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l l★K

Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272

December 3, 2004

Notice 04-85

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Policy on Payments System Risk
DETAILS
The Board has adopted several revisions to its Policy on Payments System Risk (PSR
policy). Specifically, the Board revised its expectations for risk management in payments and securities settlement systems as previously set out in part II of the PSR policy, Policies for Private-Sector
Systems, and expanded the scope of this part to cover Federal Reserve payments and securities
settlement systems. The Board also reorganized the policy such that the more general Risk Management in Payments and Securities Settlement Systems now constitutes part I of the policy, while
Federal Reserve Daylight Credit Policies constitute part II. Finally, the Board has deleted part III of
the policy, entitled “Other Policies.”
Revisions described in this notice will take effect on January 2, 2005.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 69926–40, Vol. 69, No. 230 of the
Federal Register dated December 1, 2004, is attached.
MORE INFORMATION
For more information, please contact this Bank’s Reserve and Risk Management Division
at (214) 922-5585. Paper copies of this notice or previous Federal Reserve Bank notices can be
printed from our web site at www.dallasfed.org/banking/notices/index.html.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

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Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices

FEDERAL RESERVE SYSTEM
[Docket No. OP–1191]

Policy on Payments System Risk
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Notice.
SUMMARY: The Board has adopted
several revisions to its Policy on
Payments System Risk (PSR policy).
Specifically, the Board revised its
expectations for risk management in
payments and securities settlement
systems as previously set out in part II
of the PSR policy, Policies for PrivateSector Systems, and expanded the scope
of this part to cover Federal Reserve
payments and securities settlement
systems. The Board also reorganized the
policy such that the more general Risk
Management in Payments and Securities
Settlement Systems now constitutes part
I of the policy, while Federal Reserve
Daylight Credit Policies constitute part
II. Finally, the Board has deleted part III
of the policy, entitled ‘‘Other Policies.’’
DATES: Revisions described in this
notice will take effect on January 2,
2005.
FOR FURTHER INFORMATION CONTACT: Jeff
Stehm, Assistant Director (202) 452–
2217, or Doug Conover, Senior Analyst
(202) 452–2887, Division of Reserve
Bank Operations and Payment Systems;
for the hearing impaired only:
Telecommunications Device for the
Deaf, (202) 263–4869.
SUPPLEMENTARY INFORMATION

I. Background
On April 26, 2004, the Board
requested comment on proposed
changes to part II of its Policy Statement
on Payments System Risk addressing
risk management in payments and
securities settlement systems (69 FR
22512). Key aspects of the proposal
included an expansion of the policy’s
scope to include the Federal Reserve
Banks’ (Reserve Banks) payments and
securities settlement services, revised
general risk management expectations
for all systems subject to the policy, and
the incorporation of the Core Principles
for Systemically Important Payment
Systems (Core Principles) and
Recommendations for Securities
Settlement Systems (Recommendations)
as the Board’s minimum standards for
systemically important systems.1 The
1 The Core Principles were developed by the
Committee on Payment and Settlement Systems
(CPSS) of the central banks of the Group of Ten
countries, and the Recommendations were
developed by the CPSS in conjunction with the
Technical Committee of the International

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proposed changes did not affect part I of
the PSR policy, Federal Reserve
Daylight Credit Policies, other than to
renumber it as part II.
The Board proposed these revisions to
update the policy in light of current
industry and supervisory riskmanagement approaches and the recent
publication of new international riskmanagement standards for payments
and securities settlement systems. Over
the course of several years, the Federal
Reserve has worked with other central
banks and securities regulators to
develop standards to strengthen
payments and securities settlement
infrastructures. These efforts initially
produced the Lamfalussy Minimum
Standards, which were incorporated
into the Board’s PSR policy in 1994.2
More recently, this work resulted in the
publication of the Core Principles and
the Recommendations. The Core
Principles extend and replace the
Lamfalussy Minimum Standards, while
the Recommendations provide, for the
first time, explicit standards for
securities settlement systems.3
In addition to establishing specific
standards, however, the Core Principles
and Recommendations call for central
banks to state clearly their roles and
policies regarding payments and
securities settlement systems, assess
compliance with the Core Principles
and the Recommendations when
overseeing relevant systems, and
coordinate with other authorities in
overseeing systems. Moreover, the Core
Principles and Recommendations are
intended to apply to systems operated
by central banks as well as the private
sector. The policy revisions proposed by
the Board in April were designed to
meet these and other expectations.
II. Summary of Comments and Analysis
The Board received eight comments
on the proposed policy—three from
private-sector payment system
operators, two from industry
associations, two from commercial
banks, and one from the Federal Reserve
Bank of Richmond. Comments generally
Organization of Securities Commissions (IOSCO).
The full reports on the Core Principles and the
Recommendations are available at http://
www.bis.org.
2 59 FR 67534, Dec. 29, 1994. The Lamfalussy
Minimum Standards were set out in the ‘‘Report of
the Committee on Interbank Netting Schemes of the
Central Banks of the Group of Ten Countries,’’
published by the Bank for International Settlements
in November 1990.
3 Both sets of standards are part of the Financial
Stability Forum’s Compendium of Standards that
have been widely recognized and endorsed by U.S.
authorities as integral to strengthening global
financial stability. Both sets of standards were
published by the relevant committees for public
comment before being adopted in their final form.

