Interbank Negotiation and Exchange of Bill Images
In the US, there are three principal sets of interbank image exchange rules. Essentially, each endeavours to equate the position of cheque images to that of the cheques themselves under existing legislation and other sources of law.
In fact, they extend the legal framework of Check 21 Act[919] to cover image exchanges. The first set of image exchange rules is contained in subpart A of Regulation J,[920] governing interbank exchange through Federal Reserve Banks. Further implemented by Operating Circular No 3, it specifically deals with the collection of cheques and other items by Federal Reserve Banks. Thereunder, an ‘item’ is broadly defined to cover a cheque, including one in an electronic format.[921] While it is not limited to cheques, it does not extend beyond items collected by Federal Reserve Banks.9.47
The second set is contained in the Electronic Check Clearing House Organization (‘ECCHO’) Rules.[922] ECCHO is ‘a national not-for-profit “rule-making organization” owned entirely by its member banks’.[923] ECCHO was established in 1990 primarily to address the increased risk resulting from the introduction of tight funds availability schedules for cheques under Regulation CC.[924] The use of electronics expedited both the forward presentment and return processes, so as to allow banks to meet the tight statutory schedules. The organisation has five membership classes (Full Members, Affiliate Members, Participating Members, Associate Members, and Sponsored Members), which reflect variations in Members’ roles in the corporate governance of the organisation. A Member must establish the technological and communication methods for exchanging electronic cheque transactions with another Member.
As ‘an association of banks or other payors regularly clearing items’, ECCHO is a clearing house under UCC § 4-104(a)(4) even though it does not process payments at all. Rather, it develops rules governing electronic exchanges of cheque images. Such rules qualify as ‘clearing-house rules’ under UCC § 4- 103(b) and govern bilateral and multilateral exchanges of member banks which choose to adhere to them. According to that provision, ‘all parties interested in’ the cheques are bound by such rules governing their exchange. Accordingly, while the ECCHO Rules do not constitute customer agreements, they bind customers a by virtue of UCC § 4-103(b).9.48
The ECCHO Rules provide the legal framework for both forward presentment and return of an electronic cheque, being the image and related information derived from the paper cheque. The ECCHO Rules do not apply to the substitute cheques that reproduce cheque images. Substitute cheques, and to some extent electronic cheques derived from substitute cheques, are governed by the Check 21 Act[925] and the provisions of subpart D of Regulation CC[926] implementing it. The ECCHO Rules govern only electronic cheque transactions between two Members. A Member is not required, by virtue of its membership to send and receive electronic cheque transactions with another Member. The 2012 ECCHO Rule summary specifically addressed Member agreements, sometimes referred to as Banking Practice Agreements (‘BPAs’) that may designate a particular electronic- communication switch or a cheque-image archive to exchange electronic cheque images. Such agreements, that may also establish a ‘bridge’ or link between private networks/ archives, are outside the ECCHO framework. While supporting a number of processes for cheque-image exchange, ECCHO Rules do not establish the rules for accessing or using private networks/archives.
9.49 Under the ECCHO Rules, the cheque itself is not sent to the receiving Member.
In turn, Page 1-73 (Rel 22) states that the electronic cheque is an ‘item’, as well as a ‘check’, under the UCC and Regulation CC.[927] ECCHO Rules also provide for the time and manner in which presentment is actually made and further address diverse matters such as indorsements, as well as storage and retrieval of the original cheque. To protect the receiving Member in each electronic cheque transaction, the ECCHO Rules provide for indemnifications, but rely on electronic cheque warranties provided under Regulation CC, discussed below. An additional warranty and related indemnity as to the compliance with ECCHO Rules are specifically provided.[928]9.50 The third principal set of interbank image exchange rules governs the regulatory framework in the US covering the exchange of cheque images under Regulation CC.[929] Following a proposal of the Federal Reserve Board (‘Board’) from 20 1 3,[930] the final version of § 229.30(a) (dated 15 June 2017 and effective on 1 July 2018)[931] states that unless otherwise agreed by the sending and receiving banks,[932] electronic images of cheques and electronic information related to cheques that banks send and receive by agreement would be subject to subpart C of Regulation CC as if they were paper cheques. Accordingly, a bank that transfers or presents for value an electronic cheque and electronic returned cheque, each defined in § 229.2(ggg) as ‘an electronic image of, and electronic information derived from, a paper check or paper returned check, respectively,’ gives all the cheque warranties and indemnities.[933] According to § 229.34(a)(1), which is effective from 1 July 2018, additional ‘Check-21-like warranties'[934] are specifically given with respect to electronic cheques and electronic returns:
Each bank that transfers or presents an electronic check or electronic returned check
and receives a settlement or other consideration for it warrants that—
(i) The electronic image accurately represents all of the information on the front and back of the original check as of the time that the original check was truncated and the electronic information includes an accurate record of all MICR line information required for a substitute check...
and the amount of the check, and(ii) No person will receive a transfer, presentment, or return of, or otherwise be charged for an electronic check or electronic returned check, the original check, a substitute check, or a paper or electronic representation of a substitute check such that the person will be asked to make payment based on a check it has already paid.
This provides a double warranty for not only the accuracy and completeness of the elec- 9.51
tronic record, but also against double payment of the cheque. For the purposes of this double warranty, § 229.34(a)(2) provides that the beneficiary is ‘[in] Page 1-75 (Rel.
22) the case of transfers for collection or presentment, the transferee bank, any collecting bank, the paying bank, and the drawer' and ‘[i]n the case of transfers for return, the transferee returning bank, any subsequent returning bank, the depositary bank, and the owner'.[935]
Such a scheme governing the exchange and indorsement of cheque images could be made to 9.52 apply to bill images. Under such a proposed scheme, images of electronic bills are to be treated as bills or bill substitutes for the purpose of both forward collection and return. The computer program underlying the proposed scheme could be made to facilitate the transmission of an encrypted version of the imaged ‘bill' to which the ‘handwritten' drawer's and indorser's signatures—both made on a trade acceptance by the seller of the goods, as well each successive indorsement—are attached. The double warranty for the accuracy and completeness of the electronic record and against double payment are to be given by each sender.
The key to the proposed scheme is legal equivalency in the electronic world for acts and 9.53 situations existing in the paper-based world. However, in the final analysis, practically speaking, legal equivalency works best when it goes hand in hand with technological feasibility: it is only where technology facilitates the change of control of the electronic image from one person to the other that legal equivalency of the image can work. In the alternative situation, in which parallel control remains in a sender's hands, warranties and indemnities against double payments are as good to the recipient as the creditworthiness of the sender that gives them.
VI.