR Y-11 reports collect financial information for individual non-functionally regulated U.S. nonbank subsidiaries of domestic bank holding companies (BHCs). BHCs file the FR Y-11 on a quarterly or annual basis according to filing criteria or file the FR Y-11S annually. The FR Y-11 data are used with other BHC data to assess the condition of BHCs that are heavily engaged in nonbanking activities and to monitor the volume, nature, and condition of their nonbanking operations. *Current Actions:* The Federal Reserve proposes to eliminate reporting by subsidiaries that were created for the purposes of issuing trust preferred securities (trust preferred securities subsidiaries) to substantially reduce burden on the industry and, in this regard, make the report consistent with the proposed revision to the other nonbank subsidiary reports, the Financial and Abbreviated Financial Statements of Foreign Subsidiaries of U.S. Banking Organizations (FR 2314/S; OMB No. 7100-0073) and the Financial and Abbreviated Financial Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations (FR Y-7N/NS; OMB No. 7100-0125). The Federal Reserve also proposes to collect:
(1)Certain data on the FR Y-11 from all institutions that choose, under generally accepted accounting principles, to apply a fair value option to one or more financial instruments and one or more classes of servicing assets and liabilities and
(2)a new data item on the income statement to collect fees and commissions from annuity sales. On the FR Y-11S, the Federal Reserve proposes to add a question to determine whether the subsidiary has adopted a fair value option. The Federal Reserve also requests latitude to modify proposed revisions to the FR Y-11/S to be consistent with any proposed revisions and instructional changes to the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C; OMB No. 7100-0128) for implementation in 2008. Lastly, the Federal Reserve proposes to add clarifying language to the instructions for the reporting of trading revenue and noninterest income from related organizations. Revisions to the Reporting Panel The Federal Reserve proposes eliminating reporting by BHCs for their trust preferred securities subsidiaries to reduce burden on the industry. As of December 2006, BHCs filed approximately 2,100 nonbank subsidiary reports for their trust preferred securities subsidiaries quarterly and annually with the Federal Reserve, 2,046 of which were FR 11/S filers. 5 Of the FR Y-11/S submissions, over half file the detailed FR Y-11 on an annual or quarterly basis. If reporting for trust preferred securities subsidiaries is eliminated, the number of subsidiaries for which BHCs report the FR Y-11/S quarterly and annually would be reduced by approximately 65 percent, from 3,156 to 1,110 subsidiaries. The remaining panel would still represent more than 96 percent of total nonbank assets currently reported on the FR Y-11/S. 5 As of December 2006, foreign banking organizations filed fifty-four FR Y-7N/NS reports for their trust preferred securities subsidiaries. No parent organizations filed the FR 2314 for their trust preferred securities subsidiaries. Eliminating reporting for trust preferred securities subsidiaries will not compromise essential information. The essential information for analysts can be obtained from the parent company-only financial statements. Information reported for trust preferred securities subsidiaries in these nonbank reports pertains primarily to the establishment of the trust and the issuance of trust preferred securities. As expected, the largest asset reported on the quarterly reports was the “balances due from the parent,” which represented the loan from the nonbank to the parent BHC in the trust preferred securities arrangement. Minimal information other than information related to the trust preferred securities is provided on the nonbank reports filed for trust preferred securities subsidiaries. If warranted for supervisory purposes, the Federal Reserve could request individual financial statements and other information from BHCs for their trust preferred securities subsidiaries. Reporting on Fair Value Measurements and the Use of the Fair Value Option On September 15, 2006, the Financial Accounting Standards Board
(FASB)issued Statement No. 157, *Fair Value Measurements* (FAS 157), which is effective for BHCs and other entities for fiscal years beginning after November 15, 2007. The fair value measurements standard provides guidance on how to measure fair value and describes the type of inputs used to measure fair value based on a three-level hierarchy for all assets and liabilities that are re-measured at fair value on a recurring basis. 6 6 The FASB's three-level fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting subsidiary has the ability to access at the measurement date (e.g., the FR Y-11 reporting date). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The FASB issued Statement No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities* (FAS 159), on February 15, 2007, which is effective for fiscal years beginning after November 15, 2007. This standard allows BHCs and other entities to report certain financial assets and liabilities at fair value with the changes in fair value included in earnings. FAS 159 can be applied on a contract by contract basis. Currently there is no means to determine to what extent the reporting entity is applying this standard and the basis used to value assets and liabilities. Therefore, the Federal Reserve proposes to add two new memoranda items to Schedule BS, Balance Sheet, and one new memorandum item to Schedule IS, Income Statement, that would be completed by BHCs that have elected to account for financial instruments or servicing assets and liabilities on the books of the subsidiary at fair value under a fair value option. The Federal Reserve proposes to add to Schedule BS, Memoranda item 1, Financial assets and liabilities measured at fair value under a fair value option, collecting data in Memoranda items 1.a., Total assets and 1.b, Total liabilities. The Federal Reserve proposes to add to Schedule IS, Income Statement, Memoranda item 2, Net change in fair values of financial instruments accounted for under a fair value option. The Federal Reserve also proposes to add to the FR Y-11S the question, “Has the nonbank subsidiary elected to account for certain assets and liabilities under a fair value option with changes in fair value recognized in earnings?” to determine whether the subsidiary has adopted a fair value option. Schedule IS-Income Statement The Federal Reserve proposes to add a new data item 5.a.(9), Fees and commissions from annuity sales. Currently, subsidiaries report income from sales of annuities in data item 5.a.(4), Investment banking, advisory, brokerage, and underwriting fees and commissions. Since fixed annuities are considered insurance products and variable annuities may be considered both insurance and securities products, a separate data item is deemed warranted to specifically capture revenues from annuities. Moreover, the above data item commingles income from the sale of annuities with noninterest income from a variety of activities and a separate item will assist the Federal Reserve in more clearly distinguishing the subsidiaries' sources of noninterest income. 3. *Report title:* Financial Statements of Foreign Subsidiaries of U.S. Banking Organizations. *Agency form number:* FR 2314 and FR 2314S. *OMB control number:* 7100-0073. *Frequency:* Quarterly and annually. *Reporters:* Foreign subsidiaries of U.S. state member banks, bank holding companies, and Edge or agreement corporations. *Annual reporting hours:* FR 2314 (quarterly): 5,581; FR 2314 (annual): 1,075; FR 2314S (annual): 272. *Estimated average hours per response:* FR 2314 (quarterly): 6.40; FR 2314 (annual): 6.40; FR 2314S (annual): 1.0. *Number of respondents:* FR 2314 (quarterly): 218; FR 2314 (annual): 168; FR 2314S (annual): 272. *General description of report:* This information collection is mandatory (12 U.S.C. 324, 602, 625, and 1844(c)). Confidential treatment is not routinely given to the data in these reports. However, confidential treatment for the reporting information, in whole or in part, can be requested in accordance with the instructions to the form, pursuant to sections (b)(4), (b)(6) and (b)(8) of the Freedom of Information Act [5 U.S.C. 522(b)(4) (b)(6) and (b)(8)]. *Abstract:* The FR 2314 reports collect financial information for non-functionally regulated direct or indirect foreign subsidiaries of U.S. state member banks (SMBs), Edge and agreement corporations, and BHCs. Parent organizations (SMBs, Edge and agreement corporations, or BHCs) file the FR 2314 on a quarterly or annual basis according to filing criteria or file the FR 2314S annually. The FR 2314 data are used to identify current and potential problems at the foreign subsidiaries of U.S. parent companies, to monitor the activities of U.S. banking organizations in specific countries, and to develop a better understanding of activities within the industry, in general, and of individual institutions, in particular. *Current actions:* The Federal Reserve proposes to eliminate reporting by subsidiaries that were created for the purposes of issuing trust preferred securities (trust preferred securities subsidiaries) to substantially reduce burden on the industry and, in this regard, make the report consistent with the proposed revision to the other nonbank subsidiary reports, the Financial and Abbreviated Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11/S; OMB No. 7100-0244) and the Financial and Abbreviated Financial Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations (FR Y-7N/NS; OMB No. 7100-0125). The Federal Reserve also proposes to collect:
(1)Certain data on the FR 2314 from all institutions that choose, under generally accepted accounting principles, to apply a fair value option to one or more financial instruments and one or more classes of servicing assets and liabilities and
(2)a new data item on the income statement to collect fees and commissions from annuity sales. On the FR 2314S, the Federal Reserve proposes to add a question to determine whether the subsidiary has adopted a fair value option. The Federal Reserve also requests latitude to modify proposed revisions to the FR 2314/S to be consistent with any proposed revisions and instructional changes to the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C; OMB No. 7100-0128) for implementation in 2008. Lastly, the Federal Reserve proposes to add clarifying language to the instructions for the reporting of trading revenue and noninterest income from related organizations. Revisions to the Reporting Panel The Federal Reserve proposes eliminating reporting by BHCs for their trust preferred securities subsidiaries to reduce burden on the industry. As of December 2006, BHCs filed approximately 2,100 nonbank subsidiary reports for their trust preferred securities subsidiaries quarterly and annually with the Federal Reserve. 7 Eliminating reporting for trust preferred securities subsidiaries will not compromise essential information. The essential information for analysts can be obtained from the parent company-only financial statements. Information reported for trust preferred securities subsidiaries in these nonbank reports pertains primarily to the establishment of the trust and the issuance of trust preferred securities. As expected, the largest asset reported on the quarterly reports was the “balances due from the parent,” which represented the loan from the nonbank to the parent BHC in the trust preferred securities arrangement. 7 No parent organizations filed the FR 2314 for their trust preferred securities subsidiaries. Minimal information other than information related to the trust preferred securities is provided on the nonbank reports filed for trust preferred securities subsidiaries. If warranted for supervisory purposes, the Federal Reserve could request individual financial statements and other information from BHCs for their trust preferred securities subsidiaries. Reporting on Fair Value Measurements and the Use of the Fair Value Option On September 15, 2006, the Financial Accounting Standards Board
