Review of the Division of Reserve Bank Operations and Payment Systems' Oversight of the Next Generation $100 Note

The Board is the sole issuer of U.S. currency, and the Division of Reserve Bank Operations and Payment Systems (RBOPS)  is responsible (on behalf of the Board) for ensuring the high quality of the Federal Reserve notes that are printed by Treasury's Bureau of Engraving and Printing (BEP). The next generation (NXG) $100 note is the final denomination to be redesigned in the NXG currency redesign project that began in 2000, and it includes the most complex anticounterfeiting security features ever incorporated into U.S. currency. We began this review as a result of the Board's October 1, 2010, press release announcing that it would delay issuing the NXG $100 note due to the increasing incidence of currency paper creasing during the printing process. Our review objectives were to (1) assess RBOPS' oversight of the design and production of the NXG $100 notes; (2) review the actions RBOPS has taken to address the printing problems, which included contracting for an independent technical review, and to enhance controls to minimize the likelihood of future printing problems; and (3) assess plans for the disposition of NXG $100 notes that have already been printed.

Our analysis determined that actions taken by RBOPS appropriately addressed the identified printing issues and enhanced controls to minimize the likelihood of future printing problems. In addition, we determined that RBOPS staff is participating in the assessment of plans for the disposition of the more than 1.4 billion NXG $100 notes that have been printed. We identified three areas, however, in which RBOPS could strengthen oversight of the Federal Reserve note design and quality control production process:

• RBOPS staff should comply with requirements in a memorandum of understanding (MOU) that details the authorities, responsibilities, and understandings between RBOPS and the BEP, to include agreeing on a limited initial production quantity of newly designed currency.
• The Interagency Currency Design workgroup, which provides technical guidance on currency design and other subjects that affect U.S. currency, should operate under an executed charter.
• The current MOU between the Board and the BEP should be updated and expanded to incorporate the increased complexity of note design, quality control, and production.

Our report contained recommendations to address the absence of (1) an approved and signed Interagency Currency Design workgroup charter and (2) an updated MOU that incorporates increased design complexities. We did not make a recommendation regarding compliance with requirements in the MOU because the Board and the BEP entered into a NXG $100 note production validation agreement in September 2011 to ensure that all technical problems are identified and resolved prior to restarting full production.

The Director of RBOPS agreed with our recommendations and specified actions that have been or will be taken to implement them.