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FEDERAL R ESE R V E BANK OF DALLAS
S ta tio n K, D allas, T e x a s 7 5 2 2 2

Ci r cu l ar No. 84-55
April 23, 1984

TO:

All depository i n s t i t u t i o n s in the Eleventh Federal
Reserve D i s t r i c t

ATTENTION:

Chief Executive Offi cer

SUBJECT:

Proposals to reduce risks on large dollar wire
transfer systems

SUMMARY:

The Board of Governors of the Federal Reserve System
has requested public comment on the proposals outl in ed
in the attached press r e l e a s e regarding r i s k s in large
d o l l a r wire t r a n s f e r systems. The Board is concerned
t h a t developments could a r i s e in connection with such
systems t h a t may d e s t a b i l i z e f i n a n c i a l markets and
d i s r u p t the n a t i o n ' s economy. Comments must be
received by July 27, 1984. All correspondence should
be addressed to Mr. William W Wiles, S ec re ta ry , Board
.
of Governors of the Federal Reserve System,
Washington, D.C., 20551 and should r e f e r to Docket
No. R-0515

ATTACHMENTS:

Board's press re l e a s e and material as submitted fo r
p u bl ic at io n in the Federal Register

MORE INFORMATION:

Larry Ripley, Extension 6118 or Jonnie M i l l e r ,
Extension 6290

ADDITIONAL COPIES:

Public A f fa ir s Department, Extension 6289

Banks and others are encouraged to use the follow ing incom ing W A T S numbers in contacting this Bank: 1-800-442-7140
(in trastate) and 1-800-527-9200 (interstate). For c alls placed locally, please use 651 plus the extension referred to above.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

FEDERAL RESERVE press release
For immediate r e l e a s e

March 29, 1984

The Federal Reserve Board today announced two ac ti o n s as p a r t of i t s
continuing e f f o r t to reduce r i s k s involved in the e l e c t r o n i c movement of hundreds of
b i l l i o n s of d o l l a r s a day:
--The Board requested public comment on a wide v a r i e ty of poss ib le
measures for reducing r i s k in the oper ations of l a r g e - d o l l a r wire t r a n s f e r systems.
--At the same time, the Board issued a policy statement designed to ensure
t h a t depository i n s t i t u t i o n s do not use the Federal Reserve's wire t r a n s f e r network t o
avoid the Federal Reserve or p r i v a t e s e c t o r r i s k reduction e f f o r t s t h a t are under
consideration.
There are a t p resent

four l a r g e - d o l l a r e l e c t r o n i c fund t r a n s f e r systems t h a t

to g e t h e r handle more than $500 b i l l i o n d o l l a r s in wire
th e Federal Reserve's wire t r a n s f e r system;

t r a n s f e r s a day:

Fedwire - -

CHIPS (Clearing House Interbank Payments

System) operated by the New York Clearing House;

CashWire, operated by a consortium

of banks and CHESS (Clearing House E le c tr o n i c Settlement System) operated by the
Chicago Clearing House.

On Fedwire, average d a i l y volume was about $355 b i l l i o n in 1983,

involving some 150,000 t r a n s a c t i o n s a day.
In taking i t s a c t i o n s , the Board s a i d , v i s - a - v i s th e r i s k s involved:
I f a t r a n s f e r i s made over Fedwire [ t he Board's r u l e s ] provide t h a t
t h e t r a n s f e r i s f i n a l when t h e r e c e i v e r ' s Reserve Bank c r e d i t s the
r e c e i v e r ' s account or sends advice of c r e d i t ; at t h a t point t h e
t r a n s f e r i s i r r e v o c a b l e . . . I f th e s e n d e r' s Reserve Bank processes
the t r a n s f e r when the sender did not have s u f f i c i e n t funds in i t s
account to cover the amount of the t r a n s f e r ,
t h e sender incurs a
"d ayl igh t o v e r d r a f t " in i t s account with t h e
Federal Reserve. The
Federal Reserve bears the r i s k of l o s s i f the sender i s unable to
cover the o v e r d r a f t . The f a i l u r e of an i n s t i t u t i o n to cover
o v e r d r a f t s on Fedwire, t h e r e f o r e , would by i t s e l f have no e f f e c t
on othe r i n s t i t u t i o n s , including the r e c e i v e r ; a l l of the lo ss
would be absorbed by the Federal Reserve.
P ri v a te wire networks (those o th er than Fedwire) however, ar e
t y p i c a l l y net se tt l e m e n t networks; t h a t i s , they op er at e by the

-2 -

tra nsm iss io n of payment messages throughout the day, with s e t t l e ­
ment of net p o s i t i o n s a t th e end of t he day. The (time) gap
between t h e sending of payment messages and t h e i r se t tl e m e n t gives
r i s e to i n t r a - d a y c r e d i t exposures among p a r t i c i p a n t s in p r i v a t e
networks. These exposures are often q u i t e l a r g e . Should a
p a r t i c i p a n t be unwilling or unable t o s e t t l e a l a r g e net d e b i t
p o s i t i o n (which could be due to i t s funds t r a n s f e r a c t i v i t i e s , t o
o t h er a c t i v i t i e s , or even t o circumstances such as p o l i t i c a l
developments, t h a t are beyond i t s c o n t r o l ) i t s corresponding
net c r e d i t o r s could experience a sudden, rapid d e t e r i o r a t i o n in
t h e i r f i n a n c i a l p o s i t i o n . . .The f a i l u r e of one p a r t i c i p a n t t o
s e t t l e could a f f e c t not only o t h e r network p a r t i c i p a n t s , but
also th e f u l l range of c r e d i t o r s of network p a r t i c i p a n t s ,
including bank and nonbank d e p o s i t o r s . Sudden, l a r g e changes in
th e f i n a n c i a l co nd it io n s of both network p a r t i c i p a n t s and t h e i r
c r e d i t o r s could u l t i m a t e l y lead to se rio u s d i s r u p t i o n s in money
and other f i n a n c i a l markets, as well as to t h e d i s r u p t i o n of
t r a d e and commercial a c t i v i t i e s .
The Board sa i d t h a t i t is concerned with the p o s s i b i l i t y of developments
t h a t could d e s t a b i l i z e f i n a n c i a l markets, and noted t h a t t h e Federal Reserve has already
taken a number of a c t i o n s designed to minimize r i s k s a s s o c i a t e d with d a y l i g h t o v e r d r a f t s
on Fedwire.

These and a number of o th er a c t i o n s by t h e Federal Reserve and in t h e

p r i v a t e s e c t o r during t he p as t several y e a r s , aimed a t i d e n t i f y i n g and minimizing r i s k s
of t h i s n a t u r e , are described in the att ac h ed n o t i c e r eq ue st i n g public comment.
Board

said the se developments show t h a t t h e r e i s a

t h a t makes i t a p p r o p r i a te for

The

widespread re co g n it io n of r i s k s

t h e Board to s o l i c i t comment on p o s s i b le methods

for

reducing wire t r a n s f e r r i s k s .
In i s s u i n g i t s r eq ue st f o r comment t h e Board s t a t e d four policy goals t h a t
i t seeks to achi eve .

These a r e :

--Containment of the e f f e c t s of s e t tl e m e n t f a i l u r e .
--Reduction of t h e volume of i n t r a - d a y c r e d i t exposures.
--Control of remaining c r e d i t r i s k .
--Smooth o per ati on of the payments system.

The request fo r comment
The B o a r d - i d e n t i f i e d t h r e e methods of reducing r i s k s as deserving th e most
serious c o n s i d e ra t i o n and requested comment on them.
Sender net d e b i t c a p s .

These are :

This would be a l i m i t imposing a maximum c e i l i n g or

cap on the aggregate net d e b i t p o s i t i o n t h a t an ind iv id u al sending f i n a n c i a l i n s t i t u t i o n
could incur during the day ( t h i s cap could be appl ied to the s e n d e r ' s payments made
over a p a r t i c u l a r network or a s i n g l e cap could be applied to a l l i t s t r a n s f e r
activities).
B i l a t e r a l net c r e d i t l i m i t s .

Each rec eiv in g f i n a n c i a l i n s t i t u t i o n would

determine the maximum amount i t is w i l l i n g to re ceive from any sender.
F i n a l i t y of payments.

Under t h i s arrangement, t h e receiving f i n a n c i a l

i n s t i t u t i o n would guarantee t h a t i t will promptly provide the b e n e f i c i a r i e s of funds
t r a n s f e r s with ir r e v o c a b l e c r e d i t f o r funds t r a n s f e r s .
The Board noted t h a t each of t h e s e methods could be used s i n g ly or in co nce rt
with o t h e r s , and requested commenters to suggest optimum combinations of r i s k re duction
with re sp ec t to each of t h e s e t h r e e p o s s i b l e r i s k - r e d u c t i o n methods.