(FASB)issued Statement No. 157, *Fair Value Measurements* (FAS 157), which is effective for BHCs and other entities for fiscal years beginning after November 15, 2007. The fair value measurements standard provides guidance on how to measure fair value and describes the type of inputs used to measure fair value based on a three-level hierarchy for all assets and liabilities that are re-measured at fair value on a recurring basis. 8 8 The FASB's three-level fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting subsidiary has the ability to access at the measurement date (e.g., the FR 2314 reporting date). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The FASB issued Statement No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities* (FAS 159), on February 15, 2007, which is effective for fiscal years beginning after November 15, 2007. This standard allows BHCs and other entities to report certain financial assets and liabilities at fair value with the changes in fair value included in earnings. FAS 159 can be applied on a contract by contract basis. Currently there is no means to determine to what extent the reporting entity is applying this standard and the basis used to value assets and liabilities. Therefore, the Federal Reserve proposes to add two new memoranda items to Schedule BS, Balance Sheet, and one new memorandum item to Schedule IS, Income Statement, that would be completed by BHCs that have elected to account for financial instruments or servicing assets and liabilities on the books of the subsidiary at fair value under a fair value option. The Federal Reserve proposes to add to Schedule BS, Memoranda item 1, Financial assets and liabilities measured at fair value under a fair value option, collecting data in Memoranda items 1.a., Total assets and 1.b, Total liabilities. The Federal Reserve proposes to add to Schedule IS, Income Statement, Memoranda item 2, Net change in fair values of financial instruments accounted for under a fair value option. The Federal Reserve also proposes to add to the FR 2314S the question, “Has the nonbank subsidiary elected to account for certain assets and liabilities under a fair value option with changes in fair value recognized in earnings?” to determine whether the subsidiary has adopted a fair value option. Schedule IS-Income Statement The Federal Reserve proposes to add a new data item 5.a.(9), Fees and commissions from annuity sales. Currently, subsidiaries report income from sales of annuities in data item 5.a.(4), Investment banking, advisory, brokerage, and underwriting fees and commissions. Since fixed annuities are considered insurance products and variable annuities may be considered both insurance and securities products, a separate data item is deemed warranted to specifically capture revenues from annuities. Moreover, the above data item commingles income from the sale of annuities with noninterest income from a variety of activities and a separate item would assist the Federal Reserve in more clearly distinguishing the subsidiaries' sources of noninterest income. 4. *Report title:* Financial Reports of Foreign Banking Organizations. *Agency form number:* FR Y-7N and FR Y-7NS. *OMB control number:* 7100-0125. *Frequency:* Quarterly and annually. *Reporters:* Foreign banking organizations (FBOs). *Annual reporting hours:* FR Y-7N (quarterly): 4,889; FR Y-7N (annual): 1,065; FR Y-7NS: 229. *Estimated average hours per response:* FR Y-7N (quarterly): 6.3; FR Y-7N (annual): 6.3; FR Y-7NS. *Number of respondents:* FR Y-7N (quarterly): 194; FR Y-7N (annual): 169; FR Y-7NS: 229. *General description of report:* This information collection is mandatory (12 U.S.C. 1844(c), 3106(c), and 3108). Confidential treatment is not routinely given to the data in these reports. However, confidential treatment for information, in whole or in part, on any of the reporting forms can be requested in accordance with the instructions to the form, pursuant to sections (b)(4) and (b)(6) of the Freedom of Information Act [5 U.S.C. 522(b)(4) and (b)(6)]. *Abstract:* The FR Y-7N and FR Y-7NS collect financial information for non-functionally regulated U.S. nonbank subsidiaries held by FBOs other than through a U.S. bank holding company (BHC), U.S. financial holding company
(FHC)or U.S. bank. FBOs file the FR Y-7N on a quarterly or annual basis or the FR Y-7NS annually based on size thresholds. *Current actions:* The Federal Reserve proposes to eliminate reporting by subsidiaries that were created for the purposes of issuing trust preferred securities (trust preferred securities subsidiaries) on the FR Y-7N/NS to substantially reduce burden on the industry and, in this regard, make the report consistent with the proposed revision to the other nonbank subsidiary reports, the Financial and Abbreviated Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11/S; OMB No. 7100-0244) and the Financial and Abbreviated Financial Statements of Foreign Subsidiaries of U.S. Banking Organizations (FR(2314/S; OMB No. 7100-0073). On the FR Y-7N, the Federal Reserve also proposes to collect:
(1)Certain data from all institutions that choose, under generally accounting principles, to apply a fair value option to one or more financial instruments and one or more classes of servicing assets and liabilities and
(2)a new data item on the income statement to collect fees and commissions from annuity sales. On the FR Y-7NS, the Federal Reserve proposes to add a question to determine whether the nonbank subsidiary has adopted a fair value option. The Federal Reserve also proposes the following changes to make the FR Y-7N consistent with changes made previously to other nonbank subsidiary reports:
(1)Add one new equity capital component on the balance sheet for reporting partnership interests and
(2)add a new section, Notes to the Financial Statements. The Federal Reserve also proposes to add clarifying language to the instructions for the reporting of trading revenue and noninterest income from related organizations. Lastly, the Federal Reserve requests latitude to modify proposed revisions to the FR Y-7N/NS to be consistent with any proposed revisions and instructional changes to the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C; OMB No. 7100-0128) for implementation in 2008. Proposed Revisions Related to Other Nonbank Subsidiary Reports The Federal Reserve proposes to make the following revisions to the FR Y-7N/NS to parallel proposed changes to other nonbank subsidiary reports. Revisions to the Reporting Panel The Federal Reserve proposes eliminating reporting by FBOs for their trust preferred securities subsidiaries on the FR Y-7N/NS to be consistent with proposed reporting panel revisions for other nonbank reports. Eliminating reporting by FBOs for their trust preferred securities subsidiaries on the FR Y-7N/NS would reduce burden on the industry. As of December 2006, BHCs and FBOs filed approximately 2,100 nonbank subsidiary reports for their trust preferred securities subsidiaries quarterly and annually with the Federal Reserve, fifty-two of which were FR Y-7N/NS filers. 9 If reporting for trust preferred securities subsidiaries is eliminated, the number of subsidiaries for which FBOs report the FR Y-7N/NS quarterly and annually would be reduced by approximately 8 percent, from 644 to 592 subsidiaries. The remaining panel would still represent more than 96 percent of total nonbank assets currently reported on the FR Y-7N/NS. 9 FBOs file the detailed FR Y-7N for thirty-seven of their subsidiaries on a quarterly or annual basis. Eliminating reporting for trust preferred securities subsidiaries will not compromise essential information. Information reported for trust preferred securities subsidiaries in this nonbank report pertains primarily to the establishment of the trust and the issuance of trust preferred securities. As expected, the largest asset reported on the quarterly reports was the “balances due from the parent,” which represented the loan from the nonbank to the parent organization in the trust preferred securities arrangement. Minimal information other than information related to the trust preferred securities is provided on the nonbank reports filed for trust preferred securities subsidiaries. If warranted for supervisory purposes, the Federal Reserve could request individual financial statements and other information from FBOs for their trust preferred securities subsidiaries. Reporting on Fair Value Measurements and the Use of the Fair Value Option On September 15, 2006, the Financial Accounting Standards Board
(FASB)issued Statement No. 157, *Fair Value Measurements* (FAS 157), which is effective for BHCs and other entities for fiscal years beginning after November 15, 2007. The fair value measurements standard provides guidance on how to measure fair value and describes the type of inputs used to measure fair value based on a three-level hierarchy for all assets and liabilities that are re-measured at fair value on a recurring basis. 10 10 The FASB's three-level fair value hierachy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting nonbank subsidiary has the ability to access at the measurement date (e.g., the FR 7-N reporting date). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly, or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The FASB issued Statement No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities* (FAS 159), on February 15, 2007, which is effective for fiscal years beginning after November 15, 2007. This standard allows bank holding companies and other entities to report certain financial assets and liabilities at fair value with the changes in fair value included in earnings. FAS 159 can be applied on a contract by contract basis. Currently there is no means to determine to what extent the reporting entity is applying this standard and the basis used to value assets and liabilities. Therefore, the Federal Reserve proposes to add two new memoranda items to Schedule BS, Balance Sheet, and one new memorandum item to Schedule IS, Income Statement, that would be completed by FBOs that have elected to account for financial instruments or servicing assets and liabilities on the books of the nonbank subsidiary at fair value under a fair value option. The Federal Reserve proposes to add to Schedule BS, Memoranda item 1, Financial assets and liabilities measured at fair value under a fair value option, collecting data in Memoranda items 1.a., Total assets and 1.b, Total liabilities. The Federal Reserve proposes to add to Schedule IS, Income Statement, Memoranda item 1, Net change in fair values of financial instruments accounted for under a fair value option. The Federal Reserve also proposes to add to the FR Y-7NS the question, “Has the nonbank subsidiary elected to account for certain assets and liabilities under a fair value option with changes in fair value recognized in earnings?” to determine whether the nonbank subsidiary has adopted a fair value option. Schedule IS—Income Statement The Federal Reserve proposes to add a new data item 5.a.(9), Fees and commissions from annuity sales. Currently, nonbank subsidiaries report income from sales of annuities in data items 5.a.(4), Investment banking, advisory, brokerage, and underwriting fees and commissions and 5.a.(8), Insurance commissions and fees. Since fixed annuities are considered insurance products and variable annuities may be considered both insurance and securities products, a separate data item is deemed warranted to specifically capture revenues from annuities. Moreover, the above data items commingle income from the sale of annuities with noninterest income from a variety of activities and a separate data item would assist the Federal Reserve in more clearly distinguishing the subsidiaries' sources of noninterest income. Other Proposed Revisions That Parallel Prior Revisions to Other Nonbank Subsidiary Reports The Federal Reserve proposes the following revisions to maintain consistency with other nonbank subsidiary reports. These revisions parallel revisions made to other nonbank subsidiary reports previously. Schedule BS—Balance Sheet The Federal Reserve proposes to add a new data item, 18.e, General and limited partnership shares and interests, renumber current data item, 18.e, Other equity capital components, as data item 18.f., and renumber current data item 18.f, Total equity capital, as data item 18.g. Currently, the instructions for data item 18, Equity capital, directs subsidiaries that are not corporate in form (that is, those that do not have capital structures consisting of capital stock and the other components of equity capital currently listed under data item 18) to report their entire net worth in data item 18.f, Total equity. The reporting form and the instructions for data item 18.f, Total equity capital, state that data item 18.f must equal the sum of the components of data item 18. However, equity capital of those entities not in corporate form cannot appropriately be reported in any of the components of data item 18. The proposed data item and clarifications to the instructions for data item 18 would remove this inconsistency and improve the accuracy of the information reported. In addition, the Federal Reserve proposes to clarify that Schedule IS-A, Changes in Equity Capital, data item 6, Other adjustments to equity capital, should include contributions and distributions to and from partners or limited liability company