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supported the substantive policy
revisions set out in the proposal, but
varied in regard to the Board’s series of
specific questions on the policy
threshold, the definition of a system, the
general policy expectations, and the
criteria for determining a systemically
important system. Several commenters
also discussed risks related to thirdparty access in ACH systems.
The final policy retains all substantive
aspects of the proposed policy. The final
policy, however, includes several minor
changes that address specific comments.
The final policy also includes other
editorial and technical corrections,
including several changes to make the
new introduction consistent with recent
revisions to the Federal Reserve
Daylight Credit Policies, as published
on September 28, 2004 (69 FR 57917).
Finally, in an action not proposed in
April, the Board also deleted part III of
the policy.
Policy Threshold
Five of the eight commenters offered
specific comments on the $5 billion
policy threshold. Three commenters
suggested that the threshold be modified
to be more inclusive by lowering the
threshold or by suggesting additional
quantitative or qualitative criteria. One
commenter stated that the $5 billion
threshold would leave out certain
unnamed systems that should be
covered by the policy for reasons of both
systemic risk and competitive equity.
Several commenters specifically
supported the threshold, pointing out
the current approach would ‘‘result in a
level playing field’’ and ‘‘ensure a
consistent regulatory approach.’’
In contrast, one commenter suggested
that the threshold be modified to be less
inclusive, specifically by raising the
threshold to $10 billion. This
commenter cited the original intent of
the $5 billion threshold as described in
January 1999 as exempting from the
policy smaller systems that are not
likely to ‘‘pose systemic risks or other
significant risk concerns.’’4 The
commenter argued that the $5 billion
threshold was appropriate in 1999, but
due to economic growth, the level is no
longer appropriate, as some systems
with gross settlement near $5 billion per
day still pose no systemic risk concerns.
This commenter and one other
suggested that the threshold be
increased periodically.
The Board agrees with the opinions of
several commenters who pointed out
the value of a simple policy threshold
in ensuring a consistent approach and
transparent application of the policy. In
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fact, the $5 billion gross settlement
threshold was adopted in response to
industry comments in 1998 that largely
opposed the use of more complex
formulas in favor of a simple, numerical
threshold. With regard to the absolute
level of the threshold, the Board
continues to believe that the $5 billion
level appropriately eliminates any
administrative burden of complying
with the policy for those systems that
are unlikely to pose significant risk
concerns. The Board sees no reason to
modify the existing threshold at this
time.
Definition of a System
Of the four commenters that
specifically addressed the definition of
‘‘system’’ as set out in proposed policy,
three agreed that the definition was
‘‘reasonable and appropriate,’’
especially the exemption for bilateral
relationships, such as in traditional
correspondent banking. One
commenter, however, suggested that the
Board clarify the relationship between
the ‘‘general definition’’ of a system and
the three characteristics typically
‘‘embodied’’ by such systems. The final
policy explains how the Board may use
these characteristics in determining
whether a particular arrangement meets
the policy’s definition of a system.
General Policy Expectations
All eight commenters expressed
support for the general risk management
expectations set out in part B of the
proposed policy. Several offered strong
support for these revisions. Two
commenters raised questions about
whether risks related to third-party
access to payment systems, especially
ACH systems, would fall under the
general risk-management expectations
(these comments are discussed below).
One commenter sought additional
clarity on how systems should assess
their dependencies and interrelationships with other payment and
securities settlement systems. This same
commenter suggested that, where
appropriate, oversight efforts associated
with the revised policy be conducted
through existing bank supervisory
programs, citing a minimization in
regulatory burden. The final policy
elaborates on the Board’s expectation
that a system understand the risks posed
by its various relationships with other
systems, and clarifies the Board’s intent
to minimize unnecessary burden on
systems subject to the policy, including
coordinating, where possible, any
assessments of compliance with the
policy with other supervisory attentions
to a system. The final policy also
clarifies that systems currently falling

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below the $5 billion threshold for
applying the policy, though not subject
to the policy, are nonetheless
encouraged to implement a sound riskmanagement framework.
Criteria for Systemic Importance
Four of the eight commenters
suggested modifications to the criteria
for determining ‘‘systemically
important’’ systems that were set out in
the proposed policy for assessing
whether the Core Principles or
Recommendations would be applicable
to a payments or securities settlement
system. Two commenters suggested that
the criteria needed more clarity so that
systems and their participants can know
whether a particular system would be
considered systemically important.
These same commenters also suggested
that the policy include some indicators
that suggest when a system is not
systemically important. One commenter
suggested the inclusion of a seventh
criterion, whether ‘‘a failure of the
system would cause significant or
extended loss of investor or consumer
confidence.’’ A fourth commenter
suggested that the policy clarify whether
a system would be considered
systemically important if it met only
one of the six criteria.
The Board decided to retain the six
proposed criteria for systemic
importance. These criteria are based
upon the description of ‘‘systemically
important systems’’ provided in the
Core Principles, adjusted to be
applicable to securities settlement
systems and to provide consistency with
the criteria previously set out in the
policy for applying the Lamfalussy
Standards. Regarding the suggestion that
the policy include a list of exclusions or
characteristics of systems that are not
systemically important, the Board
believed that this type of change could
introduce unnecessary conflicts with
the existing criteria. On whether to add
a seventh explicit criterion regarding
investor or consumer confidence, the
Board believes that these changes would
unnecessarily broaden the definition of
systemically important in a potentially
ambiguous manner, and with possible
unintended consequences. For example,
such a criterion may suggest that many
retail systems, such as debit card, credit
card, and ACH systems, be considered
systemically important regardless of any
limited potential to spread credit and
liquidity shocks through the financial
system.
To address commenters’ concerns
about transparency regarding whether
the Board considers a particular system
to be systemically important for
purposes of the PSR policy, the final

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policy states that the Board will
separately inform each system subject to
the policy as to whether they are or are
not considered systemically important.
This revision retains necessary
flexibility in the criteria for systemic
importance, but provides clarity for
each system subject to the policy as to
whether the Board expects them to meet
the standards for systemically important
systems.
Third-Party Access
Three commenters focused their
comments on the risks regarding ‘‘thirdparty access’’ to ACH systems. Two of
these organizations offered specific
suggestions on how to address thirdparty risks in the ACH. Both suggested
that the policy include a requirement
that all third-party arrangements be
subject to the approval of the sponsoring
institution’s board of directors or other
senior management body. One of the
two suggested that ACH operators
provide tools for institutions to manage
these risks, and controls that should, at
a minimum, include gross debit limits.
The third commenter did not make
these specific suggestions and instead
suggested that the Board request
comment on a ‘‘specific proposal’’ to
address these risks.
The Federal Reserve is interested in
risks related to third-party access in
ACH networks, and through the Federal
Reserve Banks’ role as an ACH operator,
is taking steps to address these risks. For
example, the Federal Reserve Bank
presidents recently circulated a letter to
depository institutions outlining the
risks and possible risk mitigation
techniques related to ACH debit
originations, including third-party
originators. The Federal Reserve Banks
also have offered to work with ACH
participants and the ACH rule-making
body to discuss these risks. The Federal
Reserve Banks are also examining
possible enhancements to FedACH that
could strengthen depository
institutions’ controls over ACH activity
settling through their accounts.
In recent years, however, the Board
specifically moved away from
addressing outsourcing and third-party
access risks in the context of the PSR
policy. In August 1995, the Board
sought comment on the benefits and
costs of adopting third-party access
provisions for ACH credit transfers in
the PSR policy.5 The Board’s analysis of
this issue, however, indicated that the
costs, complexity, and operational effect
of potential changes outweighed the risk
reduction benefits. An ACH third-party
access policy was never adopted.
5 60

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Moreover, in April 2001, the Board
rescinded the third-party Fedwire
access section of the PSR policy,
adopted in 1987, stating that such
access, when properly managed by
depository institutions, poses little
additional risk to the Federal Reserve
and does not warrant the administrative
burden imposed by the third-party
access policy.6 The Board also stated
that as part of the ongoing supervisory
process, banking organizations are
expected to address and manage risks
that may arise out of third-party
arrangements.7
Deletion of Part III
Given the changes to the policy that
the Board is adopting in this notice and
the changes adopted in recent revisions
to the policy concerning Federal
Reserve Daylight Credit Policies, the
Board has decided to delete part III of
the PSR policy, entitled Other Policies.
Part III encourages, but does not require,
depository institutions to use rollovers
and continuing contracts in federal
funds and Eurodollars to minimize their
use of daylight credit in their Federal
Reserve accounts. The Board adopted
this aspect of the policy in 1989 as
guidance for depository institutions.
Given the incentives to manage daylight
credit provided by the implementation
of daylight overdraft fees in 1994, the
Board believes that depository
institutions have the appropriate
incentives to incorporate the practices
encouraged in part III into their daylight
credit management procedures, and that
specific guidance in this area is no
longer necessary.
IV. Regulatory Flexibility Act Analysis
The Board has determined that these
revisions to the PSR policy would not
have a significant economic impact on
a substantial number of small entities.
The policy requires payments and
securities settlement systems to address
material risks in their systems. The
policy applies to relatively large
systems, i.e., those that expect to settle
an aggregate gross value exceeding $5
billion on any day during the next
twelve-month period. Thus, the policy
is designed to minimize regulatory
burden on smaller systems that do not
raise material risks. Although small
financial institutions may participate in
payments or securities settlement
systems that are subject to the policy,
6 66