The Board posed a

s e r i e s of qu es tio ns in connection with each of t h es e methods fo r the c o n s i d e r a t i o n and
r e a c ti o n of commenters.

The Board a l s o requested comment on c e r t a i n s p e c i f i c i s s u e s ,

(such as how p o l i c i e s should apply to Edge Act and agreement c o r po ra ti on s and U.S.
branches and agencies of fore ig n banks), and i n v i t e d commenters to suggest a l t e r n a t i v e
methods fo r reducing r i s k s , and t o comment on any r e l a t e d t o p i c .
The Board requested comment by July 27, 1984.
The po li cy s t a t e m e n t :
The Board's policy statement is aimed a t ensuring t h a t i n s t i t u t i o n s do not
use Fedwire to avoid Federal Reserve or p r i v a t e s e c t o r r i s k reduction p o l i c i e s .
Board said t h a t th e most l i k e l y v e h i c l e f o r such avoidance would be the use of

The

-

4-

periodic se t tl e m e n t between de po si to ry i n s t i t u t i o n s (probably a t the end of t h e day)
through the exchange of FedWire t r a n s f e r s .
The Board l i f t e d a c u r r e n t moratorium on p r i v a t e network access
t o Federal Reserve net s e tt l e m e n t f a c i l i t i e s over the Fedwire, but e s t a b l i s h e d the
following i n te ri m c o n d i t i o n s for e l i g i b i l i t y fo r such access:
1.

All p a r t i c i p a n t s must s e t b i l a t e r a l net c r e d i t l i m i t s .

2.

Each network must adopt a sender cap of 50 percent of
c a p i t a l f o r each p a r t i c i p a n t , applied to t r a n s f e r s sen t
over t h a t network.

3.

Each network must agree to provide the Federal Reserve
with t r a n s a c t i o n s d at a.

As the Board's requirements f o r access to net se t tl e m e n t se r v i c e s by
l a r g e - d o l l a r t r a n s f e r networks evolve over t i m e , such p o l i c i e s would apply to both
e x i s t i n g networks and th o se given access under t h e i n te r im requirements.
The statement s e t s f o r t h measures to enforce t h e Board's view t h a t

i t is

i n a p p r o p r i a t e to use Fedwire to avoid Federal Reserve or o t h er r i s k red uctio n measures.
The enforcement measures i ncl ude :
- - Ex post monitoring of Fedwire t r a n s a c t i o n s to d e t e c t p a t t e r n s
i n d i c a t i n g i n a p p r o p r i a t e use of t h e Federal Reserve network.
--Counseling of i n s t i t u t i o n s observed using Fedwire to avoid
r i s k r ed uc ti on measures.
--Removal of i n s t i t u t i o n s from d i r e c t , o n - l i n e , access to Fedwire
i f they r e p e a t e d l y abuse use of t h e wir e, o r , b ar r in g an
offending i n s t i t u t i o n from use of t he Federal Reserve network.
The Board sa id i t a n t i c i p a t e s coo peration from f i n a n c i a l i n s t i t u t i o n s
achieving

in

t h e o b j e c t i v e s of t h i s p o l i c y .
The Board's policy sta tement and i t s n o t i c e re qu est in g comment are a t t a c h e d .
-0 -

Attachments

13186

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices
Comments must be received by
July 27,1984.
ADDRESS: Comments, which should refer
to Docket No. R-0515, should be
addressed to Mr. William W. Wiles,
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW„ Washington, D.C. 20551, or
delivered to room B-2223 between 8:45
a.m. and 5:15 p.m. Comments received
may be inspected in room B-1122
between 8:45 a m. and 5:15 p.m., except
as provided in § 261.6(a) of the Board's
Rules regarding availability of
information, 12 CFR § 261.6(a).
DATE:

FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director.
Division of Research and Statistics (202/
452-3368); David B. Humphrey, Chief,
Financial Studies Section, Division of
Research and Statistics (202/452-2557);
Elliott C. McEntee, Associate Director.
Division of Federal Reserve Bank
Operations (202/452-2231); Jeffrey C.
Marquardt, Economist, Division of
International Finance (202/452-2360);
Gilbert T. Schwartz, Associate General
Counsel, Legal Division (202/452-3625);
or Joseph R. Alexander, Attorney, Legal
Division (202/452-2489). Board of
Governors of the Federal Reserve
System, Washington, D.C 20551.
SUPPLEMENTARY INFORMATION:

FEDERAL RESERVE SYSTEM

Background
Large-dollar electronic funds transfer
systems 1have become an integral part
of both the domestic and international
dollar payments mechanism, and play a
crucial role in support of U.S. financial
and real economic activity. The manner
in which private systems generally are
structured, however, creates significant
risks for the institutions that participate
in them and other sectors of the
economy as well.
Any depository institution wishing to
transfer funds (“the sender”), for its own
account or for the account of a
customer, to another depository
institution (‘ the receiver”), for the

[D o ck et No. R -0515]

Proposals to Reduce Risk on LargeDollar Transfer Systems
a g e n c y : Board of Governors of the
Federal Reserve System.
ACTION: Request for comments.

The Board of Governors is
requesting public comment on proposals
to reduce risks on large-dollar wire
transfer systems. The Board is
concerned that developments that could
arise in connection.with such systems
may destabilize financial markets and
disrupt the nation’s economy.

SUMMARY:

1 The term “large-dollar electronic funds transfer
systems" (also referred to as “electronic payments
systems” or “wire networks") refer# here to
networks composed of more than two participants
transferring payment messages of both large
average and large aggregate vahie, and providing
for settlement. i.e. the actual transfer of funds. Suet
systems may involve a time lag between the
transmission of the payment messages and
settlement that gives rise to intra-day inter-bank
credit exposures. Under these criteria, there are
presently four large-dollar electronic funds transfer
systems: Fedwire (the Federal Reserve’s wire
transfer system), CHIPS (Clearing House Interbank
Payments System, operated by the New York
Clearing House Association), CashWire (operated
by a consortium of banks), and CHESS (Clearing
House Electronic Settlement System, operated by
the Chicago Clearing House Association).

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices
benefit of the receiver or a customer of
the receiver, has several networks that it
might use.2The choice of a network can
involve several business and technical
considerations.
If a transfer is made over Fedwire,
§ 210.36(a) of Regulation }, 12 CFR
§ 210.36(a), provides that the transfer is
final when the receiver’s Reserve Bank
credits the receiver’s account or sends
the advice of credit; at that point the
transfer is irrevocable, and the receiver
has actually and finally collected funds.
If the sender’s Reserve Bank processes
the transfer when the sender did not
have sufficient funds in its account to
cover the amount of the transfer, the
sender incurs a “daylight overdraft” in
its account'with the Federal Reserve.
The Federal Reserve bears the risk of
loss if the sender is unable to cover this
overdraft. The failure of an institution to
cover daylight overdrafts on Fedwire,
therefore, would by itself have no effect
on other institutions, including the
receiver; all of the loss would be
absorbed by the Federal Reserve.
Private wire networks, however, are
typically net settlement networks; that
is, they operate by the transmission of
payment messages throughout the day
with settlement of net positions at the
end of the day. The temporal gap
between the sending of payment
messages and their settlement gives rise
to net intra-day credit exposures among
participants in private networks. These
exposures are often quite large. Should a
participant be unwilling or unable to
settle a large net debit position,3 its
corresponding net creditors could
experience a sudden, rapid deterioration
in their financial positions, The term
“systemic risk” refers to the possibility
that the failure of one participant in a
private network would so jeopardize the
financial condition of its net creditors on
that network, that its creditors, in turn,
would also be unable to settle. The
concept of systemic risk is also used to
encompass the possible effects of
settlement failure on the entire financial
system. The failure of one participant to
settle could affect not only other
network participants, but also the full
range of creditors of network
participants, including bank and
nonbank depositors. Sudden, large
2Transfers of funds involving traditional
correspondent banking arrangements are also a
possibility. Banks may also transmit payment
messages over a nonsettling communications
network and settle later over a settling network or
through adjustment of correspondent balances.
3 The failure of an institution to settle may be
related to its funds transfer activities, to other
activities, or even to circumstances, such as
political developments, that are beyond the
institution's control.