(LLC)shareholders when the company is a partnership or a LLC. Schedule IS-A, data item 6 is a component of Schedule IS-A, data item 7, Total equity at end of current period. Schedule IS-A, data item 7 must equal Schedule BS, data item 18.g, Total equity. Notes to the Financial Statements The Federal Reserve proposes to add the section, Notes to the Financial Statements, to allow respondents the opportunity to provide, at their option, any material information included in specific data items on the financial statements that the parent organization wishes to explain. The addition of this section would enable the Federal Reserve to automate information that respondents may want to report as footnotes to various reported data items and provide for release of this information to the public. This section is currently included on the FR Y-11 and FR 2314. 5. *Report title:* Consolidated Report of Condition and Income for Edge and Agreement Corporations. *Agency form number:* FR 2886b. *OMB control number:* 7100-0086. *Frequency:* Quarterly. *Reporters:* Edge and agreement corporations. *Annual reporting hours:* 2,442. *Estimated average hours per response:* 14.85 banking corporations, 8.65 investment corporations. *Number of respondents:* 12 banking corporations, 50 investment corporations. *General description of report:* This information collection is mandatory (12 U.S.C. 602 and 625). Schedules RC-M and RC-V are held as confidential pursuant to section (b)(4) of the Freedom of Information Act (5 U.S.C. 552(b)(4)). *Abstract:* The mandatory FR 2886b comprises a balance sheet, income statement, two schedules reconciling changes in capital and reserve accounts, and ten supporting schedules, and it parallels the Consolidated Reports of Condition and Income (Call Report) (FFIEC 031 and FFIEC 041; OMB No. 7100-0036) that commercial banks file. The Federal Reserve uses the data collected on the FR 2886b to supervise Edge corporations, identify present and potential problems, and monitor and develop a better understanding of activities within the industry. *Current actions:* The Federal Reserve proposes to collect certain data from all organizations that choose, under generally accepted accounting principles (GAAP), to apply a fair value option to one or more financial instruments and one or more classes of servicing assets and liabilities. The Federal Reserve also proposes to revise the instructions for information collected on restructured loans and leases consistent with proposed changes to the Call Report. The Federal Reserve proposes to make the revisions to the FR 2886b effective as of March 31, 2008. These proposed revisions are not related to the revisions proposed to the Call Report. Reporting on Fair Value Measurements and the Use of the Fair Value Option On September 15, 2006, the Financial Accounting Standards Board
(FASB)issued Statement No. 157, *Fair Value Measurements* (FAS 157), which is effective for entities for fiscal years beginning after November 15, 2007. The fair value measurements standard provides guidance on how to measure fair value and describes the type of inputs used to measure fair value based on a three-level hierarchy for all assets and liabilities that are re-measured at fair value on a recurring basis. 11 11 The FASB's three-level fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting Edge corporation has the ability to access at the measurement date (e.g., the FR 2886b reporting date). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. On February 15, 2007, FASB issued Statement No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities* (FAS 159), which is effective for fiscal years beginning after November 15, 2007. The FASB's Fair Value Option standard allows entities to report certain financial assets and liabilities at fair value with the changes in fair value included in earnings. FAS 159 can be applied on a contract by contract basis. Currently there is no means to determine to what extent the reporting entity is applying this standard and the basis used to value assets and liabilities. Therefore, the Federal Reserve proposes to add two new memoranda items to Schedule RC, Balance Sheet, and one new memorandum item to Schedule RI, Income Statement, that would be completed by Edge corporations that have elected to account for financial instruments or servicing assets and liabilities on the books of the reporting Edge at fair value under a fair value option. The Federal Reserve proposes to add to Schedule RC, Memorandum item 2, Financial assets and liabilities measured at fair value, collecting data in Memorandum items 2.a, Total assets and 2.b, Total liabilities. The Federal Reserve proposes to add to Schedule RI, Memorandum item 1, Net change in fair values of financial instruments accounted for under a fair value option. Restructured Mortgages Edge corporations currently report information on the amount of loans in past due or nonaccrual status whose terms have been modified, because of a deterioration in the financial condition of the borrower, to provide for a reduction of either interest or principal, in Schedule RC-N, Past Due and Nonaccrual Loans, Leases, and Other Assets, Memorandum item 1, Restructured loans and leases. However, the instructions advise respondents to exclude restructured loans secured by 1-4 family residential properties from this memorandum item. This exclusion was incorporated into the reporting instructions because the original disclosure requirements for troubled debt restructurings under GAAP provided that creditors need not disclose information on restructured real estate loans secured by 1-4 family residential properties. 12 However, this exemption from disclosure under GAAP has since been eliminated. 13 Accordingly, the Federal Reserve proposes to revise the instructions for Schedule RC-N, Memorandum item 1, to include restructured loans secured by 1-4 family residential properties that are past due 30 days or more or in nonaccrual status. 12 See Financial Accounting Standard Board Statement No. 15, *Accounting by Debtors and Creditors for Troubled Debt Restructurings,* footnote 25. 13 See Financial Accounting Standards Board Statement No. 114, *Accounting by Creditors for Impairment of a Loan,* paragraph 22(f). Reduction to the Optional 15-Day Extension for Submission of Completed Reports Edge corporations file the FR 2886b within thirty days of the quarter-end as of date of the report. However respondents currently have the option to take up to an additional fifteen calendar days to submit their completed reports. This option is intended to be consistent with the extended filing deadline on the commercial bank Call Report permitted for any bank that has more than one foreign office other than a shell branch or an international banking facility (IBF). Prior to June 30, 2004, such commercial banks could take an additional fifteen days to submit their Call Report. However, this optional filing extension for such banks was reduced to ten days effective with the June 30, 2004, Call Report, and further reduced to five days effective with the June 30, 2006, Call Report. The Federal Reserve proposes to reduce the optional 15-day extension for the submission of completed FR 2886b reports to an optional 5-day extension, consistent with that afforded to banks filing the Call Report that have more than one foreign office other than a shell branch or an IBF. This change would not reflect any increase in burden for Edge corporations that are subsidiaries of commercial banks and therefore must already be reflected in the consolidated Call Report within the 35-day deadline. Furthermore, in practice no FR 2886b respondent has requested an extension in the most recent quarterly filings. Proposal To Approve Under OMB Delegated Authority the Extension for Three Years, Without Revision, of the Following Reports: 1. *Report title:* Financial Statements for Bank Holding Companies. *Agency form number:* FR Y-9ES and FR Y-9CS. *OMB control number:* 7100-0128. *Frequency:* Quarterly and annually. *Reporters:* Bank holding companies (BHCs). *Annual reporting hours:* FR Y-9ES: 48; FR Y-9CS: 400. *Estimated average hours per response:* FR Y-9ES: 30 minutes; FR Y-9CS: 30 minutes. *Number of respondents:* FR Y-9ES: 96; FR Y-9CS: 200. *General description of report:* This information collection is mandatory (12 U.S.C. 1844(c)). Confidential treatment is not routinely given to the data in these reports. However, confidential treatment for the reporting information, in whole or in part, can be requested in accordance with the instructions to the form, pursuant to sections (b)(4), (b)(6) and (b)(8) of the Freedom of Information Act (5 U.S.C. 522(b)(4), (b)(6) and (b)(8)). *Abstract:* The FR Y-9ES collects financial information from employee stock ownership plans that are also BHCs on their benefit plan activities. It consists of four schedules: Statement of Changes in Net Assets Available for Benefits, Statement of Net Assets Available for Benefits, Memoranda, and Notes to the Financial Statements. The FR Y-9CS is a supplemental report that may be utilized to collect additional information deemed to be critical and needed in an expedited manner from BHCs. The items of information included on the supplement may change as needed. 2. *Report title:* Financial Reports of Foreign Banking Organizations. *Agency form number:* FR Y-7Q. *OMB control number:* 7100-0125. *Frequency:* Quarterly and annually. *Reporters:* Foreign banking organizations (FBOs). *Annual reporting hours:* FR Y-7Q (quarterly): 325; FR Y-7Q (annual): 118. *Estimated average hours per response:* FR Y-7Q (quarterly): 1.25; FR Y-7Q (annual): 1.0. *Number of respondents:* FR Y-7Q (quarterly): 65; FR Y-7Q (annual): 118. *General description of report:* This information collection is mandatory (12 U.S.C. 1844(c), 3106(c), and 3108). Confidential treatment is not routinely given to the data in these reports. However, confidential treatment for information, in whole or in part, on any of the reporting forms can be requested in accordance with the instructions to the form, pursuant to sections (b)(4) and (b)(6) of the Freedom of Information Act [5 U.S.C. 522(b)(4) and (b)(6)]. *Abstract:* The FR Y-7Q collects consolidated regulatory capital information from all FBOs either quarterly or annually. FBOs that have effectively elected to become FHCs file the FR Y-7Q on a quarterly basis. All other FBOs (those that have not elected to become FHCs) file the FR Y-7Q annually. Board of Governors of the Federal Reserve System, November 5, 2007. Robert deV. Frierson, Deputy Secretary of the Board. [FR Doc. E7-21960 Filed 11-8-07; 8:45 am] BILLING CODE 6210-01-P FEDERAL RESERVE SYSTEM [Docket No. OP-1299] Federal Reserve Bank Services AGENCY: Board of Governors of the Federal Reserve System. ACTION: Notice. SUMMARY: The Board has approved the private sector adjustment factor
