In September 1992, the Federal Reserve Board adopted long-debated amendments to Regulation CC, making same-day settlement for checks the law of the land.
For the first time, any depository institution will be able to present checks drawn on any other depository institution, provided the items arrive before 8 a.m. (local time of the paying bank), and demand settlement in same-day funds without having to pay presentment fees.
The same-day settlement regulation followed a couple of proposals and the cooperative effort of an industry task force convened by the Fed to impose a reality check on the rulemaking process.
In fact, the development of the same-day regulation -- which has the potential to affect virtually every depository institution and check-processing organization in the country -- is a good example of how a law should be written.
Confusion Looms
There may be winners and losers under the regulation, as there usually are with a new law, but the result is a fair law that will result in a more efficient and competitive check-processing environment.
Before we get to this promising conclusion however, much confusion in the banking industry is likely to result.
Depository institutions could begin to receive substantial volumes of "on us" items for payment from institutions with which they have no relationship.
The operational implications could be significant, particularly if the items begin winding up, almost literally, on the paying bank's doorstep.
Built-In Flexibility
The keys to the operational success of same-day settlement will be an open line of communication between paying and presenting banks, flexibility in terms of presentment location, and the ability to negotiate terms of presentment based on the paying and presenting banks' respective business scenarios.
Rather than amending Regulation CC to universally micromanage presentments, the Federal Reserve, in large part because it listened to the banking industry, has accommodated the need for flexibility by permitting individual players to negotiate most of the terms of same-day settlement (including changes to some of the terms imposed by the regulation).
The Fed also listened when the industry demanded that paying banks be permitted to designate their processors as their presentment locations, provided such locations are in the same check-processing region as that in which the items are drawn (paying banks can negotiate for alternative locations outside the applicable region).
Where the regulation is silent, or at least whispers, is on the issue of operational requirements. Short of encouraging (but not requiring) presenting banks to contact paying banks in advance of beginning deliveries of cash letters qualifying for same-day settlement, the Fed relies on adherence to "reasonable commercial standards of fair dealing" to enforce fair play in the delivery of same-day settlement cash letters, the handling of resulting adjustments, etc.
Under this umbrella of reasonability, the paying bank may establish "reasonable delivery requirements" to safeguard presentments, and the Uniform Commercial Code's "good faith" standards shall apply to both parties.
Nonetheless, the question remains: What is "reasonable"?
In the highly cost-conscious world of check processing, spending much time and effort chasing down a bank that may be skirting along the edges of good faith would, unless the action were terribly egregious, be entirely uneconomical.
And in most cases where behavior may lie in the grey area of Regulation CC and the commercial code, the players will probably not be cognizant that their behavior offends, while such offenses, individually, may be minimal.
Added up however, the efficiencies promised by same-day settlement and the smooth running of check operations by depository institutions would be compromised to a degree.
Toward Guidelines
In response to the highly subjective nature of the term "reasonable," at least so far as it applies to check processing, the banking industry has again come together to hammer out a framework of acceptable behavior under same-day settlement.
Initiated by the National Organization of Clearing Houses, a Same-Day Settlement Task Force of representatives of a diverse group of depository institutions met and reported its recommendations.
Included in the task force's recommendations is an "advanced notification period" of at least 20 business days. During this period, negotiations and the sharing of information necessary to the smooth operation of the presentment relationship are expected to take place.
The task force focused many of its recommendations in the area of adjustments. Taking adjustment procedures as an example, paying and presenting institutions should agree to such procedures in advance.
Timely processing is the goal; the task force recommended that a best effort be made to process adjustments within three business days, if the request is received within five days from forward presentment, and within 20 days if the request is from an older presentment.
Much of the potential confusion from same-day settlement will be alleviated if the banking industry takes to heart the guidelines it has developed for itself.