changes in the financial condition of
both network participants and their
creditors could lead to serious
disruptions in money and other financial
markets, as well as to the disruption of
trade and commercial activities.
Industry groups, as well as the
Federal Reserve, have been concerned
by these risks for some time. For
example, in April, 1982, the Association
of Reserve City Bankers (“ARCB”)
published a Report on the Payments
System, which identified risk as one of
the major issues facing participants in
the nation’s payments system. The
ARCB’s Payments System Committee
subsequently established a task force to
study the issue further. The Risk Task
Force issued its report, Risks in the
Electronic Payments Systems, in
October, 1983, suggesting, inter alia, that
certain types of voluntary credit limits
be established to minimize the
possibility that any participant would be
unable to settle its end-of-day position
on any network.
The Federal Reserve is particularly
concerned about current payments
system risks. First and foremost, the
Federal Reserve is concerned about
developments that may destabilize
financial markets. Moreover, Congress
has given the Federal Reserve a unique
role in the nation’s payments
mechanism that justifies attention on the
part of the System with the efficiency
and safety of large-dollar payments
systems. Indeed, the Federal Reserve’s
responsibility for the implementation of
monetary policy, as well as its
responsibility as a bank supervisor,
requires the preservation of a safe and
efficient payments mechanism. Further,
to reduce systemic risk, the Federal
Reserve may be called upon as lender of
last resort to prevent one participant’s
settlement failure from spreading further
through the banking system and into the
rest of economy.
Initially, the Federal Reserve's
concern with payments system risks
was centered on the problems
associated with daylight overdrafts on
Fedwire. In September, 1981, the Board
directed reserve Banks to discourage
daylight overdrafts and to prevent
institutions from incurring large daylight
overdrafts on a regular basis.
Subsequently, in May, 1982, the Board
announced a three-part policy for
dealing with these overdrafts. The
components of this policy are: (1)
Moving toward collateralization of
daylight overdrafts arising out of wire
transfers of book-entry U.S. government
and federal agency securities; (2) ex post
monitoring of daylight overdrafts
resulting from Fedwire funds transfers

13187

(those not arising out of book-entry
securities transfers) and counseling
those institutions incurring daylight
overdrafts of inordinate frequency,
duration, or size; and (3) full
collateralization and real-time
monitoring of Fedwire overdrafts of U.S.
branches and agencies of foreign banks
and Edge Act and agreement
corporations.
The Board realized, however, that
without a program to control risks
across all wire transfer systems,
reduction of Fedwire daylight overdrafts
would not reduce systemic risks,
because transfers (and overdrafts) on
Fedwire would simply shift to other
networks. To that end, the Board
directed its staff to undertake a study of
the risks associated with large-dollar
wire transfer systems.
During the course of this study, there
have been several other important
developments:
• In October, 1982, the Board
provided CashWire4access to the
Federal Reserve's net settlement service.
This access was conditioned on
CashWire's adoption of an aggregate
intra-day net debit limit applicable to
each CashWire sender (“sender net
debit cap"). CashWire has also adopted
requirements that each participant
adopt an intra-day net credit limit vis-avis each other participant (“bilateral net
credit limits"), and that each participant
guarantee irrevocable availability of
funds received over CashWire to its
customers. Each of these measures
reduces the effect that a CashWire
participant’s inability to settle would
have upon other participants and their
customers.
• Also in late 1982, the Board
established the Federal Advisory
Council/Thrift Institutions Advisory
Council (FAC/TIAC) Payments System
Committee to consider the issue of
payment system risk. In November,
1983,
the Committee issued a report
containing several important proposals
that are discussed more fully below.5
• In August, 1983, the Federal
Financial Institutions Examination
Council adopted a uniform manual of
procedures for examination of funds
transfer activities of depository
institutions on large-dollar wire transfer
networks, as well as nonsettling
*CashWire is a service offered by the Payment
and Administrative Communication Corporation
(PAC), which is owned by a consortium of 180 U.S.
banks. PAC also offers a nonsettling communication
service (Bankwire II). The 17 banks using the
CasWire service exchange about 350 messages per
day. with an average value of $700,000 per transfer.
‘ Copies of this report are available from the
Secretary of the Board at the address listed above.

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices
costs and other constraints may provide
incentives for participants to find ways
of avoiding risk reduction policies
adopted by the Federal Reserve and
privately-owned wire networks. The
most likely vehicle for such avoidance
would be the use of periodic settlement
between depository institutions (most
likely at the end of the day) through the
exchange of Fedwire transfers. It is clear
that the widespread use of these kinds
of settlement arrangements by wire
network participants could undermine
the effectiveness of any risk reduction
measures. In order to assure that this
result does not occur, the Board is
issuing this policy statement to define
more clearly the parameters of
appropriate Fedwire use.
II, The Board’s Authority Over Fedwire
Fedwire operates through the
transmission of payment messages
between Federal Reserve Banks and the
debiting and crediting of accounts at
Reserve Banks. The Federal Reserve Act
gives the Board explicit, plenary
authority to regulate all aspects of a
Fedwire transfer. This includes the
authority to regulate the withdrawal of
funds from reserve accounts, 12 U.S.C.
464, and the authority to regulate the
transfer of funds among Reserve Banks.
12 U.S.C. 248(o). The Board also
possesses authority to promulgate all
rules and regulations necessary to carry
out its functions, duties, and services. 12
U.S.C. 248(i).
III. Interim Policy
During the pendency of the Board s
consideration of the issue of wire
transfer risk, Reserve Banks were
instructed not to provide net settlement
services to wire transfer networks that
had not previously obtained Board
approval. The purpose of this
moratorium was to maintain the status
quo to ensure that sufficient options
remained open to the Board while it
considered various approaches to the
issue of risk on large-dollar transfer
systems.
Today, the Board is requesting public
comment on several proposals for
dealing with the risk issue.
Concurrently, the Board is lifting the
moratorium, and Reserve Banks will
now be able to offer net settlement
services on an interim basis to largedollar wire transfer networks that had
not previously obtained Board approval.
To be eligible for net settlement
services, such networks and their

participants must agree to the following
conditions:
1. All participants must set bilateral
credit limits.
2. The network must adopt a sender
debit cap of 50 per cent of capital for
each participant to be applied to
transfers sent over that network.
3. The network must agree to provide
ex post transaction data to the Federal
Reserve.
When the Board adopts a final policy for
large-dollar transfer networks such
policy would apply to both existing
networks and those given access under
the interim policy.
The purpose of these requirements is
to ensure that risks are not increased
while the Board considers public
comments and decides on its ultimate
risk reduction policies. It is important,
therefore, that networks and their
participants do not seek to use Fedwire
to avoid these conditions or the more
permanent policies that may eventually
be adopted.
IV. Inappropriate Uses of Fedwire
It is the Board’s policy that use of
Fedwire for the avoidance of Federal
Reserve or private sector risk reduction
measures is not appropriate. To achieve
the pbjectives of this policy, the Reserve
Banks will conduct ex post monitoring
of Fedwire transactions for the purpose
of detecting patterns indicating that
institutions are using Fedwire for
inappropriate purposes. Institutions that
use Fedwire to avoid risk reduction
measures will be counseled. Repeated
abuse of Fedwire may result in an
institution being removed from on-line
access to Fedwire so that its Fedwire
transactions may be individually
screened, or an offending institution
may be barred from using the Federal
Reserve’s wire transfer service.
The Board believes that depository
institutions perceive the seriousness of
the wire transfer risk issue. Accordingly,
the Board anticipates that institutions
will cooperate with this policy as the
Board and the banking industry pursue
appropriate measures to reduce these
risks.
By order of the Board of Governors of the
Federal Reserve System, March 29,1984.
William W. Wiles,

Secretary of the Board.
[FR Doc. 84-6797 Filed 4-2-M ; 8:45 am]
BILLING CODE S210-01-M