(PSAF)for 2008 of $113.1 million and the 2008 fee schedules for Federal Reserve priced services and electronic access. These actions were taken in accordance with the requirements of the Monetary Control Act of 1980, which requires that, over the long run, fees for Federal Reserve priced services be established on the basis of all direct and indirect costs, including the PSAF. The Board has also approved maintaining the current earnings credit rate on clearing balances. DATES: The new fee schedules and earnings credit rate become effective January 2, 2008. FOR FURTHER INFORMATION CONTACT: For questions regarding the fee schedules: Jack K. Walton II, Associate Director, (202/452-2660); Jeffrey S.H. Yeganeh, Manager, Retail Payments, (202/728-5801); Edwin J. Lucio, Senior Financial Services Analyst, (202/736-5636), Division of Reserve Bank Operations and Payment Systems. For questions regarding the PSAF and earnings credits on clearing balances: Gregory L. Evans, Assistant Director, (202/452-3945); Brenda L. Richards, Manager, Financial Accounting, (202/452-2753); or Jonathan Senner, Senior Financial Analyst, (202/452-2042), Division of Reserve Bank Operations and Payment Systems. For users of Telecommunications Device for the Deaf
(TDD)*only,* please call 202/263-4869. Copies of the 2008 fee schedules for the check service are available from the Board, the Federal Reserve Banks, or the Reserve Banks' financial services Web site at *http://www.frbservices.org.* SUPPLEMENTARY INFORMATION: I. Private Sector Adjustment Factor and Priced Services A. *Overview* —Each year, as required by the Monetary Control Act of 1980, the Reserve Banks set fees for priced services provided to depository institutions. These fees are set to recover, over the long run, all direct and indirect costs and imputed costs, including financing costs, taxes, and certain other expenses, as well as the return on equity (profit) that would have been earned if a private business firm provided the services. The imputed costs and imputed profit are collectively referred to as the PSAF. Similarly, investment income is imputed and netted with related direct costs associated with clearing balances to estimate net income on clearing balances (NICB). From 1997 through 2006, the Reserve Banks recovered 99.0 percent of their total expenses (including special project costs and imputed expenses) and targeted after-tax profits or return on equity
(ROE)for providing priced services. 1 1 The ten-year recovery rate is based upon the pro forma income statement for Federal Reserve priced services published in the Board's Annual Report. Effective December 31, 2006, the Reserve Banks implemented Financial Accounting Standards No. 158: Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158), which resulted in recognizing a reduction in equity related to the priced services' benefit plans. Including this reduction in equity results in cost recovery of 95.5 percent for the ten-year period. This measure of long-run cost recovery is also published in the Board's Annual Report. Table 1 summarizes 2006, 2007 estimated, and 2008 budgeted cost recovery rates for all priced services. Cost recovery is estimated to be 101.5 percent in 2007 and budgeted to be 101.1 percent in 2008. The check service accounts for approximately 80 percent of the total cost of priced services and thus significantly influences the aggregate cost recovery rate. The electronic services (FedACH®, the Fedwire® Funds Service and National Settlement Service (NSS), and the Fedwire® Securities Service) account for approximately 20 percent of total costs. 2 2 FedACH and Fedwire are registered servicemarks of the Reserve Banks. Table 1.—Aggregate Priced Services Pro Forma Cost and Revenue Performance a [$ millions] Year 1 b Revenue 2 c Total expense 3 Net income
(ROE)[1-2] 4 d Target ROE 5 e Recovery rate after target ROE [1/(2+4)] (percent) 2006 1,031.2 875.5 155.7 72.0 108.8 2007 (estimate) 1,015.1 920.0 95.1 80.4 101.5 2008 (budget) 897.1 821.3 75.8 66.5 101.1 a Calculations in this table and subsequent pro forma cost and revenue tables may be affected by rounding. b Revenue includes net income on clearing balances. Clearing balances are assumed to be invested in a broad portfolio of investments, such as short-term Treasury securities, government agency securities, commercial paper, long-term corporate bonds, and money market funds. To impute income, a constant spread is determined from the historical average return on this portfolio and applied to the rate used to determine the cost of clearing balances. NICB equals the imputed income from these investments less earnings credits granted to holders of clearing balances. The cost of earnings credits is based on the discounted three-month Treasury bill rate. c The calculation of total expense includes operating, imputed, and other expenses. Imputed and other expenses include taxes, FDIC insurance, Board of Governors' priced services expenses, the cost of float, and interest on imputed debt, if any. Credits or debits related to the accounting for pensions under FAS 87 are also included. d Target ROE is the after-tax ROE included in the PSAF. e The recovery rates in this and subsequent tables do not reflect the unamortized gains or losses that must be recognized in accordance with FAS 158. Including these gains or losses, the recovery rate would have been 79.9 percent for 2006 and is estimated to be 103.0 percent for 2007. Future gains or losses, and their effect on cost recovery, cannot be projected. Table 2 presents an overview of the 2006, 2007 budgeted, 2007 estimated, and 2008 budgeted cost recovery performance by priced service. Table 2.—Priced Services Cost Recovery [percent] Priced service 2006 2007 Budget 2007 Estimate 2008 Budget a All services 108.8 101.9 101.5 101.1 Check 109.3 101.8 100.4 100.3 FedACH 104.3 102.5 105.8 102.0 Fedwire Funds and NSS 111.4 102.5 107.0 105.5 Fedwire Securities 104.5 101.9 103.5 105.0 a 2008 budget figures reflect the latest data from the Reserve Banks. The Reserve Banks will transmit final budget data to the Board in November 2007, for Board consideration in December 2007. 1. *2007 Estimated Performance* —The Reserve Banks estimate that they will recover 101.5 percent of the costs of providing priced services, including imputed expenses and targeted ROE, compared with a budgeted recovery rate of 101.9 percent, as shown in table 2. The Reserve Banks estimate that they will again exceed $1 billion in revenue and that all services will achieve full cost recovery. The Reserve Banks also estimate that they will fully recover actual and imputed expenses and earn net income of $95.1 million, compared with the target of $80.4 million. The greater-than-targeted net income is largely driven by the performance of the check service, which had greater-than-expected volumes of paper return items and Check 21 substitute checks. The Reserve Banks have continued their efforts to downsize their paper check processing infrastructure as paper check volumes continue to decline nationwide. The Reserve Banks have already reduced the number of sites at which they pro cess checks from forty-five in 2003 to nineteen in 2007 and have announced that they will consolidate to four check processing offices by early 2011. These check restructuring efforts have helped the Reserve Banks to maintain full cost recovery by reducing costs in line with the decline in revenues associated with paper check processing. 2. *2008 Private Sector Adjustment Factor* —The 2008 PSAF for Reserve Bank priced services is $113.1 million. This amount represents a decrease of $19.4 million from the 2007 PSAF of $132.5 million. This reduction is primarily the result of decreases in both the amount of imputed equity and in the cost of equity. 3. *2008 Projected Performance* —The Reserve Banks project a priced services cost recovery rate of 101.1 percent in 2008. The 2008 fees for priced services are projected to result in a net income of $75.8 million compared with the target of $66.5 million. The major risks to the Reserve Banks' ability to achieve their budgeted targets are higher-than-expected declines in paper check volume as well as increased competition from correspondent banks and other service providers. Other risks include lower-than-expected electronic payments volumes, and costs associated with unanticipated problems with check office restructurings or technological upgrades. In light of these risks, the Reserve Banks will continue to refine their business and operational strategies to improve efficiency and reduce costs and excess capacity. These efforts should position the Reserve Banks to achieve their financial and other payment system objectives and statutory requirements over the long run. 4. *2008 Pricing* —The following summarizes the Reserve Banks' changes in fee schedules for priced services in 2008: Check • The Reserve Banks will raise the fees for paper forward collection check products 12.1 percent, paper return check products 12.5 percent, and payor bank check products 13.8 percent. • The Reserve Banks will decrease Check 21 fees for FedForward products delivered to electronic endpoints 3.2 percent and increase Check 21 fees for FedForward products delivered to substitute check endpoints 10.3 percent. The Reserve Banks also will increase the FedReceipt Forward deposit discount by $0.001 for each check presented through FedReceipt products. • With the 2008 fee changes, the price index for the check service will have increased 75.4 percent since 1998. FedACH • The Reserve Banks will eliminate the input file processing fee. • With the 2008 fee change, the price index for the FedACH service will have decreased 61.7 percent since 1998. Fedwire Funds and National Settlement • The Reserve Banks will decrease the online transfer fee by three cents in the highest-priced tier, two cents in the midpriced tier, and one cent in the lowest-priced tier and increase the volume thresholds for each tier. • With the 2008 fee changes, the price index for the Fedwire Funds and National Settlement Services will have decreased 51.6 percent since 1998. Fedwire Securities • The Reserve Banks will not change prices. • The price index for the Fedwire Securities Service will have decreased 44.4 percent since 1998. 5. *2008 Price Index* —Figure 1 compares indexes of fees for the Reserve Banks' priced services with the GDP price index. Compared with the price index for 2007, the price index for all Reserve Bank priced services is projected to increase 2.7 percent in 2008. The price index for electronic payment services is projected to decrease 8.3 percent in 2008. The price index for paper check services is projected to increase 11.7 percent in 2008. This increase mainly reflects the Reserve Banks' continued efforts to encourage a shift from paper check services to Check 21 products. For the period 1998 to 2008, the price index for all priced services is expected to increase by 35.4 percent. In comparison, from 1998 through 2007, the GDP price index increased 24.3 percent. BILLING CODE 6210-01-P EN09NO07.002 BILLING CODE 6210-01-C B. *Private Sector Adjustment Factor* —The method for calculating the financing and equity costs in the PSAF requires determining the appropriate levels of debt and equity to impute and then applying the applicable financing rates. In this process, a pro forma balance sheet using estimated assets and liabilities associated with the Reserve Banks' priced services is developed, and the remaining elements that would exist if these priced services were provided by a private business firm are imputed. The same generally accepted accounting principles that apply to commercial-entity financial statements also apply to the relevant elements in the priced services pro forma financial statements. The portion of Federal Reserve assets that will be used to provide priced services during the coming year is determined using information on actual assets and projected disposals and acquisitions. The priced portion of these assets is determined based on the allocation of the related depreciation expense. The priced portion of actual Federal Reserve liabilities consists of balances held by Reserve Banks for clearing priced-services transactions (clearing balances), and other liabilities such as accounts payable and accrued expenses. Long-term debt is imputed only when core clearing balances, long-term liabilities, and equity are not sufficient to fund long-term assets or if the interest rate risk sensitivity analysis, which measures the interest rate effect of the difference between interest rate sensitive assets and liabilities, indicates that a 200 basis point change in interest rates would change cost recovery by more than two percentage points. 3 Short-term debt is imputed only when short-term liabilities and clearing balances not used to finance long-term assets are insufficient to fund short-term assets. Imputed equity meets the FDIC requirements for a well-capitalized depository institution for insurance premium purposes and represents the market capitalization, or shareholder value, for Reserve Bank priced services. 4 3 A portion of clearing balances is used as a funding source for priced-services assets. Long-term assets are partially funded from core clearing balances, which are currently $4 billion. Core clearing balances are considered the portion of the balances that has remained stable over time without regard to the magnitude of actual clearing balances. 4 The FDIC requirements for a well-capitalized depository institution are
