Comment requested on proposal to discontinue FRB services for definitive municipal securities

Federal Reserve Bulletin, Autumn, 2004

The Federal Reserve Board on October 14, 2004, 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 an average of 20 percent annually and is expected to decline one-third in 2005. The declining volume has reduced service revenue for the Reserve Banks. However, service costs remain largely fixed because of 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 processing definitive municipal securities such as through 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. Comment is requested by December 20, 2004.