FR 19165, April 13, 2001.
Reserve and other FFIEC supervisors
have issued guidance concerning third-party access
risk, and continue to work to identify specific types
of ACH flows and businesses that may pose special
risks to depository institutions. See SR Ltr. 01–16
(July 3, 2001), SR Ltr. 00–4 (February 29, 2000).
7 Federal

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the compliance burden largely falls on
system operators and not on individual
participants.
V. Competitive Impact Analysis
The Board has established procedures
for assessing the competitive impact of
rule or policy changes that have a
substantial impact on payments system
participants.8 Under these procedures,
the Board will assess whether a change
would have a direct and material
adverse effect on the ability of other
service providers to compete effectively
with the Federal Reserve in providing
similar services due to differing legal
powers or constraints, or due to a
dominant market position of the Federal
Reserve deriving from such differences.
If no reasonable modifications would
mitigate the adverse competitive effects,
the Board will determine whether the
anticipated benefits are significant
enough to proceed with the change
despite the adverse effects. The PSR
policy provides that Reserve Bank
payments and securities settlement
systems will be treated similarly to
private-sector systems and thus should
have no material adverse effect on the
ability of other service providers to
compete effectively with the Federal
Reserve Banks in providing payments
and securities settlement services.
VI. Paperwork Reduction Act
In accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. ch.
3506; 5 CFR part 1320 Appendix A.1),
the Board has reviewed the policy under
the authority delegated to the Board by
the Office of Management and Budget.
No collections of information pursuant
to the Paperwork Reduction Act are
contained in the revisions to the PSR
policy.
VII. Federal Reserve Policy on
Payments System Risk
The PSR policy is revised, effective
January 2, 2005, to read as follows:
Introduction
Risks in Payments and Securities Settlement
Systems
I. Risk Management in Payments and
Securities Settlement Systems
A. Scope
B. General Policy Expectations
C. Systemically Important Systems
1. Standards for Systemically Important
Payments Systems
2. Standards for Systemically Important
Securities Settlement Systems
II. Federal Reserve Daylight Credit Policies
A. Daylight Overdraft Definition and
Measurement
B. Pricing
8 These procedures are described in ‘‘The Federal
Reserve in the Payments System,’’ as revised in
March 1990 (55 FR 11648, March 29, 1990).

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C. Net Debit Caps
1. Definition
2. Cap Categories
a. Self-Assessed
b. De minimis
c. Exempt-From-Filing
d. Zero
3. Capital measure
a. U.S.-Chartered Institutions
b. U.S. Branches and Agencies of Foreign
Banks
D. Collateralized Capacity
E. Special Situations
1. Edge and Agreement Corporations
2. Bankers’ Banks
3. Limited-Purpose Trust Companies
4. Government-Sponsored Enterprises and
International Organizations
5. Problem Institutions
F. Monitoring
1. Ex Post
2. Real Time
3. Multi-District Institutions
G. Transfer-Size Limit on Book-Entry
Securities

Introduction
Payments and securities settlement
systems are critical components of the
nation’s financial system. The smooth
functioning of these systems is vital to
the financial stability of the U.S.
economy. Given the importance of these
systems, the Board has developed this
policy to address the risks that
payments and securities settlement
systems present to the financial system
and to the Federal Reserve Banks
(Reserve Banks).
In adopting this policy, the Board’s
objectives are to foster the safety and
efficiency of payments and securities
settlement systems. These policy
objectives are consistent with (1) the
Board’s long-standing objectives to
promote the integrity, efficiency, and
accessibility of the payments
mechanism; (2) industry and
supervisory methods for risk
management; and (3) internationally
accepted risk management standards
and practices for systemically important
payments and securities settlement
systems.1
Part I of this policy sets out the key
risk management expectations of the
Board that public- and private-sector
payments and securities settlement
systems should meet in the design and
operation of those systems. Under the
policy, all payments and securities
settlement systems that expect to settle
an aggregate gross value exceeding $5
billion on any day during the next
twelve months are expected to
implement a risk management
1 For the Board’s long-standing objectives in the
payments system, see ‘‘The Federal Reserve in the
Payments System,’’ September 2001, FRRS 9–1550,
available at http://www.federalreserve.gov/
paymentsystems/pricing/frpaysys.htm.

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framework that is appropriate for the
risks they pose to the system operator,
system participants, and the financial
system more broadly. Systemically
important payments and securities
settlement systems are also expected to
meet more specific standards based
upon the Core Principles for
Systemically Important Payments
Systems (Core Principles) and the
Recommendations for Securities
Settlement Systems
(Recommendations), respectively.2
Part II of this policy governs the
provision of intraday or ‘‘daylight’’
credit in accounts at the Reserve Banks
and sets out the general methods used
by the Reserve Banks to control their
intraday credit exposures. Under this
part, the Board expects institutions to
manage their Federal Reserve accounts
effectively and use Federal Reserve
daylight credit efficiently and
appropriately, in accordance with this
policy.3 Although some intraday credit
may be necessary, the Board expects
that, as a result of this policy, relatively
few institutions will consistently rely on
significant amounts of intraday credit
supplied by the Federal Reserve to
conduct their business. The Board will
continue to monitor the effects of its
daylight credit policies on the payments
system.
Risks in Payments and Securities
Settlement Systems
The basic risks in payments and
securities settlement systems are credit
risk, liquidity risk, operational risk, and
legal risk. In the context of this policy,
these risks are defined as follows.4
Credit Risk. The risk that a
counterparty will not settle an
obligation for full value either when
due, or anytime thereafter.
2 The Core Principles were developed by the
Committee on Payment and Settlement Systems of
the central banks of the Group of Ten countries
(CPSS) and the Recommendations were developed
by the CPSS in conjunction with the Technical
Committee of the International Organization of
Securities Commissions (IOSCO). The full reports
on the Core Principles and the Recommendations
are available at http://www.bis.org.
3 In part II of this policy, the term ‘‘institution’’
will be used to refer to institutions defined as
‘‘depository institutions’’ in 12 U.S.C. 461(b)(1)(A),
U.S. branches and agencies of foreign banking
organizations, Edge and agreement corporations,
and bankers’ banks, limited purpose trust
companies, government-sponsored enterprises, and
international organizations, unless the context
indicates a different reading.
4 These definitions of credit risk, liquidity risk,
and legal risk are based upon those presented in the
Core Principles and the Recommendations. The
definition of operational risk is based on the Basel
Committee on Banking Supervision’s ‘‘Sound
Practices for the Management and Supervision of
Operational Risk.’’ See these publications at
http://www.bis.org for a fuller discussion of these
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Liquidity Risk. The risk that a
counterparty will not settle an
obligation for full value when due.
Operational Risk. The risk of loss
resulting from inadequate or failed
internal processes, people, and systems,
or from external events. This type of risk
includes various physical and
information security risks.
Legal Risk. The risk of loss because of
the unexpected application of a law or
regulation or because a contract cannot
be enforced.
These risks arise between financial
institutions as they settle payments and
securities transactions and must be
managed by institutions, both
individually and collectively.5 6
Multilateral payments and securities
settlement systems, in particular, may
increase, shift, concentrate, or otherwise
transform risks in unanticipated ways.
These systems also may pose systemic
risk to the financial system where the
inability of a system participant to meet
its obligations when due may cause
other participants to be unable to meet
their obligations when due. The failure
of one or more participants to settle
their payments or securities
transactions, in turn, could create credit
or liquidity problems for other
participants, the system operator, or
other financial institutions. Systemic
risk might lead ultimately to a
disruption in the financial system more
broadly or undermine public confidence
in the nation’s financial infrastructure.
These risks stem, in part, from the
multilateral and time-sensitive credit
and liquidity interdependencies among
financial institutions. These
interdependencies often create complex
transaction flows that, in combination
with a system’s design, can lead to
significant demands for intraday credit,
either on a regular or extraordinary
basis. Some level of intraday credit is
appropriate to ensure the smooth
functioning of payments and securities
settlement systems. To the extent that
financial institutions or the Reserve
Banks are the direct or indirect source
of such intraday credit, they may face a
direct risk of loss if daylight credit is not
5 The term ‘‘financial institution,’’ as generally
used in part I of this policy, includes organizations,
such as depository institutions, securities dealers,
and other institutions, that act as intermediaries in
financial markets and engage in financial activities
for themselves and their customers.
6 Several existing regulatory and bank supervision
guidelines and policies also are directed at
institutions’ management of the risks posed by
interbank payments and settlement activity. For
example, Federal Reserve Regulation F (12 CFR part
206) directs insured depository institutions to
establish policies and procedures to avoid excessive
exposures to any other depository institutions,
including exposures that may be generated through
the clearing and settlement of payments.

