March 7, 1989
TO: OPERATIONS COMMITTEE NO. 5-89
RE: CHECK AGING STUDY - NOVEMBER, 1988
__________________________________________________________
This is the first Institute check aging study following the
implementation of the Federal Reserve rules, effective September
1, 1988, under the Expedited Funds Availability Act. The Act
includes specific and detailed provisions requiring banks to:
(1) Make funds available to their customers
within specified time frames,
(2) Pay interest on interest-bearing transaction
accounts not later than the day the bank
receives provisional credit, and
(3) Disclose their funds availability policies
to their customers.
Under the temporary schedule that became effective on
September 1, 1988, the following must take place:
(1) a depositary bank must make the proceeds of local
checks available for withdrawal by the third
business day following deposit; that is, the
proceeds of local checks deposited on a Monday must
be available for withdrawal by the following
Thursday, and
(2) the depositary bank must make the proceeds of nonlocal
checks available for withdrawal by the seventh
business day following deposit; that is, the proceeds
of a Monday deposit must be available for withdrawal
by Wednesday of the following week.
Attached hereto are the results of the Operations Committee
Check Aging Study of investors' checks presented to money market
and other income funds during the month of November, 1988.
Thirty-seven (37) management companies representing five hundred
fifty-four (554) funds participated in the survey. One hundred
ninety-eight (198) funds reported no returned check activity.
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The results of the funds surveyed show that for the month
of November 1988, a total of 978,877 shareholder checks were
deposited and cleared. A total of 5,142 shareholder purchase
checks were dishonored or returned. Of these, a total of 4,532
or 88.1% were returned within 10 days of deposit.
For analysis purposes, a summary table of the previous six
check aging studies compared to the November, 1988 study, with
the new rules in effect since September 1, 1988, is attached.
It is important to note that it appears that the new
Federal rules requiring stepped-up clearing and availability of
check deposits is working. The November, 1988 check aging
survey, which covered many more funds than previous studies,
shows that approximately 88% of returned checks took place within
the first 10 days following deposit. This percentage is better
than the last two - 1985 and 1987 - check aging studies which
showed that 78% and 76% of checks were returned within the first
10 days. Within 15 days of deposit, 4,956 or 96.3% of all
dishonored checks were returned to funds. Thus, unlike previous
check aging studies which showed that 25% of all checks were
taking longer than 10 days to clear, the 1988 study shows that
only slightly less than 12% of checks are taking over 10 days to
clear. Still, 2.0% of dishonored checks take from 16-20 days to
be returned and 1.7% of dishonored checks take up to 25 days or
longer to be returned.
Overall, the net analysis at this early stage is that
checks are clearing somewhat faster and it appears that the new
Federal Reserve rules may be serving their purpose. The numbers,
however, are not, as yet, conclusive and it is recommended that a
follow-up check aging study be performed in mid-year to see if
further improvement takes place. It would seem that as a matter
of routine, over 92%-94% of checks should be returned within the
first ten days of deposit. This number (over 90%) will enable
funds to re-set with confidence their criteria for check holds on
shareholders purchases of mutual fund shares with personal
checks.
Donald E. O'Connor
Vice President - Operations
Attachments