What is an Authorized Settlement Agent
An authorized settlement agent is a bank that is authorized to submit checks and other cash items to the Federal Reserve for settlement through the national payments system. The 12 regional Federal Reserve Banks collect and pay checks for depository institutions; payments are also made through the automated clearing house (ACH) network and private clearing arrangements.
BREAKING DOWN Authorized Settlement Agent
The Federal Reserve plays a primary role in the in the U.S. payments system. It runs the National Settlements Service (NSS), which is a multilateral settlement service owned and operated by the regional Federal Reserve Banks. The NSS allows participants in private-sector clearing arrangements to exchange and settle transactions on a multilateral basis through designated master accounts held at the regional Federal Reserve Banks. This allows for the smooth and efficient functioning of the payments system. Those participants wishing to settle accounts will authorize a settlement agent, and it is this authorized settlement agent designated by the settling participants within the arrangement who submits settlement files to the Federal Reserve Banks.
These settlement files are usually sent electronically, including checks (almost all checks currently processed through the Federal Reserve Banks are deposited and presented through electronic check settlement services). The settlement agent will also be authorized to select, on behalf of the participants, certain service functions from the particular Federal Reserve Bank at which it is settling (for example, whether to provide immediate notification of a failed attempt to execute, or to delay notification pending a later attempt).
Before a participant may settle at a Federal Reserve Bank, it needs to sign a settlement agreement, which will name the designated authorized settlement agent. The authorized settlement agent also needs to sign an agreement informing the host Federal Reserve Bank that it has been designated as an agent by this settler and that it accepts that authorization. The host Federal Reserve Bank will require a copy of both of these agreements. Only currently-authorized settlement agents will be able to submit settlement files to the Federal Reserve Bank on any given day.