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F ederal reserve Bank of Dallas DALLAS, TEXAS 75222 C ir c u l a r No. 78-6 J a n u a r y 17, 1978 PLANS TO IMPROVE PAYMENTS SERVICES TO ALL BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: T h e Board of G o v e r n o r s of th e F e d e ra l R e s e r v e System h a s a n n o u n c e d p la n s to im prove nationw ide settlem ent s e r v i c e s for B an k w ire f u n d s t r a n s f e r s a nd among automate d c l e a r i n g h o u s e s (A C H s), a n d invites comments. T h e B o a r d 's p r e s s re le a s e a n d FEDERAL REGISTER d oc u m e n t, w hich a r e e n clo se d , p r o v id e th e d e ta ils . For those who may w ish to r e s p o n d , y o u r comments a r e r e q u e s t e d by F e b r u a r y 28, 1978. If you ha ve q u e s tio n s with r e g a r d to th e p ropo sa l on B a n k w ir e s e ttle m e n ts , p le a se contact Mr. E. W. V o rlo p , J r . , Ext. 6223. For more information a b o u t ACH s e tt le m e n ts , call Mr. C. J . P ic k e r i n g , Ext. 6294. S in c e r e ly y o u r s , R ob ert H . Boykin F i r s t Vice P r e s i d e n t E n c lo s u re Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800 -492 -440 3 (intrastate) and 1-8 00 -527 -497 0 (interstate). For calls 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) E x tract From FEDERAL REGISTER, VOL. 43, NO. 3, T h u r s d a y , J a n u a r y 5, 1978 p p . 1005 - 1007 [6210- 01 ] [ D o c k e t N o .J l- 0 1 3 8 ] NET SETTLEMENT OF MEMBER BANK RESERVE ACCOUNTS AND AUTOMATED CLEARING HOUSES A n n o u n c e m e n t o f P r o p o s e d A c tio n s SUMMARY STATEMENT: The Board of Governors has announced its intention to take two actions regard ing its funds transfer and clearing ser vices. The first action is the approval of a request from a group of member banks participating in a private clear ing and settlem ent organization that Federal Reserve Banks make available to them a net settlem ent service for their funds transfer messages. In the second action, the Board has approved plans to provide, by year end 1978, in terregional clearing and settlem ent services tor funds transfers originated at automated clearing house associ ations. The Board i s tends to take these actions in order to improve the efficiency of th e nation’s payments mechanism and to encourage privatesec tor development of electronic pay ments services for th e public. The Board has invited public comment on these actions by February 28, 1978. FOR FURTHER INFORMATION CONTACT: James R. Kucflinski, Director, Divi sion of Federal Reserve Bank Oper ations, 202-452-3985; or Allen L. Raiken, Assistant General Counsel, 202-452-3625, Board of Governors of the Federal Reserve System, Wash ington, D.C. 20551. I. I n t e r -D is t r ic t N et S e t t l e m e n t by F ederal R eser v e B a n k s fo r M em b er B anks The Board of Governors has consid ered a request from an organization of member banks that Federal Reserve assistance be provided to member banks participating in an independent privately owned organization provid ing interbank funds transfer services. The member banks participating in this organization have requested assis tance from the Federal Reserve System in an arrangement to use their reserve account balances at Federal Reserve Banks to settle for payment transactions that have been ex changed through a private clearing or ganization known as the Bankwire to which these member banks belong. Bankwire is operated by the Payment St Administrative Communications Corp., a privately owned corporation. The proposed arrangement would allow the Federal Reserve member banks in this organization, during daily operations, to transfer among themselves payment instructions throughout the country via Bankwire and then to settle for those funds transfers on that same day using the Federal Reserve Communications System to make appropriate adjust ments to member bank reserve ac count balances. The member banks participating in the Bankwire organization have indi cated that significant efficiencies in their current clearing and settlem ent services will be achieved through the receipt of the net settlem ent service requested. The proposed net settle ment service would consist of Federal Reserve Banks making debit and credit entries to the reserve accounts of member banks that are members of Bankwire. Bankwire would be appoint ed the agent of the participating member banks, and would be responsi ble for providing a designated Federal Reserve office with a list of debit and credit settlem ent instructions neces sary to effect the net settlem ent. Upon obtaining this Information, which would be received through a link-up of the Federal Reserve Communications System and the Bankwire system, the designated Federal Reserve office would distribute the accounting en tries to the Federal Reserve Banks for posting to the reserve accounts of the participating member banks. This