Proposal to discontinue services for definitive municipal securities

Federal Reserve Bulletin, Spring, 2005

The Federal Reserve Board approved on February 28, 2005, the Federal Reserve Banks' proposal to stop providing services to depository institutions for the collection and processing of definitive municipal securities. The Reserve Banks will stop accepting deposits of bonds and coupons on September 30, 2005, and will complete the withdrawal from the noncash collection service on December 30, 2005.

Definitive municipal securities are registered or bearer bonds that have been issued by state and local governments with interest coupons in certificated or physical form. Municipal bond and coupon volume 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. The noncash collection service is provided centrally by the Jacksonville Branch of the Federal Reserve Bank of Atlanta and, in 2004, represented less than 0.2 percent of the Reserve Banks' total priced financial services costs.

The withdrawal from 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. With the exit of the Reserve Banks, depository institution customers of the noncash collection service could instead use a private-sector service provider, such as the Depository Trust Company or a correspondent bank, to collect their definitive municipal bonds and coupons or could present these items for payment directly to the paying agent.