Fed Exits Noncash Business
In late February, the Federal Reserve Board approved a proposal that Reserve Banks no longer provide services to financial institutions for collecting and processing definitive municipal securities, which are registered or bearer bonds issued by state and local governments with interest coupons in physical form. Beginning Sept. 30, 2005, the Federal Reserve Banks will no longer accept deposits of bonds and coupons and will completely withdraw from the noncash collection service by Dec. 30, 2005.
Several factors prompt decision
The Fed’s decision to eliminate this service is the result of the declining volume of definitive municipal securities and the Reserve Banks’ anticipated inability to recover the cost of providing the service in the future. Financial institutions have other viable alternatives for this service, including private-sector providers such as the Depository Trust Company or a correspondent bank or presenting bonds and coupons for payment directly to the paying agent.
Definitive municipal securities on the wane
The use of these securities has been declining since the passage of the Tax Equity and Fiscal Responsibility Act of 1982, which effectively eliminated the issuance of municipal bearer bonds. At the Atlanta Fed’s Jacksonville Branch, which provides the noncash collection service for the Federal Reserve Banks, this business represented less than 0.2 percent of the Reserve Banks’ total priced financial services’ costs in 2004.