posting would represent the net amount “due from” or "due to” the member bank resulting from payment transactions exchanged that day through the Bankwire system. For some time the Federal Reserve has provided settlem ent services for member banks that, within individual Federal Reserve Districts, participate in privately run local and regional clearing organizations by charging and crediting net entries to the member banks’ reserve accounts. The proposed settlem ent service differs from such existing services in that it will be of fered on an inter-District, rather than on an intra-District basis. The Board perceives that adoption of this propos al will enhance the settlem ent services that it offers to member banks. The Board expects that the availability of these settlem ent services will facilitate member bank participation in privatesector payments clearing arrange ments and will result in same-day funds availability for member banks participating in this private-sector clearing organization. The Board views these services as consistent with the Federal Reserve System ’s commitment to provide assistance to private sector initiatives directed toward improving the efficiency of the nation’s pay ments mechanism. Providing this net settlem ent service should permit the Bankwire organization and its member banks to offer improved funds transfer services to the public. Should other requests by member banks for specialized settlem ent ser vices be received in the future, the Board will review these requests on a case-by-case basis considering among other matters overall System capabili ties and consistency with the Federal Reserve’s traditional payments mecha nism responsibilities. II. I n te r r e g io n a l C le a rin g an d S e t tle m e n t S e rv ic e s T h ro u g h A u to m a te d C le a r in g H o u s e s On th e basis of its review of the re cently completed pilot study, the Board of Governors has determined that it is appropriate for th e Federal Reserve System to establish an Inter regional Automated Clearing House system. The Board believes that inter regional clearings will facilitate the development of a more efficient na tionwide payments system available to depository Institutions and will pro vide research and development data and experience that should be of assis tance to other potential developers of automated clearing services. Provision of this interbank service also should enhance the opportunities open to de pository institutions for developing improved "retail” payments services for the public. The Board intends to have the Federal Reserve interre gional ACH system operational by the end of 1978. Since 1968 the Federal Reserve System has assisted groups of deposi tory institutions in the development and operation df automated clearing houses (ACHs) that provide facilities for the exchange of payment informa tion on magnetic tape (1976 Fed. Res. Bull. 481). These facilities were devel oped as a means of reducing the grow ing volume and increased cost of pro cessing paper checks. At the present time, the Federal Reserve provides processing, settlem ent and delivery services on a regional basis for 31 auto mated clearing house associations and makes available settlem ent and deliv ery services for two privately operated ACHs. These facilities are also used in connection with the Federal Reserve’s participation as fiscal agent in the Federal Government’s recurring pay ments program. At the present time the major portion of Federal Reserve System ACH transactions consist of direct deposit and other funds trans fers for the United States Treasury. In 1976, the National Automated Clearing House Association (NACHA) requested Federal Reserve participa tion in a pilot study to determine the feasibility of handling inter-District ACH items over the Federal Reserve Communications System. Ten ACHs participated in the interregional pilot. Depository institutions belonging to th e participating ACH associations re ceived instructions from corporate cus tomers to pay out or collect funds from customers who elected to partici pate in the program. Generally, under the pilot, the instructions were for the collection of insurance payments and for Income payments. The customers deposited these instructions on mag netic tape with their local Federal R e serve clearing and settlem ent facility, and the instructions were transmitted to the receiving facility using the Fed eral Reserve Communications System. T he receiving Federal Reserve ACH facility processed and delivered the instructions to the appropriate deposi tory institutions for debiting and cred iting to the accounts of their custom ers. Settlem ent for the funds trans ferred was through the reserve ac counts of member banks. The feasibility and potential bene fits of a nationwide'ACH facility has been demonstrated in the Treasury’s direct deposit program and in the pilot test of interregional commercial pay