(1)a ratio of total capital to risk-weighted assets of 10 percent or greater,
(2)a ratio of Tier 1 capital to risk-weighted assets of 6 percent or greater, and
(3)a leverage ratio of Tier 1 capital to total assets of 5 percent or greater. The priced services balance sheet has no components of Tier 1 or total capital other than equity; therefore, requirements 1 and 2 are essentially the same measurement. As used in this context, the term “shareholder” does not refer to the actual member banks of the Federal Reserve System, but rather to the implied shareholders who would have an ownership interest if the Reserve Banks' priced services were provided by a private firm. The equity financing rate is the target ROE rate produced by the capital asset pricing model (CAPM). In the CAPM, the required rate of return on a firm's equity is equal to the return on a risk-free asset plus a risk premium. To implement the CAPM, the risk-free rate is based on the three-month Treasury bill; the beta is assumed to equal 1.0, which approximates the risk of the market as a whole; and the monthly returns in excess of the risk-free rate over the most recent 40 years are used as the market risk premium. The resulting ROE influences the dollar level of the PSAF because this is the return a shareholder would expect in order to invest in a private business firm. For simplicity, given that federal corporate income tax rates are graduated, state income tax rates vary, and various credits and deductions can apply, an actual income tax expense is not calculated for Reserve Bank priced services. Instead, the Board targets a pretax ROE that would provide sufficient income to fulfill its income tax obligations. 5 To the extent that actual performance results are greater or less than the targeted ROE, income taxes are adjusted using an imputed income tax rate. Because the Reserve Banks provide similar services through their correspondent banking activities, including payment and settlement services, and the amount of imputed equity meets the FDIC requirements for a well-capitalized depository institution, the imputed income tax rate is the median of the rates paid by the top fifty bank holding companies
(BHCs)based on deposit balances over the past five years adjusted to the extent that they invested in tax-free municipal bonds. 5 Other taxes, such as sales taxes, are included in priced-services actual or imputed costs. The PSAF also includes the estimated priced-services-related expenses of the Board of Governors and imputed sales taxes based on Reserve Bank estimated expenditures. An assessment for FDIC insurance, when required, is imputed based on current FDIC rates and projected clearing balances held with the Reserve Banks. 1. *Net Income on Clearing Balances* —The NICB calculation is performed each year along with the PSAF calculation and is based on the assumption that the Reserve Banks invest clearing balances net of imputed reserve requirements and balances used to finance priced-services assets. Using these net clearing balance levels, the Reserve Banks impute a constant spread, determined by the return on a portfolio of investments, over the three-month Treasury bill rate. 6 The calculation also involves determining the priced-services cost of earnings credits (amounts available to offset service fees) on contracted clearing balances held, net of expired earnings credits, based on a discounted Treasury bill rate. Rates and clearing balance levels used in the NICB estimate are based on the most recent rates and clearing balance levels. 7 Because clearing balances are held for clearing priced-services transactions or offsetting priced-services fees, they are directly related to priced-services. The net earnings or expense attributed to the investments and the cost associated with holding clearing balances, therefore, are considered net income for priced-services. 6 The investment portfolio is composed of investments comparable to a BHC's investment holdings, such as short-term Treasury securities, government agency securities, commercial paper, long-term corporate bonds, and money market funds. See table 7 for the investments imputed in 2008. NICB is projected to be $125.8 million for 2008 using a constant spread of 26 basis points over the three-month Treasury bill rate and applying this rate to the clearing balance levels used in the 2008 pricing process. The 2007 NICB estimate is $135.7 million. 7 July 2007 rates and balances were used to project 2008 NICB. 2. *Analysis of the 2008 PSAF* —The decrease in the 2008 PSAF is primarily due to an overall reduction in imputed equity and a slight decrease in the required ROE result provided by the CAPM. Estimated 2008 Federal Reserve assets, reflected in table 3, have decreased $2,279.8 million, mainly due to a decline in items in process of collection of $1,977.2 million. This reduction largely stems from the accelerated collection of items processed in the Check 21 environment. As shown in table 4, the portion of assets financed with clearing balances has increased. Short-term assets funded with clearing balances total $4.2 million. This figure represents a $6.0 million decline from the short-term assets funded in 2007, a decrease that results from the reduction in estimated short-term receivables. The amount of core clearing balances used to fund long-term assets has increased $68.5 million primarily because of an increase in long-term assets and a lower amount of imputed equity, which also is used to fund long-term assets. As previously mentioned, clearing balances are available as a funding source for priced-services assets. Table 4 shows that $72.7 million in clearing balances is used to fund priced-services assets in 2008. The interest rate sensitivity analysis in table 5 indicates that a 200 basis point decrease in interest rates affects the ratio of rate-sensitive assets to rate-sensitive liabilities and decreases cost recovery by 1.5 percentage points, while an increase of 200 basis points in interest rates increases cost recovery by 1.4 percentage points. The established threshold for a change in cost recovery is two percentage points; therefore, interest rate risk associated with using these balances is within acceptable levels and no long-term debt is imputed. As shown in table 3, the amount of equity imputed for the 2008 PSAF is $628.9 million, a decrease of $114.0 million from the imputed equity for 2007. In accordance with FAS 158, this amount includes an accumulated other comprehensive loss of $328.4 million. The capital to total assets ratio and the capital to risk-weighted assets ratio both meet or exceed the regulatory requirements for a well-capitalized depository institution. Equity is based on 5 percent of total assets, and capital to risk-weighted assets is 10.1 percent. 8 Following the final FDIC regulations regarding the assessment of insurance premiums, the Reserve Banks imputed a one-time priced services assessment credit of $16.6 million. In 2007, this imputed credit fully offset the imputed assessment for the priced services. For 2008, the net FDIC assessment is imputed at $0.4 million. 9 8 In December 2006, bank regulators (the Board of Governors of the Federal Reserve System, the FDIC, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision) announced an interim ruling that excludes FAS 158-related accumulated other comprehensive income or losses from the calculation of regulatory capital. The Reserve Banks, however, elected to impute total equity at 5 percent of assets, as indicated above, until the regulators announce a final ruling. 9 Per FDIC rules, any remaining portion of the one-time assessment credit can offset up to 90 percent of the assessment amount in subsequent years. For 2008, 90 percent of the total imputed assessment of $4.1 million was offset by the remaining assessment credit, resulting in a net assessment of $0.4 million. Table 6 shows the imputed PSAF elements, the pretax ROE, and other required PSAF costs for 2007 and 2008. The $20.7 million decrease in ROE is primarily caused by a lower amount of imputed equity and a slight decrease in the risk-free rate of return. Sales taxes increased from $8.5 million in 2007 to $8.9 million in 2008. The effective income tax rate used in 2008 decreased to 31.2 percent from 31.5 percent in 2007. The priced-services portion of the Board's expenses increased $0.5 million from $6.7 million in 2007 to $7.2 million in 2008. Table 3.—Comparison of Pro Forma Balance Sheets for Federal Reserve Priced Services [Millions of dollars—projected average for year] 2008 2007 Change Short-term assets: Imputed reserve requirement on clearing balances $799.7 $823.4 $(23.7) Receivables 64.3 70.1 (5.8) Materials and supplies 2.0 1.1 0.9 Prepaid expenses 29.3 30.2 (0.9) Items in process of collection 10 3,411.7 5,388.9 (1,977.2) Total short-term assets 4,307.0 6,313.7 (2,006.7) Imputed investments 7,124.5 7,444.5 (320.0) Long-term assets: Premises 11 393.9 395.2 (1.3) Furniture and equipment 131.0 138.7 (7.7) Leasehold improvements and long-term prepayments 86.7 56.6 30.1 Prepaid pension costs 384.2 349.1 35.1 Deferred tax asset 150.0 159.3 (9.3) Total long-term assets 1,145.8 1,098.9 46.9 Total assets 12,577.3 14,857.1 (2,279.8) Short-term liabilities: 12 Clearing balances 7,683.9 8,322.7 (638.8) Deferred credit items 10 3,724.7 5,300.3 (1,575.6) Short-term payables 91.4 91.2 0.2 Total short-term liabilities 11,500.0 13,714.2 (2,214.2) Long-term liabilities: 12 Postemployment/postretirement benefits liability 448.4 400.0 48.4 Total liabilities 11,948.4 14,114.2 (2,165.8) Equity 13 628.9 742.9 (114.0) Total liabilities and equity 12,577.3 14,857.1 (2,279.8) 10 Represents float that is directly estimated at the service level. 11 Includes the allocation of Board of Governors assets to priced services of $1.2 million for 2008 and 2007. 12 No debt is imputed because clearing balances are a funding source. 13 Includes an accumulated other comprehensive loss of $361.0 million for 2007, which was reduced to $328.4 million for 2008 to reflect the ongoing amortization of the accumulated loss in accordance with FAS 158. Future gains or losses, and their effects on the pro forma balance sheet, cannot be projected. BILLING CODE 6210-01-P EN09no07.003 Table 5.