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extinguished as planned. In addition,
measures taken by Reserve Banks to
limit their intraday credit exposures
may shift some or all of the associated
risks to private-sector systems.
The smooth functioning of payments
and securities settlement systems is also
critical to certain public policy
objectives in the areas of monetary
policy and banking supervision. The
effective implementation of monetary
policy, for example, depends on both
the orderly settlement of open market
operations and the efficient distribution
of reserve balances throughout the
banking system via the money market
and payments system. Likewise,
supervisory objectives regarding the
safety and soundness of depository
institutions must take into account the
risks payments and securities settlement
systems pose to depository institutions
that participate directly or indirectly in,
or provide settlement, custody, or credit
services to, such systems.
Through this policy, the Board
expects financial system participants,
including the Reserve Banks, to manage
appropriately the settlement and
systemic risks arising in payments and
securities settlement systems, consistent
with the smooth operation of the
financial system. This policy is
designed to fulfill that aim by (1)
informing all financial system
participants and system operators of the
basic risks that arise in the settlement
process, and encouraging the
management of these risks (2) describing
the Board’s general expectations for risk
management in payment and securities
settlement systems subject to this
policy, (3) providing explicit risk
management standards for systemically
important systems, and (4) establishing
the policy conditions governing the
provision of Federal Reserve intraday
credit to account holders. The Board’s
adoption of this policy in no way
diminishes the primary responsibilities
of financial system participants
generally and settlement system
operators, participants, and Federal
Reserve accountholders more
specifically, to address the risks that
may arise through their operation of, or
participation in, payments and
securities settlement systems.
I. Risk Management in Payments and
Securities Settlement Systems
This part sets out the Board’s
expectations regarding the management
of risk in payments and securities
settlement systems, including those
operated by the Reserve Banks. The
Board will be guided by this part, in
conjunction with relevant laws and
other Federal Reserve policies, when (1)

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supervising state member banks, bank
holding companies, and clearinghouse
arrangements, including the exercise of
authority under the Bank Service
Company Act, where applicable,7 (2)
setting the terms and conditions for the
use of Federal Reserve payments and
settlement services by system operators
and participants, (3) developing and
applying policies for the provision of
intraday credit to Reserve Bank account
holders, and (4) interacting with other
domestic and foreign financial system
authorities on payments and settlement
risk management issues. The Board’s
adoption of this policy is not intended
to exert or create new supervisory or
regulatory authority over any particular
class of institutions or arrangements
where the Board does not currently have
such authority.
Where the Board does not have direct
or exclusive supervisory or regulatory
authority over systems covered by this
policy, it will work with other domestic
and foreign financial system authorities
to promote effective risk management in
payments and securities settlement
systems. The Board encourages other
relevant authorities to consider the
principles embodied in this policy
when evaluating the payments and
securities settlement risks posed by and
to the systems and individual system
participants that they oversee,
supervise, or regulate. In working with
foreign financial system authorities, the
Board will be guided by Responsibility
D of the Core Principles,
Recommendation 18 of the
Recommendations, and the ‘‘Principles
for Cooperative Central Bank Oversight
of Cross-border and Multi-currency
Netting and Settlement Schemes’’ and
related documents.8 The Board believes
these international principles provide
an appropriate framework for
cooperating with foreign authorities to
address risks in cross-border,
multicurrency, and, where appropriate,
offshore payments and securities
settlement systems.
A. Scope
This policy applies to public- and
private-sector payments and securities
settlement systems that expect to settle
a daily aggregate gross value of U.S.
dollar-denominated transactions
exceeding $5 billion on any day during
7 12

U.S.C. 1861 et seq.
‘‘Principles for Cooperative Central Bank
Oversight and Multi-currency Netting and
Settlement Schemes’’ are set out in the ‘‘Report of
the Committee on Interbank Netting Schemes of the
central banks of the Group of Ten countries’’
(Lamfalussy Report). The Lamfalussy Report is
available at http://www.bis.org/cpss/cpsspubl.htm.
8 The