13195

13194

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices

permissible for bank holding companies.
Unless otherwise noted, such activities
will be conducted throughout the United
States.
Each application is available for
immediate inspection at the Federal
Reserve Bank indicated. Once the
application has been accepted for
processing, it will also be available for
inspection at the offices of the Board of
Governors. Interested persons may
express their views in writing on the
question whether consummation of the
proposal can “reasonably be expected
to produce benefits to the public, such
as greater convenience, increased
competition, or gains in efficiency, that
outweigh possible adverse effects such
as undue concentration of resources,
decreased or unfair competition,
conflicts of interests, or unsound
banking practices.” Any request for a
hearing on this question must be
accompanied by a statement of the
reasons a written presentation would
not suffice in lieu of a hearing,
identifying specifically any questions of
fact that are in dispute, summarizing the
evidence that would be presented at a
hearing, and indicating how the party
commenting would be aggrieved by
approval of the proposal.
Unless otherwise noted, comments
regarding the application must be
received at the Reserve Bank indicated
or the offices of the Board of Governors
not later than April 23,1984.
A. Federal Reserve Bank of Atlanta
(Robert E. Heck, Vice President) 104
Marietta Street, NW., Atlanta, Georgia
30303:
1. First Continental Bancshares, Inc..
Gretna, Louisiana; to engage de novo
through its subsidiary Liberty Heritage
Life Insurance Company, Shreveport,
Louisiana, in the sale of life, accident
and health insurance, and disability
insurance directly related to its
extensions of credit. These activities
will be provided in the State of
Louisiana.
B. Federal Reserve Bank of Chicago
(Franklin D. Dreyer, Vice President) 230
South LaSalle Street, Chicago, Illinois
60690:
1. Firsnabanco, Inc., Viroqua,
Wisconsin; to engage de novo in making
or acquiring loans and other extensions
of credit secured by a borrower's
inventory, accounts receivable or other
assets. These activities will be provided
in the State of Wisconsin.
2. First o f America Bank Corporation,
Kalamazoo, Michigan; to engage de novo
through its subsidiary First of America
Insurance Company, Phoenix, Arizona,
in the activity of underwriting, as
reinsurer, credit life and credit disability
insurance. The activities are directly

related to the extension of credit by the
credit-extending affiliates of First of
America Bank Corporation. These
activities will be provided in the State of
Michigan. Comments on this application
must be received not later than April 20.
1984.
3. Midwest Financial Group, Inc.,
Peoria, Illinois; to engage de novo
through its subsidary Midwest Financial
Data Corp., Peoria, Illinois, in providing
data processing services tdTits affiliated
banks and to customers of its affiliated
banks, such data processing facilities
being designed, marketed and operated
for the transmission of financial,
banking or economic data. These
activities will be provided in the State of
Illinois a;id states contiguous to Illinois.
C. Federal Reserve Bank of San
Francisco (Harry W. Green, Vice
President) 101 Market Street, San
Francisco, California 94105:
1. Fresno Bancorp, Fresno, California;
to engage de novo through Fresno
Bansystem, Inc., Fresno, California, in
providing to others data processing and
data transmission services, facilities
(including data processing and data
transmission hardware, software,
documentation, or operating personnel),
data bases on access to such services,
facilities or data bases. Comments on
this application must be received not
later than April 17,1984.
2. Security Pacific Corporation, Los
Angeles, California; to engage de novo
through its subsidiary Security Pacific
Mortgage Corporation, Los Angeles,
California, in the origination and
acquisition of mortgage loans, including
residential mortgage loans, development
and construction loans on multi-family
and commercial properties for its own
account or for sale to others and the
servicing, including the purchase and
sale of such loans for others.
Board of Governors of the Federal Reserve
System, March 28,1984.
Jam es McAfee,
Associate Secretary of the Board.
[FR O cc 84-6799 Filed 4-2-84; 8:45 am )
BILLING CODE 621 0 -0 1 -M

[D o ck et No. R -0516]

Policy Statement on Use of the
Federal Reserve’s Wire Transfer
Network

Board of Governors of the
Federal Reserve System.
a c t i o n : Policy statement.
AGENCY:

s u m m a r y : In recent years, the Board has
become concerned with the increasing

risk associated with large-dollar wire
transfer systems. In a related action, the
Board issued for public comment
proposals to reduce those risks and
interim policies regarding the provision
of Reserve Bank net settlement services
to wire transfer networks. To ensure
that institutions do not use the Federal
Reserve’s wire transfer network
(Fedwire) to avoid Federal Reserve or
private sector risk reduction policies, the
Board is issuing a policy statement
indicating that use of Fedwire to avoid
risk reduction measures is
inappropriate.
EFFECTIVE DATE: April 30, 1984.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director. (202/
452-3368), or David B. Humphrey, Chief,
Financial Studies Section, Division of
Research and Statistics (202/452-2557);
Elliott C. McEntee, Associate Director.
Division of Federal Reserve Bank
Operations (202/452-2231); Jeffrey C.
Marquardt, Economist, Division of
International Finance (202/452-2360); or
Gilbert T. Schwartz, Associate General
Counsel (202)/452-3625), or Joseph R.
Alexander, Attorney, Legal Division
(202/452-2489), Board of Governors of
the Federal Reserve System.
Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION:

1. Introduction
The Board has been increasingly
concerned with the risks associated
with participation on large-dollar wire
transfer networks.1The Board has been
considering several methods of reducing
wire transfer risk, and has today
requested public comment on several of
these methods.
As the Board indicated in its request
for comment, an effective program for
reducing wire transfer risks may involve
certain costs and constraints. These will
likely include a reduction in the amount
of intra-day credit exposure associated
with wire transfers and an increase in
the costs of effectively managing an
institution's position. The increased
1The term "large-dollar wire networks” refers to
networks composed of more than two participants
transferring payment messages of both large
average and large aggregate value, and providing
for settlement, i.e. the actual transfer of funds. Such
networks may involve a time lag between the
transmission of the payment messages and
settlement that gives rise to intra-day inter-bank
credit exposures. Under these criteria, there are
presently four large-dollar networks: Fedwire (the
Federal Reserve’s wire transfer system), CHIPS
(Clearing House Interbank Payments System,
operated by the New York Clearing House
Association), CashWire (operated by a consortium
of banks), and CH£SS (Clearing House Electronic
Settlement System, operated by the Chicago
Clearing House Association).

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices
and summarizing the evidence that
would be presented at a hearing.
Unless otherwise noted, comments
regarding each of these applications
must be received not later than April 23,
1984.
A. Federal Reserve Bank of Richmond
(Lloyd W. Bostian, Jr , Vice President)
701 East Byrd Street, Richmond, Virginia
23261:
1. Guyan Bankshares, Inc., Gilbert
West Virginia; to become a bank
holding company by acquiring 100
percent of the voting shares of Gilbert
Bank & Trust Company, Gilbert, West
Virginia.
B. Federal Reserve Bank of Atlanta
(Robert E. Heck, Vice President) 104
Marietta Street, N.W., Atlanta, Georgia
30303:
1. Bank South Corporation, Atlanta,
Georgia, to merge with Gumming
Bancshares, Inc., Cumming, Georgia,
and thereby indirectly acquire Bank of
Cumming, Cumming, Georgia.
C. Federal Reserve Bank of Chicago
(Franklin D. Dreyer, Vice President) 230
South LaSalle Street, Chicago, Illinois
60690:
1. Citizens Bancorporation,
Sheboygan, Wisconsin; to acquire the
assets and liabilities of Bancorporation
of Wisconsin, Inc., West Allis,
Wisconsin, and thereby indirectly
acquire Southwest Bank, New Berlin,
Wisconsin, and West Allis State Bank,
West Allis, Wisconsin. Comments on
this application must be received not
later than April 17,1984.
2. Citizens Banking Corporation, Flint,
Michigan; to acquire 100 percent of the
v6ting shares of Grayling State Bank,
Grayling, Michigan. Comments on this
application must be received not later
than April 20,1984.
4. Northern Trust Corporation,
Chicago, Illinois; to acquire 100 percent
of the voting shares of Northern Trust of
Florida Corporation, Miami, Florida, and
thereby indirectly acquire Northern
Trust Bank of Florida, N.A., Miami,
Florida; Northern Trust Bank of Florida/
Naples, N.A., Naples, Florida; Northern
Trust Bank of Florida/Palm Beach, N.A.,
Palm Beach, Florida; and Northern Trust
Bank of Florida/Sarasota, N.A.,
Sarasota, Florida.
4. Northern Trust of Florida
Corporation, Miami, Florida; to become
a bank holding company by acquiring 99
percent of the voting shares of each of
the following banks: Northern Trust
Bank of Florida, N.A., Miami, Florida;
Northern Trust Bank of Florida/Naples,
N.A., Naples, Florida; Northern Trust
Bank of Florida/Palm Beach, N.A., Palm
Beach, Florida; and Northern Trust Bank
of Florida/Sarasota, N.A., Sarasota,
Florida.