—2008 Interest Rate Sensitivity Analysis 16 [Millions of dollars] Rate sensitive Rate insensitive Total Assets: Imputed reserve requirement on clearing balances $799.7 $799.7 Imputed investments $7,124.5 7,124.5 Receivables 64.3 64.3 Materials and supplies 2.0 2.0 Prepaid expenses 29.3 29.3 Items in process of collection 17 (313.0) 3,724.7 3,411.7 Long-term assets 1,145.8 1,145.8 Total assets 6,811.5 5,765.8 12,577.3 Liabilities: Clearing balances 18 5,851.6 1,832.3 7,683.9 Deferred credit items 3,724.7 3,724.7 Short-term payables 91.4 91.4 Long-term liabilities 448.4 448.4 Total liabilities 5,851.6 6,096.8 11,948.4 200 basis point decrease in rates 200 basis point increase in rates Rate change results: Asset yield ($6,811.5 × rate change) (136.2) 136.2 Liability cost ($5,851.6 × rate change) (117.0) 117.0 Effect of 200 basis point change (19.2) 19.2 2008 budgeted revenue 897.1 897.1 Effect of change (19.2) 19.2 Revenue adjusted for effect of interest rate change 877.9 916.3 2008 budgeted total expenses 770.5 770.5 2008 budgeted PSAF 117.3 117.3 Tax effect of interest rate change ($ change × 31.2%) (6.0) 6.0 Total recovery amounts 881.8 893.8 Recovery rate before interest rate change 101.1% 101.1% Recovery rate after interest rate change 99.6% 102.5% Effect of interest rate change on cost recovery 19 (1.5)% 1.4% 16 The interest rate sensitivity analysis evaluates the level of interest rate risk presented by the difference between rate-sensitive assets and rate-sensitive liabilities. The analysis reviews the ratio of rate-sensitive assets to rate-sensitive liabilities and the effect on cost recovery of a change in interest rates of up to 200 basis points. 17 The amount designated as rate-sensitive represents items collected prior to providing credit according to established availability schedules. 18 The amount designated as rate-insensitive represents clearing balances on which earnings credits are not paid. 19 The effect of a potential change in rates is less than a two percentage point change in cost recovery; therefore, no long-term debt is imputed for 2008. EN09NO07.004 BILLING CODE 6210-01-C Table 7.—Computation of 2008 Capital Adequacy for Federal Reserve Priced Services [Millions of dollars] Assets Risk weighted Weight assets Imputed reserve requirement on clearing balances $799.7 0.0 $0.0 Imputed investments: 1-year Treasury note 25 26 2,475.5 0.0 0.0 Commercial paper (3-month) 25 4,249.5 1.0 4,249.5 GNMA mutual fund 27 399.5 0.2 79.9 Total imputed investments 7,124.5 4,329.4 Receivables 64.3 0.2 12.9 Materials and supplies 2.0 1.0 2.0 Prepaid expenses 29.3 1.0 29.3 Items in process of collection 3,411.7 0.2 682.3 Premises 393.9 1.0 393.9 Furniture and equipment 131.0 1.0 131.0 Leasehold improvements and long-term prepayments 86.7 1.0 86.7 Prepaid pension costs 384.2 1.0 384.2 Deferred tax asset 150.0 1.0 150.0 Total 12,577.3 6,201.7 Imputed equity for 2008 628.9 Capital to risk-weighted assets 10.1% Capital to total assets 5.0% 25 The imputed investments are assumed to be similar to those for which rates are available on the Federal Reserve's H.15 statistical release, which can be located at *http://www.federalreserve.gov/releases/h15/data.htm.* 26 Includes estimated amounts arising from the collection of items prior to providing credit according to established availability schedules. These amounts are assumed to be invested in a short-term Treasury security. 27 The imputed mutual fund investment is based on Vanguard's GNMA Fund Investor Shares fund, which was chosen based on the investment strategies articulated in its prospectuses. The fund returns can be located at *https://personal.vanguard.com/VGApp/hnw/FundsByType* . C. *Earnings Credits on Clearing Balances* —The Reserve Banks will maintain the current rate of 80 percent of the three-month Treasury bill rate to calculate earnings credits on clearing balances. 28 28 Two adjustments are applied to the earnings credit rate so that the return on clearing balances at the Federal Reserve is comparable to what the depository institution
(DI)would have earned had it maintained the same balances at a private-sector correspondent. The “imputed reserve requirement” adjustment is made because a private-sector correspondent would be required to hold reserves against the respondent's balance with it. As a result, the correspondent would reduce the balance on which it would base earnings credits for the respondent because it would be required to hold a portion, determined by its marginal reserve ratio, in the form of non-interest-bearing reserves. For example, if a DI held $1 million in clearing balances with a correspondent bank and the correspondent had a marginal reserve ratio of 10 percent, then the correspondent bank would be required to hold $100,000 in reserves, and it would typically grant credits to the respondent based on 90 percent of the balance, or $900,000. This adjustment imputes a marginal reserve ratio of 10 percent to the Reserve Banks. The “marginal reserve requirement” adjustment accounts for the fact that the respondent can deduct balances maintained at a correspondent, but not at the Federal Reserve, from its reservable liabilities. This reduction has value to the respondent when it frees up balances that can be invested in interest-bearing instruments, such as federal funds. For example, a respondent placing $1 million with a correspondent rather than the Federal Reserve would free up $30,000 if its marginal reserve ratio were 3 percent. The formula used by the Reserve Banks to calculate earnings credits can be expressed as [ b * (1−FRR) * r] + [ b *
(MRR)* f] Where e is total earnings credits, b is the average clearing balance maintained, FRR is the assumed Reserve Bank marginal reserve ratio (10 percent), r is the earnings credit rate, MRR is the marginal reserve ratio of the DI holding the balance (either 0 percent, 3 percent, or 10 percent), and f is the average federal funds rate. A DI that meets its reserve requirement entirely with vault cash is assigned a marginal reserve requirement of zero. Clearing balances were introduced in 1981, as part of the Board's implementation of the Monetary Control Act, to facilitate access to Federal Reserve priced services by institutions that did not have sufficient reserve balances to support the settlement of their payment transactions. The earnings credit calculation uses a percentage discount on a rolling thirteen-week average of the annualized coupon equivalent yield of three-month Treasury bills in the secondary market. Earnings credits, which are calculated monthly, can be used only to offset charges for priced services and expire if not used within one year. 29 29 A band is established around the contracted clearing balance to determine the maximum balance on which credits are earned as well as any deficiency charges. The clearing balance allowance is 2 percent of the contracted amount or $25,000, whichever is greater. Earnings credits are based on the period-average balance maintained up to a maximum of the contracted amount plus the clearing balance allowance. Deficiency charges apply when the average balance falls below the contracted amount less the allowance, although credits are still earned on the average maintained balance. D. *Check Service* —Table 8 shows the 2006, 2007 estimated, and 2008 budgeted cost recovery performance for the commercial check service. Table 8.—Check Service Pro Forma Cost and Revenue Performance [$ millions] Year 1 1 Revenue 2 Total expense 3 Net income
(ROE)[1-2] 4 Target ROE 5 Recovery rate after target ROE [1/(2+4)] (percent) 2006 845.7 716.9 128.7 57.1 109.3 2007 (estimate) 815.2 748.5 66.7 63.2 100.4 2008 (budget) 701.5 647.2 54.4 51.9 100.3 1. *2007 Estimate* —For 2007, the Reserve Banks estimate that the check service will recover 100.4 percent of total expenses and targeted ROE, compared with the budgeted recovery rate of 101.8 percent. The Reserve Banks expect to recover all actual and imputed expenses of providing check services and earn net income of $66.7 million (see table 8). The lower-than-budgeted cost recovery is the result of costs that were $40.3 million greater than budgeted and are primarily attributable to the accrual of one-time costs associated with the next phase of check restructuring. Revenue was $29.7 million higher than expected, reflecting additional revenue associated with Check 21 deposits presented to non-electronic endpoints using substitute checks and helped to offset the unbudgeted costs. The number of checks deposited electronically has grown rapidly in 2007 (see table 9). Year-to-date through September, 37.9 percent of the Reserve Banks' volume was deposited through Check 21 products. Year-to-date figures, however, understate the current penetration rate of Check 21 products because volume has increased throughout 2007. In the month of September, for example, the proportion of checks deposited electronically with the Reserve Banks for collection rose to about 50.6 percent of total check deposits. The number of checks presented electronically using Check 21 products has also grown steadily in 2007 (see table 9). Year-to-date through September, 18.6 percent of the Reserve Banks' volume was presented using Check 21 products, compared with a rate of 26.7 percent for the month of September. Before the end of the year, the Reserve Banks expect that nearly a third of all checks will be presented using Check 21 products. Depository institutions have been slower to accept check presentments electronically because financial incentives are generally stronger for electronic check deposit and because integrating electronic presentments into back-office processing and risk-management systems can be a complex and expensive undertaking. **Table 9.—Check 21 Product Penetration Rates ** a **[Percent] ** b 2006 September 2007 Year-to-date September 2007 Deposit: 12.0 38.8 51.7 FedForward 11.4 37.9 50.6 Paper to Check 21 0.6 1.0 1.1 Presentment: 4.1 18.6 26.7 FedReceipt 0.1 1.1 1.5 FedReceipt Plus 4.0 17.5 25.2 Return: FedReturn 12.0 36.0 39.4 a The Reserve Banks' Check 21 product suite includes FedForward, FedReturn, FedReceipt, and FedReceipt Return. FedForward is the electronic alternative to forward check collection; FedReturn is the electronic alternative to paper check return; FedReceipt is electronic presentment with accompanying images; and FedReceipt Return is the electronic return of unpaid checks. Under FedReceipt, the Reserve Banks electronically present only the checks that were deposited electronically or that were deposited in paper form and converted into electronic form by the Reserve Banks. Under FedReceipt Plus, the Reserve Banks electronically present all checks drawn on the customer. b Deposit and presentment statistics are calculated as a percentage of total forward collection volume. Return statistics are calculated as a percentage of total return volume. For full-year 2007, the Reserve Banks estimate that their total forward check volume will decline 8 percent. 30 Paper forward-collection volume is expected to decline 35.3 percent for the full year compared with a budgeted decline of 21.3 percent as more volume is deposited electronically (see table 10). This greater-than-expected decline in paper check volume is a result of more checks being deposited electronically. The Reserve Banks estimate that paper return volume will decline at a slower pace than forward paper volume, 27.1 percent for the full year compared with a budgeted decline of 31.7 percent. 30 Total forward Reserve Bank check volumes have dropped from roughly 11.0 billion in 2006 to 10.1 billion in 2007 and are expected to fall to 9.2 billion in 2008. Table 10.—Paper Check Product Volume Changes [Percent] Budgeted 2007 change Change through September 2007 Estimated 2007 change Total forward collection −21.3 −35.7 −35.3 Returns −31.7 −23.4 −27.1 2. *2008 Pricing* —In 2008, the Reserve Banks project that the check service will recover 100.3 percent of total expenses and targeted ROE. Revenue is projected to be $701.5 million, or about a $114 million decline from 2007. This decline is driven by a $142 million drop in paper check and payor bank fee revenue that is partially offset by a $43 million increase in Check 21 fee revenue. Total expenses for the check service are projected to be $647.2 million, or about a $101 million decline from 2007. A key driver in the reduction of local check costs is the continued planned restructuring of the Reserve Banks' check-processing sites, including a reduction in staff of approximately 20 percent. 