DEFINITION of 'Regulation J'

Regulation J is a regulation set forth by the Federal Reserve. Regulation J establishes the core guidelines for the processing of checks and other cash instruments for Federal Reserve Banks, senders and payers of checks, and recipients and senders of Fedwire funds. It also allows for these items to be settled on a net basis.

BREAKING DOWN 'Regulation J'

Regulation J also stipulates the collection framework for sent checks for banks or depository institutions. It describes the procedure for presentation to a paying bank as well as the return of items that are unpaid. Member banks of the Federal Reserve also periodically publish operating circulars that serve as supplements to the Regulation.

Summary of Regulation J

Regulation J establishes a legal framework which allows depository institutions to settle balances and collect checks via the Federal Reserve System. It specifies the terms under which the Federal Reserve Banks will accept checks and other items for collection and present them for collection to the institutions upon which they are drawn. It also establishes guidelines for the return of unpaid checks, and the receipt and delivery of funds via Fedwire.

Subpart A of Regulation J deals with guidelines for the handling and collection of checks and other noncash items by Federal Reserve Banks. The provisions also govern the handling of foreign items by the U.S. government. Section 210.4 states that a non-Reserve Bank may send any item to the Federal Reserve Bank for collection, and identifies parties that can be deemed to have handled an item. This section further describes the order in which such an item should be handled in order to meet regulations. Other sections of Subpart A govern the rights and responsibilities of senders in sending items to the Reserve Bank, and the Reserve Bank itself in receiving and handling them.

Subpart B of Regulation J covers funds transferred through the Federal Reserve’s wire transfer system, Fedwire. It establishes rules governing these transfers, and authorizes the Federal Reserve to debit a sender’s account in order to obtain payment for a transfer sent over the Fedwire system. Subpart B further elaborates on the procedure for handling overdrafts that result due to Fedwire payments, the receipt of said payments from the Reserve Bank, and the handling of payment orders by Reserve Banks.

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