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the next 12 months.9 For purposes of
this policy, a payments or securities
settlement system is considered to be a
multilateral arrangement (three or more
participants) among financial
institutions for the purposes of clearing,
netting, and/or settling payments or
securities transactions among
themselves or between each of them and
a central party, such as a system
operator or central counterparty.10 In
determining whether a particular
arrangement meets this definition, the
Board may consider, but will not be
limited to, whether the arrangement
exhibits one or more of the following
characteristics: (1) A set of rules and
procedures, common to all participants,
that govern the clearing or settlement of
payments or securities transactions, (2)
a common technical infrastructure for
conducting the clearing or settlement
process, and (3) a risk management or
capital structure where at least some
losses would be borne by participants
rather than the arrangement’s operator,
central counterparty or guarantor, or
shareholders or owners.
These systems may be organized,
located, or operated within the United
States (domestic systems), outside the
United States (offshore systems), or both
(cross-border systems) and may involve
other currencies in addition to the U.S.
dollar (multicurrency systems). The
policy also applies to any system based
or operated in the United States that
engages in the settlement of non-U.S.
dollar transactions if that system would
be otherwise subject to the policy.11
This policy does not apply to bilateral
relationships between financial
institutions and their customers, such as
traditional correspondent banking and
correspondent securities clearing
9 The ‘next’ twelve-month period is determined
by reference to the date a determination is being
made as to whether the policy applies to a
particular system. Aggregate gross value of U.S
dollar-denominated transactions refers to the total
dollar value of individual U.S. dollar transactions
settled in the system which also represents the sum
of total U.S. dollar debits (or credits) to all
participants prior to or in absence of any netting of
transactions.
10 A system includes all of the governance,
management, legal and operational arrangements
used to effect settlement as well as the relevant
parties to such arrangements, such as the system
operator, system participants, and system owners.
The types of systems that may fall within the scope
of this policy include, but are not limited to, largevalue funds transfer systems, automated
clearinghouse (ACH) systems, check
clearinghouses, and credit and debit card settlement
systems, as well as central counterparties, clearing
corporations, and central depositories for securities
transactions. For purposes of this policy, the system
operator is the entity that manages and oversees the
operations of the system. For the definition of
financial institution, see footnote 5.
11 The daily gross value threshold will be
calculated on a U.S. dollar equivalent basis.

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arrangements, including, for example,
government securities clearing services
provided to securities dealers by banks
or correspondent clearing services
provided by broker-dealers. The Board
believes that these relationships do not
constitute ‘‘a system’’ for purposes of
this policy and that relevant safety and
soundness issues associated with these
relationships are more appropriately
addressed through the supervisory and
regulatory process. This policy also does
not apply to clearance or settlement
systems for exchange-traded futures and
options that fall under the oversight of
the Commodities and Futures Trading
Commission or the Securities and
Exchange Commission.
B. General Policy Expectations
The Board expects payments and
securities settlement systems within the
scope of this policy to implement a risk
management framework appropriate for
the risks the system poses to the system
operator, system participants, and other
relevant parties as well as the financial
system more broadly. A risk
management framework is the set of
objectives, policies, arrangements,
procedures, and resources that a system
employs to limit and manage risk. While
there are a number of ways to structure
a sound risk management framework, all
frameworks should:
• Clearly identify risks and set sound
risk management objectives;
• Establish sound governance
arrangements;
• Establish clear and appropriate
rules and procedures; and,
• Employ the resources necessary to
achieve the system’s risk management
objectives and implement effectively its
rules and procedures.
The Board also expects any system it
deems to be systemically important both
to establish a sound risk management
framework and to comply with the more
detailed standards set out in Section I.C.
The Board will seek to understand how
and whether systems subject to this
policy achieve a sound risk management
framework and, if relevant, meet the
detailed standards for systemically
important systems. In addition, the
Board encourages systems with
settlement activity below the $5 billion
threshold, though not subject to this
policy, to consider implementing some
or all of the elements of a sound risk
management framework.12
12 The Board may ask a system approaching the
policy threshold to provide limited information on
trends in its gross settlement activity to determine
when that system might become subject to the
policy. Systems approaching the threshold should
anticipate meeting the expectations of this policy.

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Identify Risks and Set Sound Risk
Management Objectives. The first
element of a sound risk management
framework is the clear identification of
all risks that have the potential to arise
in or result from the system’s settlement
process and the development of clear
and transparent objectives regarding the
system’s tolerance for and management
of such risks.
System operators should identify the
forms of risk present in their system’s
settlement process as well as the parties
posing and bearing each risk. In
particular, system operators should
identify the risks posed to and borne by
themselves, the system participants, and
other key parties such as a system’s
settlement banks, custody banks, and
third-party service providers. System
operators should also analyze whether
risks might be imposed on other
external parties and the financial system
more broadly.
In addition, system operators should
analyze how risk is transformed or
concentrated by the settlement process.
System operators should also consider
the possibility that attempts to limit one
type of risk could lead to an increase in
another type of risk. Moreover, system
operators should be aware of risks that
might be unique to certain instruments,
participants, or market practices.
System operators should also analyze
how risks are correlated among
instruments or participants.13
Based upon its clear identification of
risks, a system should establish its risk
tolerance, including the levels of risk
exposure that are acceptable to the
system operator, system participants,
and other relevant parties. The system
operator should then set risk
management objectives that clearly
allocate acceptable risks among the
relevant parties and set out strategies to
manage this risk. Risk management
objectives should be consistent with the
objectives of this policy, the system’s
business purposes, and the type of
instruments and markets for which the
system clears and settles. Risk
management objectives should also be
communicated to and understood by
both the system operator’s staff and
system participants.
13 Where systems have inter-relationships with or
dependencies on other systems, system operators
should also analyze whether and to what extent any
cross-system risks arise and who bears them.
Examples of such dependencies include, but are not
limited to, financial and legal relationships, such as
cross-margining, cross-collateralization, or crossguarantees, operational relationships, such as
shared platforms or networks, inter-system links to
move transactions between systems, and tiered
settlement dependencies (e.g. reliance on a second
system to settle net obligations).

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System operators should re-evaluate
their risks in conjunction with any
major changes in the settlement process
or operations, the instruments or
transactions settled, a system’s rules or
procedures, or the relevant legal and
market environments. Systems should
review their risk management objectives
regularly to ensure that they are
appropriate for the risks posed by the
system, continue to be aligned with the
system’s purposes, remain consistent
with this policy, and are being
effectively adhered to by the system
operator and participants.
Sound Governance Arrangements.
Systems should have sound governance
arrangements to implement and oversee
their risk management frameworks. The
responsibility for sound governance
rests with a system operator’s board of
directors or similar body and with the
system operator’s senior management.
Governance structures and processes
should be transparent; enable the
establishment of clear risk management
objectives; set and enforce clear lines of
responsibility and accountability for
achieving these objectives; ensure that
there is appropriate oversight of the risk
management process; and enable the
effective use of information reported by
the system operator’s management,
internal auditors, and external auditors
to monitor the performance of the risk
management process.14 Individuals
responsible for governance should be
qualified for their positions, understand
their responsibilities, and understand
their system’s risk management
framework. Governance arrangements
should also ensure that risk
management information is shared in
forms, and at times, that allow
individuals responsible for governance
to fulfill their duties effectively.
Clear and Appropriate Rules and
Procedures. Systems should implement
rules and procedures that are
appropriate and sufficient to carry out
the system’s risk management objectives
and that have a well-founded legal
basis. Such rules and procedures should
specify the respective responsibilities of
the system operator, system
participants, and other relevant parties.
Rules and procedures should establish
the key features of a system’s settlement
and risk management design and specify
clear and transparent crisis management
procedures and settlement failure
procedures, if applicable.15
14 The internal audit function should be
independent of those responsible for day-to-day
operational and other business functions.
15 Examples of key features that might be
specified in a system’s rules and procedures are
controls to limit participant-based risks, such as
membership criteria based on participants’ financial