D. Federal Reserve Bank of Dallas
(Anthony J. Montelaro, Vice President)
400 South Akard Street, Dallas, Texas
75222:
1. Oak Ridge Bancshares, Inc., Oak
Ridge, Louisiana; to become a bank
holding company by acquiring 80
percent of the voting shares of Bank of
Oak Ridge, Oak Ridge, Louisiana.
Comments on this application must be
received not later than April 25,1984.
Board of Governors of the Federal Reserve
System, March 27,1984.
fames McAfee,

Associate Secretary of the Board
[FR Doc. 84-6671 Filed 4-2-84; 8:45 am)

BILLING CODE 6210-01-M

First Community Bancshares* Inc., et
al.; Formations of; Acquistions by; and
Mergers of Bank Holding Companies

The companies listed in this notice
have applied for the Board’s approval
under section 3 of the Bank Holding
Company Act (12 U.S.C. 1842) and
§ 225.14 of the Board’s Regulation Y (49
FR 794) to become a bank holding
company or to acquire a bank or bank
holding company. The factors that are
considered in acting on the applications
are set forth in section 3(c) of the Act (12
U.S.C. 1842(c)).
Each application is available for
immediate inspection at the Federal
Reserve Bank indicated. Once the
application has been accepted for
processing, it will also be available for
inspection at the offices of the Board of
Governors. Interested persons may
express their views in writing to the
Reserve Bank or to the offices of the
Board of Governors. Any comment on
an application that requests a hearing
must include a statement of why a
written presentation would not suffice in
lieu of a hearing, identifying specifically
any questions of fact that are in dispute
and summarizing the evidence that
would be presented at a hearing.
Unless otherwise noted, comments
regarding each of these applications
must be received not later than April 26,
1984.
A. Federal Reserve Bank of Richmond
(Lloyd W. Bostian, Jr., Vice President)
701 East Byrd Street, Richmond, Virginia
23261:
1. First Community Bancshares, Inc.,
Princeton, West Virginia, to acquire 100
percent of the voting shares of Oceana
National Bank, Oceana, West Virginia,
B. Federal Reserve Bank of Atlanta
(Robert E. Heck, Vice President) 104
Marietta Street, N.W., Atlanta, Georgia
30303:

13193

1. First National Bancshares of West
Alabama, Inc., Aliceville, Alabama; to
become a bank holding company by
acquiring 80 percent of the voting shares
of First National Bank of Aliceville,
Aliceville, Alabama, and Bank of Gordo,
Gordo, Alabama. Comments on this
application must be received not later
than April 25,1984.
2. NBC Bancshares ofDeRidder, Inc.,
DeRidder, Louisiana, to become a bank
holding company by acquiring 100
percent of the voting shares of National
Bank of Commerce of DeRidder,
DeRidder, Louisiana. Comments on this
application must be received not later
than April 25,1984.
C. Federal Reserve Bank of Chicago
(Franklin D. Dreyer, Vice President) 230
South LaSalle Street, Chicago, Illionis
60690:
1. Evergreen of Wisconsin, Inc., Poy
Sippi, Wisconsin, to become a bank
holding company by acquiring 100
percent of the voting shares of Farmers
State Bank, Poy Sippi, Wisconsin.
Comments on this application must be
received not later than April 25,1984.
2. Rockford City Bancorp, Inc.,
Rockford, Illinois, to merge with Boone
Bancorp, Inc., Belvidere, Illinois and
thereby indirectly acquire Boone State
Bank, Belvidere, Illinois. Comments on
this application must be received not
later than April 25,1984.
D. Federal Reserve Bank of Dallas
(Anthony J. Montelaro, Vice President)
400 South Akard Street, Dallas, Texas
75222:
1. Amarillo Western Rancshares, Inc.,
Amarillo, Texas, to acquire 100 percent
of the voting shares of City National
Bank, Amarillo, Texas.
Board of Governors of the Federal Reserves
System, March 28,1984.
James McAfee,

Associate Secretary of the Board.
(FR Doc. 84-8798 Filed 4-2-84; 8:46 am|
BILLING CODE 6210-01-M

First Continental Bancshares, Inc. et
al.; Notice of Applications To Engage
de Novo In Permissible Nonbanking
Activities

The companies listed in this notice
have filed an application under
§ 225.23(a)(1) of the Board’s Regulation
Y (49 FR 794) for the Board’s approval
under section 4(c)(8) of the Bank
Holding Company Act (12 U.S.C.
1843(c)(8)) and § 225.21(a) of Regulation
Y (49 FR 794) to commence or to engage
de novo, either directly or through a
subsidiary, in a nonbanking activity that
is listed in § 225.25 of Regulation Y as
closely related to banking and

13192

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices

under section 4(c)v of the Bank
8)
Holding Company Act (12 U.S.C.
1843(c)(8)) and section 225.21(a) of
Regulation Y (49 FR 794) to commence
or to engage de novo, either directly or
through a subsidiary, in a nonbanking
activity that is listed in section 225.25 of
Regulation Y as closely related to
banking and permissible for bank
holding companies. Unless otherwise
noted, such activities will be conducted
throughout the United States.
Each application is available for
immediate inspection at the Federal
Reserve Bank indicated. Once the
application has been accepted for
processing, it will also be available for
inspection at the offices of the Board of
Governors. Interested persons may
express their views in writing on the
question whether consummation of the
proposal can "reasonably be expected
to produce benefits to the public, such
as greater convenience, increased
competition, or gains in efficiency, that
outweigh possible adverse effects, such
as undue concentration of resources,
decreased or unfair competition,
conflicts of interest, or unsound banking
practices." Any request for a hearing on
this question must be accompanied by a
statement of the reasons a written
presentation would not suffice in lieu of
a hearing, identifying specifically any
questions of fact that are in dispute,
summarizing the evidence that would be
presented at a hearing, and indicating
how the party commenting would be
aggrieved by approval of the proposal.
Unless otherwise noted, comments
regarding the applications must be
received at the Reserve Bank indicated
or the offices of the Board of Governors
not later than April 20,1984.
A. Federal Reserve Bank of Richmond
(Lloyd W. Bostian, Jr., Vice President)
701 East Byrd Street, Richmond, Virginia
23261 :

1. First Maryland Bancorp, Baltimore,
Maryland and Allied Irish Banks
Limited, Dublin, Ireland; to engage de
novo through a subsidiary, First
Maryland Mortgage Corporation, in
commercial and industrial real estate
equity financing.
B. Federal Reserve Bank of Atlanta
(Robert E. Heck, Vice President 104
Marietta Street, N.W., Atlanta, Georgia
30303:
1. Citizens and Southern Georgia
Corporation, Atlanta Georgia; to engage
de novo in the activity of management
consulting to nonaffiliated bank and
nonbank depository institutions and
their subsidiaries.
C. Federal Reserve Bank o f San
Francisco, (Harry W. Green, Vice
President) 101 Market Street, San
Francisco. California 94105:

1. Nevs City Bancorp, Orange,
California; to engage de novo througtuts
subsidary, New City Leasing, Orange.
California in leasing of personal
property, especially motor vehicles;
insurance sales as an agent or broker
with respect to any insurance directly
related to an extension of credit by a
bank or bank related firm, or any
insurance directly related to the
provision of other financial services by
a bank or bank related firm, serving the
state of California. Comments on this
application must be received not later
then April 23,1984.
Board o f Governors of the Federal Reserve
System . March 27,1984.
lam es M cA fee,

Association Secretary of the Board
jJ-'R Otic

m e Filed 4-2-84'. 8:45 am)

BILLING CODE 6 2 10-01-M

Acquisition of Company Engaged in
Permissible Nonbanking Activities;
First Security Corporation

The organization listed in this notice
has applied under section 225.23(a)(2) or
(f) of the Board’s Regulation Y (49 FT
*
794 ) for the Board’s approval under
section 4(c)(8) of the Bank Holding
Company Act (12 U.S.C. 1843(c)(8)) and
section 225.21(a) of Regulation Y (49 FR
794 ) to acquire or control voting
securities or assets of a company
engaged in a nonbanking activity that is
listed in section 225.25 of Regulation Y
as closely related to banking and
permissible for bank holding companies.
Unless otherwise noted, such activities
will be conducted throughout the United
States.
The application is available for
immediate inspection at the Federal
Reserve Bank. Once the application has
been accepted for processing, it will also
be available for inspection at the offices
of the Board of Governors. Interested
persons may express their views in
writing on the question whether
consummation of the proposal can
“reasonably be expected to produce
benefits to the public, such as greater
convenience, increased competition, or
gains in efficiency, that outweigh
possible adverse effects, such as undue
concentration of resources, decreased or
unfair competition, conflicts of interests,
or unsound banking practices.” Any
request for a hearing on this question
must be accompanied by a statement of
the reasons a written presentation
would not suffice in lieu of a hearing,
identifying specifically any questions of
fact that are in dispute, summarizing the
evidence that would be presented at a
hearing, and indicating how the party

commenting would be aggrieved by
approval of the proposal.
Comments regarding the application
must be received at the Reserve Bank or
the offices of the Board of Governors not
later than April 25,1984.
A. Federal Reserve Bank of San
Francisco (Harry W. Green, Vice
President) 101 Market Street, San
Francisco. California 94105:
1. First Security Corporation, Salt
Lake City, Utah; to acquire Mission Bay
Mortgage Company, San Diego,
California, and thereby engage in
making or acquiring loans and other
extensions of credit such as would be
made by a mortgage financing company,
including making both residential and
commericial mortgage loans for its own
portfolio and for sale to others; the
purchase of such loans from affiliated
banks and other entities and from
others; the assembly of loans into blocks
for investors; servicing of such loans for
others, and all activities incident
thereto; limited insurance agency
activities directly, through an affiliate,
or through other insurance companies
covering insurance related to the
extension of credit.
Board o f Governors of the Federal Reserve
System , March 27,1984.

