To All Depository Institutions and Others Concerned in the Second Federal Reserve District:
In a press release, the Federal Reserve Board requested comment on a proposal for the Federal Reserve Banks to stop providing services to depository institutions for the collection of definitive municipal securities at the end of 2005. The proposal to exit this service is prompted by the declining volume of definitive municipal securities, the Reserve Banks’ expected underrecovery of costs for providing the service in future years, and the availability of reasonable private-sector alternatives.
The Reserve Banks’ noncash collection service involves the collection and processing of definitive municipal bonds and coupons issued by state and local governments. Definitive municipal securities are registered or bearer bonds that have been issued with interest coupons in certificated, or physical, form. The declining volume of these securities has reduced service revenue for the Reserve Banks. However, service costs remain largely fixed due to the strict custody control requirements for handling physical securities.
If the Reserve Banks withdraw from the service, depository institution customers would have several reasonable, private-sector options available for the processing of definitive municipal securities such as the Depository Trust Company, correspondent banks, or direct presentment to the paying agents. Collectively, these alternatives would be expected to provide an adequate level of service nationwide.
Comments are requested by December 20, 2004.
Further details are available in the Board’s press release and notice.
Stephanie A. Heller
Counsel and Vice President