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Employ Necessary Resources. Systems
should ensure that the appropriate
resources and processes are in place to
allow them to achieve their risk
management objectives and effectively
implement their rules and procedures.
In particular, the system operator’s staff
should have the appropriate skills,
information, and tools to apply the
system’s rules and procedures and
achieve the system’s risk management
objectives. System operators should also
ensure that their facilities and
contingency arrangements, including
any information system resources, are
sufficient to meet their risk management
objectives.16
The Board recognizes that payments
and securities settlement systems differ
widely in terms of form, function, scale,
and scope of activities and that these
characteristics result in differing
combinations and levels of risks. Thus,
the exact features of a system’s risk
management framework should be
tailored to the risks of that system. The
Board also recognizes that the specific
features of a risk management
framework may entail trade-offs
between efficiency and risk reduction
and that payments and securities
settlement systems will need to consider
these trade-offs when designing
appropriate rules and procedures. In
considering such trade-offs, however, it
is critically important that systems take
into account the costs and risks that
may be imposed on all relevant parties,
including parties with no direct role in
the system.
To determine whether a system’s
current or proposed risk management
framework is consistent with this
policy, the Board will seek to
understand how a system achieves the
four elements of a sound risk
management framework set out above.
In this context, it may be necessary for
the Board to obtain information from
system operators regarding their risk
management framework, risk
management objectives, rules and
procedures, significant legal analyses,
general risk analyses, analyses of the
credit and liquidity effects of settlement
disruptions, business continuity plans,
crisis management procedures, and
and operational health, limits on settlement
exposures, and the procedures and resources to
hedge, margin, or collateralize settlement
exposures. Other examples of key features might be
business continuity requirements and loss
allocation procedures.
16 Such arrangements may also be subject to
various supervisory guidelines, such as the
‘‘Interagency Paper on Sound Practices to
Strengthen the Resilience of the U.S. Financial
System.’’ (68 FR 17809, April 11, 2003)

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other relevant documentation.17 It may
also be necessary for the Board to obtain
data or statistics on system activity on
an ad-hoc or ongoing basis. All
information provided to the Federal
Reserve for the purposes of this policy
will be handled in accordance with all
applicable Federal Reserve policies on
information security, confidentiality,
and conflicts of interest. In seeking to
obtain information and in determining
whether a system’s risk management
framework is consistent with this
policy, the Board intends to minimize
unnecessary burden on systems, and
will coordinate its activities, if
practicable, with supervisory attentions
to the system.
C. Systemically Important Systems
In addition to establishing a risk
management framework that includes
the key elements described above, the
Board expects systemically important
payments and securities settlement
systems to comply with the detailed
standards set out in this section.18 To
determine whether a system is
systemically important for purposes of
this policy, the Board may consider, but
will not be limited to, one or more of the
following factors:
• Whether the system has the
potential to create significant liquidity
disruptions or dislocations should it fail
to perform or settle as expected;
• Whether the system has the
potential to create large credit or
liquidity exposures relative to
participants’ financial capacity;
• Whether the system settles a high
proportion of large-value transactions;
• Whether the system settles
transactions for critical financial
markets; 19
• Whether the system provides
settlement for other systems;
• Whether the system is the only
system or one of a very few systems for
settlement of a given financial
instrument.
Systemically important systems are
expected to meet specific risk
17 To facilitate analysis of settlement disruptions,
systems with significant settlement flows may need
to develop the capability to simulate credit and
liquidity effects on participants and on the system
resulting from one or more participant defaults, or
other possible sources of settlement disruption.
Such simulations may need to include, if
appropriate, the effects of changes in market prices,
volatilities, or other factors.
18 The Board will separately inform systems
subject to the policy as to whether they are or are
not systemically important.
19 The ‘‘Interagency Paper on Sound Practices to
Strengthen the Resilience of the U.S. Financial
System’’ defines critical financial markets as the
markets for federal funds, foreign exchange, and
commercial paper; U.S. government and agency
securities; and corporate debt and equity securities.

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management standards because of their
potential to cause major disruptions in
the financial system. The Board,
therefore, expects systemically
important payments systems to comply
with the standards listed in section
I.C.1. Securities settlement systems of
systemic importance are expected to
comply with the standards listed in
section I.C.2. Some systemically
important systems, however, may
present an especially high degree of
systemic risk, by virtue of their high
volume of large-value transactions or
central role in the operation of critical
financial markets. Because all systems
are expected to employ a risk
management framework that is
appropriate for their risks, the Board
may expect these systems to exceed the
standards set out below.
The Board acknowledges that
payments and securities settlement
systems vary in terms of the range of
instruments they settle and markets they
serve. It also recognizes that systems
may operate under different legal and
regulatory constraints and within
particular market infrastructures or
institutional frameworks. The Board
will consider these factors when
assessing how a systemically important
system addresses a particular standard.
The Board’s standards for
systemically important payments and
securities settlement systems are based,
respectively, on the Core Principles and
the Recommendations. The Core
Principles and the Recommendations
are two examples of recent initiatives
pursued by the international financial
community to strengthen the global
financial infrastructure.20 The Federal
Reserve worked closely with other
central banks to develop and draft the
Core Principles and with other central
banks and securities regulators to
develop and draft the
Recommendations. These standards are
part of the Financial Stability Forum’s
Compendium of Standards that have
been widely recognized, supported, and
endorsed by U.S. authorities as integral
to strengthening the stability of the
financial system.
20 The Core Principles draw extensively on the
previous work of the CPSS, most importantly the
Report of the Committee on Interbank Netting
Schemes of the Central Banks of the Group of Ten
Countries (the Lamfalussy Minimum Standards).
The Core Principles extend the Lamfalussy
Minimum Standards by adding several principles
and broadening the coverage to include
systemically important payments systems of all
types, including gross settlement systems and
hybrid systems, operated by either the public or
private sector. The Core Principles also address the
responsibilities of central banks in applying the
Core Principles.

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1. Standards for Systemically Important
Payments Systems
1. The system should have a wellfounded legal basis under all relevant
jurisdictions.
2. The system’s rules and procedures
should enable participants to have a
clear understanding of the system’s
impact on each of the financial risks
they incur through participation in it.
3. The system should have clearly
defined procedures for the management
of credit risks and liquidity risks, which
specify the respective responsibilities of
the system operator and the participants
and which provide appropriate
incentives to manage and contain those
risks.
4. The system should provide prompt
final settlement on the day of value,
preferably during the day and at a
minimum at the end of the day.
5. A system in which multilateral
netting takes place should, at a
minimum, be capable of ensuring the
timely completion of daily settlements
in the event of an inability to settle by
the participant with the largest single
settlement obligation.
6. Assets used for settlement should
preferably be a claim on the central
bank; where other assets are used, they
should carry little or no credit risk and
little or no liquidity risk.
7. The system should ensure a high
degree of security and operational
reliability and should have contingency
arrangements for timely completion of
daily processing.
8. The system should provide a means
of making payments which is practical
for its users and efficient for the
economy.
9. The system should have objective
and publicly disclosed criteria for
participation, which permit fair and
open access.
10. The system’s governance
arrangements should be effective,
accountable and transparent.
2. Standards for Systemically Important
Securities Settlement Systems
The CPSS–IOSCO Recommendations
apply to the full set of institutional
arrangements for confirmation,
clearance, and settlement of securities
transactions, including those related to
market convention and pre-settlement
activities. As such, not all of these
standards apply to all systems.
Moreover, the standards applicable to a
particular system also will vary based
on the structure of the market and the
system’s design.
While the Board endorses the CPSS–
IOSCO Recommendations in their
entirety, its primary interest for