James McAfee,
Associate Secretary of the Board.
[FR Doc 84-8870 Filed 4-2-84; 8:45 ami
BILLING CODE 6 2 10-01-M

Formations of; Acquisitions by; and
Mergers of Bank Holding Companies;
Guyan Bankshares, Inc., et al.

The companies listed in this notice
have applied for the Board’s approval
under section 3 of the Bank Holding
Company Act (12 U.S.C. 1842) and
section 225.14 of the Board’s Regulation
Y (49 FR 794) to become a bank holding
company or to acquire a bank or bank
holding company. The factors that are
considered in acting on the applications
are set forth in section 3(c) of the Act (12
U.S.C 1842(c)).
Each application is available for
immediate inspection at the Federal
Reserve Bank indicated. Once the
application has been accepted for
processing, it will also be available for
inspection at the offices of the Board of
Governors. Interested persons may
express their views in writing to the
Reserve Bank or to the offices of the
Board of Governors. Any comment on
an application that requests a hearing
must include a statement of why a
written presentation would not suffice in
lieu of a hearing, identifying specifically
any questions of fact that are in dispute

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices
foreign banks continue to be fully
collateralized?
• If caps are established, how should
Edge Act and agreement corporations be
treated?
—As separate entities, with a cap
determined by reference their own
capital?
—As part their parent institutions with
one overall cap for the parent and all
of its subsidiaries?
• If caps are established, how should
U.S. agencies and branches of foreign
banks be treated?
—as separate entities, with a cap
determined by reference to branch or
agency assets, or some form of capital
equivalent?
—as consolidated entities, with a cap
determined by reference to the
consolidated U.S. branch and agency
assets of each foreign bank, or some
form of capital equivalent based on a
consolidated U.S. balance sheet?
—as part of their parent institutions
with one overall cap for the parent,
hence for all of its branches and
agencies, detemined by reference to
the parent’s worldwide capital stated
in U.S. dollars?
• Should monitoring of these entities
be on a real-time or expost basis?
5. Enhanced Examination Procedures,
As noted previously, the Federal
Financial Institutions Examination
Council (“FFIEC”) has adopted a
uniform manual of procedures for
examining funds transfer activities on
large-dollar wire transfer networks and
nonsettling communications networks.
These procedures have been designed to
disclose deficiencies in the internal
credit and operational controls of
institutions participating in large-dollar
networks, and to assess the adequacy of
the senior management’s supervision of
these activities.
With the FFIEC’s approval, the role of
the examination process could be
expanded further. Federal examiners
could review and comment on the
bilateral net credit limits and sender net
debit caps voluntarily established by
each institution. This review might
include analysis of the procedures used
by each institution to establish and
periodically review its limits and caps,
comparison of the size of an institution’s
limits and caps with those established
by per group institutions, consideration
of whether the limits and caps have ever
been exceeded, and review of
procedures used when limits or caps are
exceeded.
The Board requests comment on
whether it should seek FFIEC
concurrence for expanded examination
of wire transfer activities, and, if so,

what this expanded examination should
entail.
6. Monitoring. The FAC/TIAC
Payment Systems Committee
recommended that “[t]he Federal
Reserve continue to collect and review
information on daylight credit exposures
on Fedwire and private wire systems.”
This monitoring may be done in a
variety of ways. For example, the
Federal Reserve requires, as a condition
to access to Federal Reserve net
settlement services, access to
transaction data on an ex post basis,
and the Board may collect similar
information from all other networks.
The Board requests comment on this
issue, specifically on the appropriate
uses for transaction data from wire
networks, and the type of analysis that
would be necessary for continued
monitoring of wire transfer activities,
7. Book-Entry U.S. Government
Securities Transfers. When the Board
announced its policy for dealing with
Fedwire daylight overdrafts, it directed
the Reserve Banks to develop, if legally
and operationally possible, a plan for
collateralizing, with the underlying
securities being transferred, daylight
overdrafts arising out of book-entry
transfers of U.S. government and federal
agency securities. This decision
reflected the Board’s concern that
subjecting these overdrafts to overall
controls could disrupt the government
securities market and, hence, the
conduct of monetary policy through
open market operations. Technical
difficulties have made it impossible so
far to implement the Board’s policy, and,
pending development of an
operationally feasible collateralization
plan, Reserve Banks have been
exempting overdrafts arising from the
transfer of book-entry U.S. government
and federal agency securities from the
counseling guidelines the Board also
adopted.
The Board will continue, for the time
being, to exempt daylight overdrafts
arising form book-entry government
securities transfers from the limitations
of the proposal. Procedures are being
developed that will permit at least
partial collateralization of such
overdrafts by pools of pledgeable bookentry U.S. Treasury and agency
securities, which the Board hopes to
adopt by mid-1985.
Limiting Avoidance Techniques
The adoption of voluntary or
regulatory risk reduction measures may
induce some depository institutions to
attempt to avoid the costs and restraints
such measures may entail. The most
probable vehicle for such avoidance
would be the use of new or existing

13191

communcations networks that send
payments messages during the day,
coupled with periodic bilateral
settlement through the exchange of
individual Fedwire transfers. The use of
such arrangements would circumvent
risk reduction policies, and could
seriously jeopardize the success of any
Federal Reserve or private sector risk
reduction program. To deter such a
possibility, the Board has adopted a
general policy statement declaring that
the use of Fedwire to avoid risk
reduction measures is an unacceptable
use of Fedwire.
Interim Measures
In conjunction with seeking public
comment on these proposals, the Board
is lifting the System’s moratorium on the
provision of net settlement services for
any wire networks that had not
previously been specifically approved
for net settlement services by the Board.
This moratorium was established
pending further Board'consideration of
the issue of risk on large-dollar transfer
systems. During the period before the
adoption of a final risk reduction
program, Reserve Banks may, upon
application, provide interim net
settlement services to large-dollar
transfer networks that had not
previously received authorization from
the Board. To be eligible for net
settlement services, such networks and
their participants must agree to the
following conditions:
1. All participants must set bilateral
net credit limits.
2. The network must adopt a sender
debit cap of 50 percent of capital for
each participant to be applied to
transfers sent over that network.
3. The network must agree to provide
ex post transaction data to the Federal
Reserve.
When the Board adopts a final policy
for large-dollar transfer networks, such
policy will apply to both existing
networks and those given access under
the interim policy.
By order of the Board of Governors of the
Federal Reserve System, March 29,1984.
William W. Wiles,

Secretary of the Board.
[FR Doc. 84-8796 Filed 4-2-84; 8:45 am}
BILLING CODE 6210-01-M

Applications to Engage de novo in
Permissible Nonbanking Activities;
First Maryland Bancorp, et al.

