To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Financial Officer



The Board of Governors of the Federal Reserve System has 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 volume of these securities has declined over the years as a result of legal and market changes. Over the past five years, volume has decreased by an average of 20 percent annually and is expected to decline by one-third in 2005. The declining volume 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. Although the Reserve Banks have recovered the costs of their noncash collection service over the long run, they project a significant underrecovery of costs beginning in 2005 even if the fees they charge depository institutions are increased.

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.

The Federal Register notice, published October 19, 2004, is available here (34 KB, 7 pages).

Date: The Board requests comments by December 20, 2004.

For Further Information: Kent Owens, Manager (202/728-5848), or Lyndsay Huot, Financial Services Analyst (202/452-5238), Division of Reserve Bank Operations and Payment Systems; for the hearing impaired only: Telecommunications Device for the Deaf, 202/263-4869.