31 31 In February 2003, the Reserve Banks announced an initiative to reduce the number of sites at which they process checks from forty-five to thirty-two. The Reserve Banks announced further rounds of restructurings in August 2004, May 2005, and May 2006. As of October 2007, there are nineteen Reserve Bank check processing offices. The Reserve Banks have announced plans to consolidate to four check processing sites by early 2011. For 2008, the Reserve Banks estimate that their total forward check volume will decline 9 percent. The Reserve Banks project that paper check volume for forward products will decrease about 44 percent, volume for paper check return products will decrease 33 percent, and volume for payor bank products will decrease 45 percent. These expected volume declines will be offset by a projected increase in Check 21 volumes as the shift from paper to electronic check volume continues. The Reserve Banks project that FedForward volume will increase 42 percent, FedReceipt Plus volume will increase 87 percent, and FedReturn volume will increase 39 percent (see table 11). The Reserve Banks' projected increase in Check 21 volume will result in a more modest 17 percent increase in Check 21 product revenue as the share of Check 21 deposits presented to FedReceipt electronic endpoints grows. Board and Reserve Bank staff believe that the key to realizing Check 21 cost efficiencies for the System continues to be the widespread acceptance of electronic check presentments by paying banks, and by year-end 2008, the Reserve Banks expect that 75 percent of their check volume will be deposited using Check 21 services and that 55 percent of their check volume will be presented using Check 21 services. Table 11.—Check 21 Volume 2008 Budgeted volume (millions of items) Growth from 2007 estimate (percent) FedForward 5,842 42 FedReceipt Plus 3,841 87 FedReturn 60 39 The Reserve Banks expect to see continued growth in their Check 21 volumes in 2008, as market participants continue to replace their existing traditional check infrastructure to take advantage of more cost-effective electronic clearing. The Reserve Banks project volume losses from large banks that are expected to increase the number of check images exchanged among themselves. This volume loss, however, is expected to be offset through the expansion of customers using existing Check 21 products and the introduction of new Check 21 products. In addition, the Reserve Banks will further standardize their product offerings and will eliminate products that generate little volume. These actions will help the Reserve Banks achieve a more uniform product suite, leading to greater operational efficiencies. For 2008, the Reserve Banks are targeting an overall price increase for traditional check services of 12.5 percent, including a 12.1 percent increase in forward check collection fees, a 12.5 percent increase in return service fees, and a 13.8 percent increase in payor bank services fees. 32 For Check 21 services, the Reserve Banks will decrease by 3.2 percent the fees for Check 21 deposits that are presented electronically. The fees for Check 21 deposits that are presented as substitute checks, however, will increase 10.3 percent. There will be no change in fees charged for the Check 21 FedReturn product (see table 12). 32 In 2007, the Reserve Banks announced a sunset strategy for payor bank services. The Reserve Banks will discontinue offering these services by the end of 2009. Table 12.—2008 Fee Changes [Percent] Product Fee change Traditional Check 12.5 Forward collection 12.1 Returns 12.5 Payor bank services 13.8 Check 21: FedForward (electronic endpoints) −3.2 FedForward (substitute check endpoints) 10.3 FedReturn ( B ) a FedReceipt customers currently receive a $0.003 discount per check presented electronically, which will increase to a $0.004 discount in 2008. This discount can be used to offset fees for checks deposited electronically with the Reserve Banks. b No changes. The major risks to meeting the Reserve Banks' budgeted 2008 cost recovery are higher-than-expected declines in paper check volume as well as increased competition from correspondent banks and other service providers as they expand their Check 21 service offerings. The Reserve Banks may also suffer greater Check 21 volume losses if large banks exchange images among themselves more quickly than anticipated. Other risks include unanticipated problems with check restructurings or other major initiatives that may result in significant cost overruns. *E. FedACH Service* —Table 13 below shows the 2006, 2007 estimated, and 2008 budgeted cost recovery performance for the commercial FedACH service. Table 13.—FedACH Service Pro Forma Cost and Revenue Performance [$ millions] Year 1 Revenue 2 Total expense 3 Net income
(ROE)[1-2] 4 Target ROE 5 Recovery rate after target ROE [1/(2+4)] (percent) 2006 91.4 80.1 11.3 7.5 104.3 2007 (estimate) 101.7 87.3 14.3 8.8 105.8 2008 (budget) 99.1 89.6 9.5 7.6 102.0 1. *2007 Estimate* —The Reserve Banks estimate that the FedACH service will recover 105.8 percent of total expenses and targeted ROE, compared with the budgeted recovery rate of 102.5 percent. The Reserve Banks expect to recover all actual and imputed expenses of providing FedACH services and earn net income of $14.3 million. Year-to-date through September, FedACH commercial origination volume is 13.6 percent higher than during the same period last year, compared with a budgeted full-year growth of 12.4 percent. For full-year 2007, the Reserve Banks estimate that FedACH commercial originations will grow 13.1 percent because some of their customers will have migrated their business to EPN, the other automated clearing house
(ACH)operator. 2. *2008 Pricing* —The Reserve Banks project that the FedACH service will recover 102.0 percent of total expenses and targeted ROE in 2008. Total revenue is budgeted to decrease $2.6 million from the 2007 estimate, primarily as the result of the elimination of the input file processing fee. Total expenses are budgeted to increase $2.3 million from the 2007 estimate. This increase reflects the additional resources needed to support the multiyear technology transition plan from a mainframe-computer to a distributed-server processing environment. The Reserve Banks expect FedACH commercial origination volume to grow 11.2 percent in 2008. This expected growth is largely attributable to volume increases associated with electronic check conversion applications, including checks converted at lockboxes and at the point of sale. The Reserve Banks will also change their pricing approach for two existing ACH products. The first, FedEDI® Plus, offers depository institutions the ability to provide corporate-level payment data to their customers. 33 The second, FedACH risk management services, provides depository institutions the ability to better monitor the risks of their ACH transactions. Beginning in 2008, the subscription fee for FedACH risk management services will be eliminated, and fees for monitoring criteria will be reduced and tiered. In addition, access to FedACH risk management services, along with FedEDI Plus, will be bundled with FedLine Web connectivity. Separate fees will also be charged for FedEDI Plus scheduled, secure delivery, and on demand reports. 34 33 FedEDI is a registered servicemark of the Reserve Banks. 34 Depository institutions that use FedLine Advantage, FedLine Command, and FedLine Direct will also have access to FedEDI Plus and FedACH risk management services because FedLine Web functionality is included in these electronic access packages. The primary risk to meeting the Reserve Banks' budgeted 2008 cost recovery is the loss of large ACH originators to EPN. Other risks include the potential growth of direct ACH exchanges that bypass the ACH operators and unanticipated problems with technology upgrades that may result in significant cost overruns. F. *Fedwire Funds and National Settlement Services* —Table 14 below shows the 2006, 2007 estimated, and 2008 budgeted cost recovery performance for the Fedwire Funds and National Settlement Services. Table 14.—Fedwire Funds and National Settlement Services Pro Forma Cost and Revenue Performance [$ millions] Year 1 Revenue 2 Total expense 3 Net income
(ROE)[1-2] 4 Target ROE 5 Recovery rate after target ROE [1/(2+4)] (percent) 2006 72.3 59.3 13.0 5.6 111.4 2007 (estimate) 74.8 63.6 11.2 6.3 107.0 2008 (budget) 72.9 63.8 9.0 5.3 105.5 1. *2007 Estimate* —The Reserve Banks estimate that the Fedwire Funds and National Settlement Services will recover 107.0 percent of total expenses and targeted ROE, compared with a 2007 budgeted recovery rate of 102.5 percent. The greater-than-expected recovery rate is primarily attributed to higher-than-expected electronic connection and fee revenues and lower-than-budgeted operating costs. Year-to-date through September, online funds volume was 1.4 percent higher than during the same period last year. For full-year 2007, the Reserve Banks estimate that online funds volume will grow 1.4 percent, compared with a budgeted flat growth. With respect to the National Settlement Service, the Reserve Banks estimate that the volume of settlement entries processed during 2007 will be 7.0 percent higher than the 2007 budget projection of flat growth. The higher-than-budgeted National Settlement Service volume is due primarily to the Depository Trust & Clearing Corporation subsidiaries' greater use of the National Settlement Service for settlement activity. 2. *2008 Pricing* —In 2008, the Reserve Banks expect the Fedwire Funds and National Settlement Services to recover 105.5 percent of total expenses and targeted ROE. The Reserve Banks project 2008 total revenue to decline $1.9 million compared with the 2007 estimate. The decline in total revenue is due to lower service revenue generated by the lower transfer fees. Total expenses for 2008 are budgeted to increase $0.2 million from the 2007 estimate. Online volume for the Fedwire Funds Service for 2008 is budgeted to increase 1.9 percent compared with 2007 estimates. Volume for the National Settlement Service for 2008 is budgeted to be unchanged from 2007 estimated volume. The Reserve Banks will decrease the online transfer fee by three cents in the highest-priced tier, two cents in the midpriced tier, and one cent in the lowest-priced tier. The Reserve Banks also will increase the volume thresholds for each tier. The fee reductions for online transfers are intended to better position the Reserve Banks to remain competitive with CHIPS. The Reserve Banks will not change the National Settlement Service fee schedule. G. *Fedwire Securities Service* —Table 15 below shows the 2006, 2007 estimated, and 2008 budgeted cost recovery performance for the Fedwire Securities Service. 35 35 The Reserve Banks provide transfer services for securities issued by the U.S. Treasury, federal government agencies, government-sponsored enterprises, and certain international institutions. The priced component of this service, reflected in this memorandum, consists of revenues, expenses, and volumes associated with the transfer of all non-Treasury securities. For Treasury securities, the U.S. Treasury assesses fees for the securities transfer component of the service. The Reserve Banks assess a fee for the funds settlement component of a Treasury securities transfer; this component is not treated as a priced service. Table 15.—Fedwire Securities Service Pro Forma Cost and Revenue Performance [$ millions] Year 1 Revenue 2 Total expense 3 Net income