The companies listed in this notice
have filed an application under section
225.23(a)(1) of the Board’s Regulation Y
(49 FR 794) for the Board’s approval

13190

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices

As with sender net debit caps,
bilateral credit limits have support
among private sector participants. Both
the FAC/TIAC Payment System
Committee and the ARCB Risk Task
Force have recommended that receiving
banks adopt bilateral credit limits.
CashWire requires each of its
participants to set bilateral net credit
limits vis-a-vis other participants on that
network, which CashWire monitors on a
real-time basis. CHIPS has begun
experimenting with bilateral credit
limits for members of its network, and
expects to have its program fully in
effect by October, 1984. As with the
CashWire sender net debit caps, any
payment message which causes a CHIPS
sender to exceed the credit limit
established by its receiver will be
rejected unless the receiver increases
the limit.
The Board requests comment on
whether bilateral net credit limits would
be useful in reducing payment system
risk. Specifically, the Board requests
comments on the following questions:
• Would bilateral net credit limits be
effective in reducing risks?
• What criteria should institutions
use in establishing these limits?
• Would finality of payments (see
below) be necessary or desirable to
provide receivers of payments with
appropriate incentives to establish
bilateral credit limits that will lead to
effective risk management?
• Should examiners review and
comment on bilateral credit limits?
• If sender net debit caps are used, is
there a need to have bilateral net credit
limits?
3. Finality of Payments. As noted
previously, transfers of funds made over
Fedwire are final when the receiver’s
Reserve Bank credits the receiver's
account or sends the advice of credit.
The credit to the receiver is irrevocable
(although subject to the Reserve Bank’s
right of setoff against the receiver), and
the receiver agrees, under Regulation ],
to make the amount of the transfer
available to the beneficiary promptly. 12
CFR §§ 210.36, 210.30(b). In other words,
the Federal Reserve guarantees “good
funds” to the receiver.
CashWire also provides finality of
payments, by providing that receivers of
transfers over that network agreee to
provide final credit to the beneficiaries.
If the sender does not settle its net
position at the end of the day, receivers
of the failed sender’s transfers do not
have recourse to the funds that have
been made available to the
beneficiaries. CHIPS and CHESS, on the
other hand, do not provide for finality in

this sense.9Rather, finality is
conditional upon settlement, and if
settlement does not occur, the receiver
has recourse to any funds provisionally
credited to its customer’s account.
Finality is achieved primarily through
a receiver “guarantee” that irrevocable
credit will promptly be given to the
accounts of customers receiving
payments. Such guarantees are likely to
induce receiving banks to redtice their
risk exposure by establishing lower
bilateral net credit limits for each sender
than they would without them. Indeed, if
receiver guarantees were required, there
would be little need to require bilateral
credit limits, because such limits would
naturally evolve as the method of
managing receiver risk exposure.
An important advantage of finality is
that it tends to insulate the nonbank
sector from the effects of a settlement
failure, thus protecting financial markets
and the general economy. Moreover,
because finality is achieved through
receiver guarantees, receivers are
induced to make more prudent credit
evaluations of their senders and modify
such evaluations promptly as new
information becomes available, reducing
risk to the banking system in the
process.
Unlike bilateral credit limits and
sender net debit caps, the concept of
finality does not yet appear to have
wide-spread support in the private
sector. The FAC/TIAC Payment
Systems Committee concluded that,
while finality of payments is a
worthwhile goal, its achievement
through receiver guarantees is
premature and should not now be
required. That committee believes that
the costs of receiver guarantees
(reduction in volume of transfers and
increased payment system cost to
compensate the receivers for bearing the
increased risk) cannot be justified at this
time, and that other measures (such as
bilateral credit limits and sender caps)
car, control risks significantly. The
ARCB Risk Task force did not reach a
consensus on the issue of finality,
although its report noted that a minority
of its credit risk working group believed
that finality would be necessary for a
network to compete effectively with
CashWire and Fedwire, which do
®CHIPS and CHESS transfers are final in the
senst thai in releasing a payment message, the
sender becomes obligated to pay the amount of the
transfer and, hence, to settle its net position. CHIPS
rule 13a; CHESS rule 5.1.4; see also Delhruech & Co.
i’. Manufacturers Hanover Trust Co., 609 F,2d 1047,
1051 (2d Cir, 1979). CHIPS and CHESS transfers are
not completely "final," however, because credits
made to beneficiaries are in fact provisional until
settlement, and receiving institutions have recourse
to amounts credited to beneficiaries in the event a
seudw fails to settle.

provide for finality. Although CHIPS
currently does not provide for finality,
its committee working on sender net
debit caps is studying this issue.
The Board request comments on the
following points:
• Should all private wire transfer
systems provide for finality of
payments?
• Should finality be achieved by
receiver guarantees?
• If finality is desirable, would
Federal or uniform state legislation or
regulation on this topic be desirable?
• In lieu of finality by receiver
guarantees, what methods of risk
sharing designed to assure settlement
(e.g., insurance, indemnity agreements,
or collateralization) might be useful or
appropriate?
4. Edge Act and Agreement

Corporations and U.S. Agencies and
Branches of Foreign Banks. There are
special risks associated with the
participation in large-dollar transfer
systems of Edge Act and agreement
corporations and U.S. agencies and
branches of foreign banks. These
institutions are often major participants
in such networks, often making and
receiving large volumes of payments on
behalf of themselves, their parent
organizations, and others. The size of
their payment activities is generally
quite large relative to their U.S. capital
or U.S. assets.
Under current policy, the Board
requires full collateralization of daylight
overdrafts on Fedwire by all Edge Act
and agreement corporations and by U.S.
agencies and branches of foreign banks.
In the case of agencies and branches,
this collateralization requirement
reflects the concern that the system does
not have sufficient timely information on
the financial condition of foreign banks
to warrant Reserve Bank extension of
uncollateralized daylight credit. The
Board applied similar constraints to
Edge and agreement corporations
because of their small capital base
relative to potential Fedwire payments.
The Board will continue this policy
during the period comments are being
received and studied, and pending
adoption of a more permanent policy
regarding Edge Act and agreement
corporations and U.S. branches and
agencies of foreign banks.
The Board requests comment on what
policies should be adopted with respect
to these institutions. Commenters are
asked to respond specifically to the
following questions:
• Should Fedwire daylight overdrafts
of Edge Act and agreement corporations
and U.S. branches and agencies of

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices
cap is monitored on an ex post basis.
When funds transfers cause daylight
overdrafts to exceed the cap, the
overdrafting institution is counseled;
individual transfers are not rejected.
The purpose of sender net debit caps
is to reduce the size of intra-day credit
exposure. Some have argued that to be
effective and equitable, the cap must
apply to a sender’s total net debit
position across all large-dollar transfer
systems; otherwise, volume (and risk]
would be shifted from networks which
imposed caps to those that did not, or, if
caps were imposed on each network,
volume (and risk) would shift to
networks with “unused" caps. New
networks might also proliferate. Others
have argued that caps on each network
would be effective because a large
number of networks would not develop.
While debit caps would reduce risks,
one effect of such caps is the possibility
that senders would be so severely
constrained by these limits as to be
unable to make the volume of payments
requested by their customers.8
Alternatively, individual senders may
delay making payments in order to
minimize the risk of being bound by
their debit cap. This might shift the
burden of the cap to other banks and
generally slow the process of making
payments.
Some have also argued that sender
caps, if based on a percentage of capital
and applied uniformly, would be unfair
to banks located in unit banking states,
because banks in those states fund a
larger proportion of their assets through
overnight federal funds borrowings.
Thus, daylight overdrafts on Fedwire
from the morning repayment of federal
funds borrowed the previous day may
be significantly larger for banks
operating in unit banking states than for
banks operating in states that permit
branching.
There are several steps that could be
taken to alleviate these concerns. One
would be to set caps initially at higher
than optimal levels, lowering them in
stages over time. A second procedure
which might be helpful would involve
the adoption by individual networks of
general “rules” which seek to minimize
the extent to which one sender could
purposely and consistently delay
payments until later in the day in order
to shift its daylight exposure problem to
others who continue to send payments
early in the day. With any form of
binding net debit cap, it is likely that an
'T h e FAC/TIAC Payment Systems Committee
pointed out in its report that bilateral n et credit
limits, especially if coupled with re ceiver
guarantees (discussed below), could have the same
effect of restraining the volume of payments Benders
are able to make.

intra-day funds market would develop
and/or institutional changes would
occur in the overnight funds markets
(e.g., earlier transfer of the proceeds of
borrowing, later repayments of
borrowings, increased reliance on term
funds, etc.) that would ease the burden
of constraints on sender net debit
positions. Such market developments
would, however, involve adaptations
that require lenders and borrowers to
share explicitly risks and costs in a
market-determined way, and should, as
a result, reduce risk but increase
participant costs.
Several private sector study groups
support sender net debit caps. For
example, the FAC/TIAC Payment
Systems Committee recommended “(t]he
prompt establishment of caps by each
sending institution on its overall net
debit position across all payments
systems, including Fedwire * *
The
ARCB Task Force also recommended
that caps be established, and the ARCB
has formed a working group to develop
guidelines and procedures to be used to
aid depository institutions in setting
their own sender net debit caps across
all networks. The New York Clearing
House Association has also adopted the
principle of sender net debit caps for
CHIPS participants, and has appointed a
committee to study the implementation
of these caps on CHIPS. The Board
welcomes these and other efforts,
believing that they are indications of the
seriousness with which the private
sector is approaching the issue of
payments systems risk.
The Board seeks comment on whether
sender net debit caps are a useful and
appropriate method of reducing wire
transfer risk. The Board especially
desires comments on the following
questions:
• Should institutions be encouraged
to establish sender net debit caps?
• Should the caps be established
across all networks, or be established
separately for each network?
• Should each institution establish its
own caps, or should each network, or
the Federal Reserve, establish caps for
participants based on objective criteria?
• Should examiners review the caps
that are set?
• If caps are set individually or by
private networks, how should Fedwire
daylight overdrafts be treated?
• If caps are to be established on the
basis of objective criteria, what should
those criteria be?
—percentage of capital;
—other factors, such as an institution’s
internal controls, type of business,
quality of management;