ments. T he Board believes that the probable long ran efficiencies result ing from interconnection of all operat ing ACH facilities justify the Board’s action at this time to provide these services to the Tresury, member banks, and other members of ACH as sociations. Moreover, the Board re gards its action to interconnect the current regional ACH facilities as a re search and development program that will provide technical data and experi ence in the operation of nationwide ACH facilities. The Federal Reserve System intends to make this Informa tion available to those in the private sector interested in the development of alternative systems. The Board intends to continue to reevaluate Federal Reserve participa tion in the ACH program in order to assure that its actions remain consis tent with its payment mechanism re sponsibilities. In this regard, the Board views its participation in a na tionwide ACH facility providing ser vices to member banks, other deposi tory institutions and the U.S. Trea sury as an appropriate activity. The Board has carefully considered the report of the National Commission on Electronic Fund Transfers to the President and Congress with regard to th e Federal Reserve’s role In the de velopment of ACH systems. The Board’s participation in a national ACH system for depository institu tions was specifically considered by the Commission and was determined to be a proper action for the Federal Reserve (Final Report— National Com mission on Electronic Fund Transfers (1977), p. 214). In addition, upon review of the results of the interre gional pilot, the National Automated Clearing House Association, comprised of 9,000 member and nonmember banks and 1,000 thrift institutions of fering ACH retail payment services to their customers, has requested that the Federal Reserve take action to in terconnect local ACH facilities nation wide in order to provide financial de pository institutions with access to a basic level of automated clearing and settlem ent nationwide, as in the check system. T he technical procedures and time schedule employed in the pilot test of interregional clearing and settlem ent are expected to serve as the model to be used in providing such service na tionwide. The longer-term objective, is to provide a clearing and settlem ent system that is more efficient than the 'check system. The Board anticipates that Reserve Banks will work closely with the national and the local ACH associations in implementing interre gional ACH services as it believes such cooperative efforts are necessary and have been successful In the past. Currently, member banks and mem bers of automated clearing house asso ciations, including thrift Institutions, may utilize the ACH clearing and set tlem ent facilities operated by Reserve Banks locally in 31 regions for com mercial payments. T h e procedures de scribed in T reasury regulations for th e delivery of government paym ents n a tionwide by Reserve Banks are n ot af fected by today’s announcem ent. In a related m atter, th e Board is continuing to develop a regulatory framework for Federal Reserve Bank ACH clearing and settlem ent oper ations th a t will accomodate cu rren t ACH arrangem ents. The proposed S ub p art C to Regulation J has been revised since its most recent publica tion for comm ent in Ja n u a ry 1976 (30 F R 32952 and 41 F R 3097) when it was proposed along w ith S ubpart B to th a t Regulation. Su bp art B was adopted by th e Board in Septem ber 1977 (42 FR 31763). T he Board intends to repub lish th e proposed S u b part C in revised form for public comment in th e near future. To aid th e Board in its final consid eration of these plans, interested p e r sons are invited to subm it comments, views or argum ents. Any such material should be subm itted in writing to the Secretary, Board of Governors of th e Federal Reserve System, W ashington, D.C. 20551, to be received no t later th a n F ebruary 28, 1978. Such m aterial will be made available for inspection and copying upon request except as provided in § 261.6(a) o f-th e B oard’s rules regarding availability of inform a tion. Board of Governors of th e Federal Reserve System, December 23, 1977. T h e o d o re E. A lliso n , Secretary o f the Board. [ F R Doc. 78-110 F iled 1-4-78; 8:45 am ] FEDERAL press RESERVE r e I e ct s e ‘vf*AL R t ^ For immediate release December 27, 1977 The Board of Governors of the Federal Reserve System today invited comment on plans to enhance and improve payments services to financial institutions and the public. The Board requested comment by February 28, 1978. These plans are expected to encourage private sector development of competitive payments services and to encourage broader use of electronic fund transfers as a more efficient, lower cost means of payment. The two programs on which the Board invited comnent are: 1. To make available Federal Reserve net settlement services to member banks, on their reserve accounts, for wire transfers conducted on Bankwire. Bankwire is a conmunications network operated by Payments and Communications Administrative Communications Corporation and owned by an association of banks. It provides interbank funds transfer services to about 200 banks throughout the country. 