(ROE)[1-2] 4 Target ROE 5 Recovery rate after target ROE [1/(2+4)] (percent) 2006 21.9 19.1 2.7 1.8 104.5 2007 (estimate) 23.5 20.6 2.8 2.0 103.5 2008 (budget) 23.6 20.8 2.9 1.7 105.0 1. *2007 Estimate* —The Reserve Banks estimate that the Fedwire Securities Service will recover 103.5 percent of total expenses and targeted ROE, compared with a 2007 budgeted recovery rate of 101.9 percent. The higher-than-budgeted recovery is attributable to greater-than-expected fee revenue and lower-than-expected operating costs. Year-to-date through September, online securities volume was 6.4 percent higher than during the same period last year. For full-year 2007, the Reserve Banks estimate that online securities volume will grow 6.4 percent, compared with a budgeted flat growth. The higher-than-budgeted volume is due to the recent substantial growth in online volume driven by recent market volatility. 2. *2008 Pricing* —The Reserve Banks project that in 2008 the Fedwire Securities Service will recover 105.0 percent of total expenses and targeted ROE. Total revenue and total expenses are expected to be only slightly higher than 2007. Online and offline securities volumes in 2008 are projected to be unchanged from 2007 estimates. The Reserve Banks will leave prices unchanged. H. *Electronic Access* —The Reserve Banks allocate the costs and revenues associated with electronic access to the Reserve Banks' priced services. There are currently three types of electronic access channels through which customers can access the Reserve Banks' priced services: FedLine®, FedMail®, and FedPhone®. 36 For 2008, the Reserve Banks will be adding new services to, and increasing the fees for, the FedLine packaged solutions. 36 FedPhone, FedMail, and FedLine are registered servicemarks of the Reserve Banks. These connections may also be used to access non-priced services provided by the Reserve Banks. FedPhone is a free access option. The Reserve Banks offer seven electronic access packages that are supplemented by a number of premium (or à la carte) access and accounting information options. The first package provides access to information services through FedMail Email. The next two packages are FedLine Web® packages, with either three or five subscribers, that offer access to basic information and check services. The next two packages are FedLine Advantage® packages, with either three or five subscribers, that expand upon the FedLine Web packages to offer access to FedACH and Fedwire services. The final two packages are FedLine Command and FedLine Direct. FedLine Command can connect over the Internet or through a dedicated connection, while FedLine Direct exclusively connects through a dedicated connection. FedLine Command is designed for FedACH functionality, while FedLine Direct, which is the replacement channel for Computer Interface customers, has both FedACH and Fedwire functionality. Both FedLine Command and FedLine Direct expand upon the FedLine Advantage ackages and include most accounting information services. The increases to electronic access pricing for 2008 reflect enhanced services in the FedLine packages. Specifically, the Reserve Banks are including in the FedLine packages additional enhanced accounting information services, the FedEDI Plus service, and the FedACH risk management service. The Reserve Banks will charge an additional $5 per month for the FedLine Web packages, $10 per month for the FedLine Advantage and FedLine Command packages, and $100 per month for the FedLine Direct packages. II. Analysis of Competitive Effect All operational and legal changes considered by the Board that have a substantial effect on payments system participants are subject to the competitive impact analysis described in the March 1990 policy, “The Federal Reserve in the Payments System.” 37 Under this policy, the Board assesses whether the changes 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 because of differing legal powers or constraints or because of a dominant market position deriving from such legal differences. If the changes create such an effect, the Board must further evaluate the changes to assess whether its benefits—such as contributions to payment system efficiency, payment system integrity, or other Board objectives—can be retained while minimizing the adverse effect on competition. 37 Federal Reserve Regulatory Service
(FRRS)9-1558. The Board believes that the 2008 fees, fee structures, and changes in service will not have a direct and material adverse effect on the ability of other service providers to compete effectively with the Reserve Banks in providing similar services. The changes should permit the Reserve Banks to earn an ROE that is comparable to overall market returns. FedACH Service 2008 Fee Schedule—Effective January 2, 2008 [ Bold indicates changes from 2007 fee schedule] Fee Origination (per item or record): 38 Items in small files $0.0030 Items in large files 0.0025 Addenda record 0.0010 Input file processing (per file): eliminated Receipt (per item or record): 39 Item 0.0025 Addenda record 0.0010 FedACH risk management: Risk service subscription eliminated Risk origination monitoring service Monitoring criteria: 40 Per set of criteria for the first 20 sets per month 8.00 Per set of criteria for additional sets up to 150 per month 4.00 Per set of criteria for every set over 150 per month 1.00 Batch monitoring 0.0025 FedEDI Plus (per report): Scheduled report 0.20 On demand report 0.75 Secure delivery 0.20 Monthly (per routing number): Account servicing 41 25.00 FedACH settlement 42 20.00 Information extract file 20.00 FedLine Web origination returns and notification of change
(NOC)43 0.30 Voice response returns/NOC 44 2.00 Non-electronic input/output: 45 Tape input/output 25.00 Paper output 15.00 Facsimile exception returns/NOC 46 15.00 Canada service: Cross-border item surcharge 47 0.039 Return received from Canada 48 0.77 Same-day recall of item at receiving gateway operator 4.00 Same-day recall of item not at receiving gateway operator 7.00 Trace of item at receiving gateway 3.50 Trace of item not at receiving gateway 5.00 Mexico service: Cross-border item surcharge 47 0.67 Return received from Mexico 48 0.69 Item trace 11.50 Transatlantic service: Cross-border item surcharge: 47 Austria 2.00 Germany 2.00 The Netherlands 2.00 Switzerland 2.00 United Kingdom 2.00 Return received: 48 Austria 5.00 Germany 8.00 The Netherlands 5.00 Switzerland 5.00 United Kingdom 8.00 38 Small files contain fewer than 2,500 items and large files contain 2,500 or more items. These origination fees do not apply to items that the Reserve Banks receive from the private-sector ACH operator. 39 Receipt fees do not apply to items that the Reserve Banks send to the private-sector ACH operator. 40 Sets of criteria are the combination of variables the originating depository financial institution
(ODFI)will use to monitor ACH processing. For example, ODFIs can select which originators to monitor, set debit and credit caps, and receive e-mail notification. 41 The account servicing fee applies to routing numbers that have received or originated FedACH transactions. Institutions that receive only U.S. government transactions or that elect to use the other operator exclusively are not assessed the account servicing fee. 42 The FedACH settlement fee is applied to any routing number with activity during a month. This fee does not apply to routing numbers that use the Reserve Banks for government transactions only. 43 The fee includes the transaction and addenda fees. 44 The fee includes the transaction fee in addition to the voice response fee. 45 These services are offered for contingency situations only. 46 The fee includes the transaction fee in addition to the conversion fee. 47 This per-item surcharge is in addition to the standard domestic origination fees. 48 This per-item surcharge is in addition to the standard domestic receipt fees. Fedwire Funds and National Settlement Services 2008 Fee Schedule—Effective January 2, 2008 [ Bold indicates changes from 2007 fee schedule] Fee Fedwire Funds Service Origination and receipt: Per transfer for the first 3,000 transfers per month $0.26 Per transfer for additional transfers up to 90,000 per month 0.17 Per transfer for every transfer over 90,000 per month 0.08 Surcharge: Offline transfer originated or received 30.00 National Settlement Service Basic: Settlement entry 0.80 Settlement file 14.00 Surcharge for offline file origination 25.00 Minimum monthly charge (account maintenance) 49 60.00 Special settlement arrangements 50 Per day 100.00 49 This minimum monthly charge will only be assessed if total settlement charges during a calendar month are less than $60. 50 Special settlement arrangements use Fedwire funds transfers to effect settlement. Participants in arrangements and settlement agents are also charged the applicable Fedwire funds transfer fee for each transfer into and out of the settlement account. Fedwire Securities Service 2008 Fee Schedule (Non-Treasury Securities)—Effective January 2, 2008 [ Bold indicates changes from 2007 fee schedule] Fee Transfer or reversal, originated or received $0.34 Surcharge: Offline transfer or reversal originated or received 60.00 Monthly maintenance: Account maintenance (per account) 16.00 Issues maintained (per issue/per account) 0.40 Claim adjustment 0.30 Joint custody 40.00 Electronic Access 2008 Fee Schedule [Effective January 2, 2008. Bold indicates changes from 2007 fee schedule] Electronic Access Packages (Monthly) FedMail E-mail $15.00 FedLine Web W3 $85.00 Includes: FedMail E-mail FedLine Web with three individual subscriptions Service Charge Information
(SCI)Account Management Information
(AMI)FedACH risk management service FedEDI Plus service FedLine Web W5 $130.00 Includes: FedMail E-mail FedLine Web with five individual subscriptions Service Charge Information
(SCI)Account Management Information
(AMI)FedACH risk management service FedEDI Plus service Cash Management System Basic—Own report only FedLine Advantage A3 $310.00 Includes: FedLine Web W3 package FedLine Advantage with three individual subscriptions Virtual Private Network
(VPN)maintenance FedLine Advantage A5 $360.00 Includes: FedLine Web W5 package FedLine Advantage with five individual subscriptions VPN maintenance Intraday search download feature within AMI FedLine Command $660.00 Includes: FedLine Advantage A5 package One dedicated unattended connection over the Internet for ACH services Billing data format file
(BDFF)Intra-day file End of day file
(FIRD)Statement of account spreadsheet file
(SASF)FedLine Direct D56, D256, DT1 D56 $2,100.00, D256 $3,100.00, and DT1 $3,600.00 Includes: FedLine Command package One dedicated unattended connection for Computer Interface or FedLine Direct Premium Options (Monthly) 51 Electronic Access FedMail Fax (monthly per fax line) $25.00 Additional subscribers package (each package contains 5 additional subscribers) $75.00 Maintenance of additional VPN $50.00 Additional dedicated connections 52 Primary: 56K $750.00 256K $1,750.00 T1 $2,250.00 Contingency: 56K $650.00 256K $1,650.00 T1 $2,150.00 FedImage/Check 21 large file delivery Various Accounting Information Services Cash Management System: Basic—Respondent and/or subaccount reports (per report/month) $7.00 Basic—Respondent/subaccount recap report (per month) $35.00 Plus—Own report up to six times a day (per month) $50.00 Plus—Less than 10 respondent and/or subaccounts and SASF (per month) $100.00 Plus—10 or more respondent and/or subaccounts and SASF (per month) $200.00 End of day reconcilement file
(FIRD)(per month) $100.00 Statement of account spreadsheet file
(SASF)(per month) $100.00 Intra-day search download file (per month) $100.00 51 Premium options for FedLine Web W3 and FedLine Advantage A3 limited to FedMail Fax. 52 Network diversity supplemental charge of $1,000 a month may apply in addition to these fees. By order of the Board of Governors of the Federal Reserve System, November 5, 2007. Robert deV. Frierson, Deputy Secretary of the Board. [FR Doc. 07-5602 Filed 11-8-07; 8:45 am]
Connectionstraces to 4
3 references not yet in our index
- 5 CFR 1320.16
- 5 CFR 1320
- 5 USC 522(b)(4)
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Cite5 CFR 1320.16
Cite5 CFR 1320
Cite5 USC 522(b)(4)
Cites 7Cited by 0 across 0 sources