13189

—a combination of percentage of capital
and other factors?
• If caps are to be based on capital,
what should the percentage be? Should
this percentage be lowered over time to
reduce risks further?
• How much lead-time is desirable
between the adoption of a policy of caps
and the date on which such caps
become effective?
• Will the market respond to caps
with developments^ such as an intra-day
federal funds market or institutional
modifications in the overnight federal
funds and other markets, that will
reduce the possibility of payments
mechanism disruptions?
• Would some institutions—such as
those from unit banking states, Edge Act
and agreement corporations, or U.S.
branches and agencies of foreign
banks—face special problems in the
implementation of caps?
• How should caps be enforced? By
voluntary compliance, network rules,
examiner review?
• What policy should the Federal
Reserve adopt if caps set by each bank
for itself or by networks for their
participants are either extremely high or
frequently breached?
• Will caps increase costs
significantly or otherwise reduce the
efficiency of the payments mechanism?
Will this be a temporary or long-run
development? Are the higher costs or
reduced efficiency worthwhile to
achieve (or a necessary by-product of)
risk reduction? If so, what alternatives
should be used to reduce risks?
• Should Reserve Banks permit
institutions to exceed their caps on
Fedwire occasionally (if such caps are
established) in order to provide some
flexibility in the administration of caps?
Should such “excess” overdrafts or
“overline” credits be negotiated in
advance, be collateralized, or be subject
to penalty rates?
• If bilateral credit limits (see below)
are established, are sender net debit
caps necessary?
2. Bilateral net credit limits. Under
this method, each receiver would itself
determine the maximum amount of net
transfers (i.e., value of receives in
excess of the value of sends) that it is
willing to receive from each sender
either across all networks other than
Fedwire or from each sender on a
particular private network. The purpose
of this limit is to reduce risk by limiting
the exposure of receivers of payments in
the event that a sender fails to settle.
Presumably, the net credit limit would
be based on the receiver's credit
analysis of the sending bank.

13188

Federal Register / Vol. 49, No. 65 / Tuesday, April 3, 1984 / Notices

communications networks. The new
procedures have been designed to
disclose deficiencies in the internal
credit and operational controls of those
institutions participating on these
networks, and to assess the adequacy of
senior management’s supervision of
such activities.
• In March, 1984, CHIPS ®
began
testing bilateral net credit limits. Under
this test, each participant sets the
maximum amount of net payments it
will accept from each of the other
participants over CHIPS. CHIPS intends
to have these credit limits fully
implemented by October, 1984. When
these limits are effective, however,
receivers will not, as on CashWire, be
required to provide the beneficiaries
with irrevocable access to payments
received over CHIPS prior to settlement.
CHIPS has also decided in principle to
adopt sender net debit caps, and has
formed a task force to study the
implementation of these caps. This task
force will also explore ways of making
CHIPS payments final. This task force is
to report by year-end 1984.
• The ARCB has also formed a task
force to develop guidelines and
procedures for the establishment by
each institution of voluntary sender net
debit caps as recommended by its Risk
Task Force and the FAC/TIAC
Committee.
These developments demonstrate that
participants in the large-dollar payments
systems (the private sector as well as
the Federal Reserve) are increasingly
aware of the risks such systems entail
and are beginning to take steps to
control them. At this point, the Board
believes that it is appropriate to solicit
public comment on several methods that
could be used, individually or in concert,
by the banking industry, the Federal
Reserve, or both to achieve these goals.
Objectives of a Risk Reduction Policy
The Board believes that there are
several important goals that any policy
to reduce risks on large-dollar transfer
systems must seek. These goals are not
mutually exclusive, although in some
cases, attainment of one of the goals
may. in the short-run, work against the
attainment of one or more of the other
goals, The Board realizes, therefore, the
necessity of some short-run trade offs
among these goals.
1. Contain the effects o f o settlement
failure. Potential settlement failures
pose the threat that their effects could
spread beyond the participants to the
8CHIPS (Clearing House Interbank Payments
System) is owned and operated by the New York
Clearing House Association. This network
processes about 75,000 transactions per day, each
having an average size of about 3 million.

banking system as a whole, to othei1
financial markets, and to the rest of the
economy. An important goal of a risk
reduction policy is, therefore, to contain
the effects of a settlement failure.
2. Reduce the volume o f intra-day
credit exposures. As noted above, the
principal source of risk in wire networks
is the amount of intra-day credit
exposure incurred by senders and
receivers in connection with wire
transfers. Reduction of the aggregate
volume of daylight credit exposure is,
therefore, a primary goal of a risk
reduction program.
3. Control remaining credit risk. Some
extensions of credit are, perhaps,
inescapable if large-dollar networks are
to run smoothly. Another goal of a risk
reduction policy is, accordingly, to
encourage institutions participating on
such networks to exercise prudent
judgment in extending and managing
such credit.
4. Smooth operation o f the payments
system. As was noted at the outset,
large-dollar electronic funds transfer
systems are an integral part of the
payments mechanism. Any risk
reduction program must, therefore, seek
its objectives without causing undue
operational disruptions to the payments
mechanism.
The public may wish to comment on
these goals and provide its views on
whether there are other goals that
should be sought.
Methods of Reducing Risks
In the course of its study of payment
system risk, the Federal Reserve
considered and discussed with the FAC/
TIAC Committee and private sector
participants numerous proposals for
reducing risks. The methods discussed
below, on which the Board is explicitly
requesting comment, are those that
appear to be best suited to attaining the
goals discussed above. Each of these
methods may be used singly or in
concert, and the Board asks commenters
for their views on whether a particular
combination of these methods would be
best. Commenters are, of course, free to
suggest alternative methods which might
be used, singly or in combination with
other methods, to reduce payment
systems risk.
The Board also considered several
other risk reduction options, including
collateralization of sender net debit
positions, charging a fee for extending
intra-day credit, and methods to assure
settlement (such as settlement insurance
or agreements among participants on a
network to cover a failed sender’s
settlement obligations on that network).
Each of these options poses difficulties
that, in the Board’s view, make them

undesirable. For example,
collateralization would appear merely to
shift risks from those holding collateral
to the deposit insurance funds, and
available collateral is not likely to
provide the liquidity necessary to assure
settlement.7Any pricing proposal would
have to overcome the exceedingly
difficult problem of determining an
appropriate price for the intra-day
extension of credit. While settlement
insurance and other methods of assuring
settlement would tend to minimize the
disruptions that a settlement failure
would cause, they may tend to reduce
the degree of prudence exercised by
individual participants, who would look
to others for the protection of their
positions. Commenters may wish to
provide their views on how these
difficulties might be overcome.
While the Board requests specific
comments on the issues presented
below, it also requests comments on the
degree to which the intensely
competitive atmosphere in which
payment services are offered may act as
a constraint on some of the risk
reduction options. For example, in the
current environment, would completely
voluntary measures be adequate, should
examiner review of risk reduction
measures be an essential part of a risk
reduction program, or should the Federal
Reserve and the other regulators of
financial institutions take a more active
role in designing and enforcing risk
reduction measures?
1. Sender net debit caps. These limits
would impose a maximum ceiling or
“cap” on the aggregate net debit
position (i.e., the value of all sends in
excess of the value of all receives) that
an individual sender could incur on any
one network or across all networks
during a day. A sender net debit cap
applied across all networks would
permit net debits on one network to be
offset by net credits on another, and
would impose a maximum intra-day
debit exposure on each sending
institution. CashWire, as previously
noted, imposes a net debit cap of 50
percent of the sender’s capital for net
positions on that one network. This cap
is applied on a real-time basis; any
payment message that would bring the
sender in excess of its cap is rejected.
The Fedwire daylight overdraft policy,
in principle, imposes a sender cap equal
to 50 per cent of capital as well, but this
1As discussed below, collateralization may be
useful in securing Fedwire daylight overdrafts of
Edge Act and agreement corporations and U.S.
branches and agencies of foreign banks, and for
daylight overdrafts arising out of the transfers of
book-entry U.S. Treasury and federal agency
securities.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102