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purposes of this policy is in those
standards related to the settlement
aspects of securities transactions,
including the role of central
counterparties and central depositories,
the delivery of securities against
payment, and related risks.21 The Board
expects that systems engaged in the
management or conduct of settling
securities transactions and their
participants to comply with the
expectations set forth in the applicable
Recommendations. Securities settlement
systems also may wish to consult the
Assessment Methodology for
‘‘Recommendations for Securities
Settlement Systems’’ for further
guidance on each standard.22
1. Securities settlement systems
should have a well-founded, clear and
transparent legal basis in the relevant
jurisdictions.
2. Confirmation of trades between
direct market participants should occur
as soon as possible after trade execution,
but no later than the trade date (T+0).
Where confirmation of trades by
indirect market participants (such as
institutional investors) is required, it
should occur as soon as possible after
the trade execution, preferably on T+0,
but no later than T+1.
3. Rolling settlement should be
adopted in all securities markets. Final
settlement should occur no later than
T+3. The benefits and costs of a
settlement cycle shorter than T+3
should be evaluated.
4. The benefits and costs of a central
counterparty should be evaluated.
Where such a mechanism is introduced,
the central counterparty should
rigorously control the risks it assumes.
5. Securities lending and borrowing
(or repurchase agreements and other
economically equivalent transactions)
should be encouraged as a method for
expediting the settlement of securities
transactions. Barriers that inhibit the
practice of lending securities for this
purpose should be removed.
6. Securities should be immobilized
or dematerialized and transferred by
book entry in a central securities
depository to the greatest extent
possible.
7. Central securities depositories
should eliminate principal risk by
linking securities transfers to funds
21 The CPSS and the Technical Committee of
IOSCO have recently developed a separate set of
Recommendations for Central Counterparties,
which are intended to supersede those elements of
the Recommendations for Securities Settlement
Systems that are applicable to central
counterparties. The Board will review the new
recommendations and determine whether it is
appropriate to incorporate them into this policy.
22 CPSS and Technical Committee of IOSCO
(November 2002). Available at http://www.bis.org.

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transfers in a way that achieves delivery
versus payment.
8. Final settlement should occur no
later than the end of the settlement day.
Intraday or real time finality should be
provided where necessary to reduce
risks.
9. Central securities depositories that
extend intraday credit to participants,
including central securities depositories
that operate net settlement systems,
should institute risk controls that, at a
minimum, ensure timely settlement in
the event that the participant with the
largest payment obligation is unable to
settle. The most reliable set of controls
is a combination of collateral
requirements and limits.
10. Assets used to settle the ultimate
payment obligations arising from
securities transactions should carry
little or no credit or liquidity risk. If
central bank money is not used, steps
must be taken to protect central
securities depository members from
potential losses and liquidity pressures
arising from the failure of the cash
settlement agent whose assets are used
for that purpose.
11. Sources of operational risk arising
in the clearing and settlement process
should be identified and minimized
through the development of appropriate
systems, controls and procedures.
Systems should be reliable and secure,
and have adequate, scalable capacity.
Contingency plans and backup facilities
should be established to allow for the
timely recovery of operations and
completion of the settlement process.
12. Entities holding securities in
custody should employ accounting
practices and safekeeping procedures
that fully protect customers’ securities.
It is essential that customers’ securities
be protected against the claims of a
custodian’s creditors.
13. Governance arrangements for
central securities depositories and
central counterparties should be
designed to fulfill public interest
requirements and to promote the
objectives of owners and users.
14. Central securities depositories and
central counterparties should have
objective and publicly disclosed criteria
for participation that permit fair and
open access.
15. While maintaining safe and secure
operations, securities settlement
systems should be cost-effective in
meeting the requirements of users.
16. Securities settlement systems
should use or accommodate the relevant
international communication
procedures and standards in order to
facilitate efficient settlement of crossborder transactions.

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17. Central securities depositories and
central counterparties should provide
market participants with sufficient
information for them to identify and
evaluate accurately the risks and costs
associated with using the central
securities depository or central
counterparty services.
18. Securities settlement systems
should be subject to transparent and
effective regulation and oversight.
Central banks and securities regulators
should cooperate with each other and
with other relevant authorities.
19. Central securities depositories that
establish links to settle cross-border
trades should design and operate such
links to reduce effectively the risks
associated with cross-border settlement.
II. Federal Reserve Daylight Credit
Policies
This part outlines the methods used
to control intraday overdraft exposures
in Federal Reserve accounts. These
methods include limits on daylight
overdrafts in institutions’ Federal
Reserve accounts and collateralization,
in certain situations, of daylight
overdrafts at the Federal Reserve.
To assist institutions in implementing
this part of the policy, the Federal
Reserve has prepared two documents:
the Overview of the Federal Reserve’s
Payments System Risk Policy on
Daylight Credit (Overview) and the
Guide to the Federal Reserve’s Payments
System Risk Policy on Daylight Credit
(Guide).23 The Overview summarizes
the Board’s policy on the provision of
daylight credit, including net debit caps
and daylight overdraft fees, and is
intended for use by institutions that
incur only small and infrequent daylight
overdrafts. The Guide explains in detail
how these policies apply to different
institutions and includes procedures for
completing a self-assessment and filing
a cap resolution, as well as information
on other aspects of the policy.
A. Daylight Overdraft Definition and
Measurement
A daylight overdraft occurs when an
institution’s Federal Reserve account is
in a negative position during the
business day. The Reserve Banks use an
ex post system to measure daylight
overdrafts in institutions’ Federal
Reserve accounts. Under this ex post
measurement system, certain
transactions, including Fedwire funds
transfers, book-entry securities transfers,
and net settlement transactions, are
posted as they are processed during the
business day. Other transactions,
23 Available at http://www.federalreserve.gov/
paymentsystems/PSR.