2. To provide a nationwide Federal Reserve service for clearing and settlement of electronic payments through automated clearinghouses (ACH's). An automated clearinghouse association is a local or regional association of banks and other depositories agreeing to make and receive electronic payments among themselves on behalf of the customer. The Federal Reserve currently operates 33 automated clearinghouses where magnetic tapes -2bearing the payments instructions of members of the local clearinghouse associations are sorted and cleared. At present, payment instructions are exchanged generally only locally among members of the various regional clearinghouse associations. Use of these electronic payments systems would be voluntary. In making these proposals the Board said: "We expect that the program to carry out net settlement for Bankwire transactions will stimulate private sector alterna tives in the payments mechanism leading to lower cost provision of banking services throughout the nation. The Board will consider other requests for such settlement services on a case- by -case basis to ensure that the cost and operational impacts and the public service benefits are consistent with the Board's overall responsibilities. "With respect to providing interregional clearing and settlement facilities for ACH's, we hope to encourage the use of electronic fund transfers as a more efficient and less costly alternative to check payments. The Board recognized the evoluti onary nature of the program and the need for continuing analysis of Federal Reserve operational involvement. However, we would emphasize the compatibility of this program with the traditional wholesale ievsl services which the Federal Reserve has provided historically. We have basic responsibilities to provide a miniajum service capability to the public and to ensure the certainty and reliability of payments as well as to encourage improved methods of meeting the credit and debit transfers of the public. Our payments system is important to the smooth functioning of the whole economy. Not least, we attach importance to the fact that this project hag been recommended by the National Commission on Electronic fund Transfers." The terms of the project under which the Federal Reserve would settle wire transfers made over Bankwire were based on a request to the Federal Reserve by member banks participating in Bankwire. terns,member banks would appoint Bankwire their Under these agent, and settlement would J -3 - be effected by crediting or debiting member bank reserve accounts. Bankwire would be responsible for supplying information needed for settlement: net amounts to be credited or debited to participating member banks, in accordance with payment instructions received during the day on Bankwire from all Bankwire members. The planned connection of automated clearinghouses to form a national network was based on a request by the National Automated Clearing House Association — comprised of some 9,000 member and nonmember banks, and 1,000 thrift institutions. Under the planned linkage a member bank or other financial institution in the Dallas automated clearinghouse association, for example, could present to the Federal Reserve automated clearinghouse at Dallas electronically recorded instructions to make a payment to a member of the San Francisco clearinghouse association. The Federal Reserve would -- as it does with payments instructions recorded on checks -- forward the instruc tions from Dallas to San Francisco. But ACH transactions would be forwarded over the Federal Reserve's communications system, rather than by mail or courier. The Federal Reserve would collect the amount involved from the Dallas depository and pay the amount to the San Francisco depository. The Dallas and San Francisco depositories would credit or debit their customers. The feasibility of connecting these facilities has been shown in two recent programs. One is the Treasury's program of direct deposit of social security and other recurring Federal payments. In place of sending out checks, the Treasury -- at the request of beneficiaries -- will send their payments directly to depository institutions through automated clearing facilties operated by Reserve Banks. V -4 More recently, the feasibility of interregional commercial payments through the automated facility was tested during a nine-month pilot test conducted by the National Automated Clearing House Association and the Federal Reserve. Today's proposal does not alter the Treasury's procedures in its direct deposit program. The text of the plans on which the Board invited comment is attached. - 0 -