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including ACH and check transactions,
are posted to institutions’ accounts
according to a defined schedule. The
following table presents the schedule
used by the Federal Reserve for posting
transactions to institutions’ accounts for
purposes of measuring daylight
overdrafts.
Procedures for Measuring Daylight
Overdrafts 24
Opening Balance (Previous Day’s
Closing Balance)
Post throughout business day:
± Fedwire funds transfers.
± Fedwire book-entry securities
transfers.
± National Settlement Service entries.
Post throughout business day
(beginning July 20, 2006):
+ Fedwire book-entry interest and
redemption payments on securities
that are not obligations of, or fully
guaranteed as to principal and interest
by, the United States.25 26 27
+ Electronic payments for matured
coupons and definitive securities that
are not obligations of, or fully
24 This schedule of posting rules does not affect
the overdraft restrictions and overdraftmeasurement provisions for nonbank banks
established by the Competitive Equality Banking
Act of 1987 and the Board’s Regulation Y (12 CFR
225.52).
25 The Reserve Banks act as fiscal agents for
certain entities, such as government-sponsored
enterprises (GSEs) and international organizations,
whose securities are Fedwire-eligible but are not
obligations of, or fully guaranteed as to principal
and interest by, the United States. The GSEs
include Fannie Mae, the Federal Home Loan
Mortgage Corporation (Freddie Mac), entities of the
Federal Home Loan Bank System (FHLBS), the
Farm Credit System, the Federal Agricultural
Mortgage Corporation (Farmer Mac), the Student
Loan Marketing Association (Sallie Mae), the
Financing Corporation, and the Resolution Funding
Corporation. The international organizations
include the World Bank, the Inter-American
Development Bank, the Asian Development Bank,
and the African Development Bank. The Student
Loan Marketing Association Reorganization Act of
1996 requires Sallie Mae to be completely
privatized by 2008; however, Sallie Mae plans to
complete privatization by September 2006. Upon
privatization, the Reserve Banks will no longer act
as fiscal agents for new issues of Sallie Mae
securities, and the new Sallie Mae will not be
considered a GSE.
26 The term ‘‘interest and redemption payments’’
refers to payments of principal, interest, and
redemption on securities maintained on the
Fedwire Securities Service.
27 The Reserve Banks will post these transactions,
as directed by the issuer, provided that the issuer’s
Federal Reserve account contains funds equal to or
in excess of the amount of the interest and
redemption payments to be made. In the normal
course, if a Reserve Bank does not receive funding
from an issuer for the issuer’s interest and
redemption payments by the established cut-off
hour of 4 p.m. eastern time on the Fedwire
Securities Service, the issuer’s payments will not be
processed on that day.

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guaranteed as to principal and interest
by, the United States.28
Post at 8:30 a.m. eastern time:
± Government and commercial ACH
credit transactions.29
+ Treasury Electronic Federal Tax
Payment System (EFTPS) investments
from ACH credit transactions.
+ Advance-notice Treasury investments.
+ Treasury checks, postal money orders,
local Federal Reserve Bank checks,
and EZ-Clear savings bond
redemptions in separately sorted
deposits; these items must be
deposited by 12:01 a.m. local time or
the local deposit deadline, whichever
is later.
¥ Penalty assessments for tax payments
from the Treasury Investment
Program (TIP).30
Post at 8:30 a.m. eastern time and
hourly, on the half-hour, thereafter:
± Main account administrative
investment or withdrawal from TIP.
± Special Direct Investment (SDI)
administrative investment or
withdrawal from TIP.
+ 31 CFR part 202 account deposits
from TIP.
¥ Uninvested paper tax (PATAX)
deposits from TIP.
¥ Main account balance limit
withdrawals from TIP.
¥ Collateral deficiency withdrawals
from TIP.
¥ 31 CFR part 202 deficiency
withdrawals from TIP.
Post at 8:30 a.m., 1 p.m., and 6:30
p.m. eastern time:

¥ Main account Treasury withdrawals
from TIP.31
Post by 9:15 a.m. eastern time:
+ U.S. Treasury and government agency
Fedwire book-entry interest and
redemption payments.32
+ Electronic payments for U.S. Treasury
and government agency matured
coupons and definitive securities.33
Post by 9:15 a.m. eastern time (until
July 20, 2006):
+ Fedwire book-entry interest and
redemption payments on securities
that are not obligations of, or fully
guaranteed as to principal and interest
by, the United States.34
+ Electronic payments for matured
coupons and definitive securities that
are not obligations of, or fully
guaranteed as to principal and interest
by, the United States.35
Post beginning at 9:15 a.m. eastern
time:
¥ Original issues of Treasury
securities.36
Post at 9:30 a.m. eastern time and
hourly, on the half-hour, thereafter:
+ Federal Reserve Electronic Tax
Application (FR–ETA) value Fedwire
investments from TIP.
Post at 11 a.m. eastern time:
± ACH debit transactions.
+ EFTPS investments from ACH debit
transactions.
Post at 11 a.m. eastern time and
hourly thereafter:
±Commercial check transactions,
including returned checks.37, 38

28 Electronic payments for credits on these
securities will post according to the posting rules
for the mechanism through which they are
processed, as outlined in this policy. However, the
majority of these payments are made by check and
will be posted according to the established check
posting rules as set forth in this policy.
29 Institutions that are monitored in real time
must fund the total amount of their commercial
ACH credit originations in order for the transactions
to be processed. If the Federal Reserve receives
commercial ACH credit transactions from
institutions monitored in real time after the
scheduled close of the Fedwire Funds Service,
these transactions will be processed at 12:30 a.m.
the next business day, or by the ACH deposit
deadline, whichever is earlier. The Account
Balance Monitoring System provides intraday
account information to the Reserve Banks and
institutions and is used primarily to give authorized
Reserve Bank personnel a mechanism to control
and monitor account activity for selected
institutions. For more information on ACH
transaction processing, refer to the ACH Settlement
Day Finality Guide available through the Federal
Reserve Financial Services Web site at http://
www.frbservices.org.
30 The Reserve Banks will identify and notify
institutions with Treasury-authorized penalties on
Thursdays. In the event that Thursday is a holiday,
the Reserve Banks will identify and notify
institutions with Treasury-authorized penalties on
the following business day. Penalties will then be
posted on the business day following notification.

31 On rare occasions, the Treasury may announce
withdrawals in advance that are based on
institutions’ closing balances on the withdrawal
date. The Federal Reserve will post these
withdrawals after the close of Fedwire.
32 For purposes of this policy, government
agencies are those entities (other than the U.S.
Treasury) for which the Reserve Banks act as fiscal
agents and whose securities are obligations of, or
fully guaranteed as to principal and interest by, the
United States.
33 Electronic payments for credits on these
securities will post by 9:15 a.m. eastern time;
however, the majority of these payments are made
by check and will be posted according to the
established check posting rules as set forth in this
policy.
34 See footnote 25.
35 See footnote 33.
36 Original issues of government agency,
government-sponsored enterprise, or international
organization securities are delivered as book-entry
securities transfers and will be posted when the
securities are delivered to the purchasing
institutions.
37 This does not include electronic check
presentments, which are posted at 1 p.m. local time
and hourly thereafter. Paper check presentments are
posted on the hour at least one hour after
presentment. Paper checks presented before 10:01
a.m. eastern time will be posted at 11 a.m. eastern
time. Presentment times will be based on surveys
of endpoints’ scheduled courier deliveries and so

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Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices
±Check corrections amounting to $1
million or more.39
+ Currency and coin deposits.
+ Credit adjustments amounting to $1
million or more.40
Post at 12:30 p.m. eastern time and
hourly, on the half-hour, thereafter:
+ Dynamic investments from TIP.
Post by 1 p.m. eastern time:
+ Same-day Treasury investments.
Post at 1 p.m. local time and hourly
thereafter:
¥ Electronic check presentments.41
Post at 5 p.m. eastern time:
+ Treasury checks, postal money orders,
and EZ-Clear savings bond
redemptions in separately sorted
deposits; these items must be
deposited by 4 p.m. eastern time.
+ Local Federal Reserve Bank checks;
these items must be presented before
3 p.m. eastern time.
± Same-day ACH transactions; these
transactions include ACH return
items, check-truncation items, and
flexible-settlement items.
Post at 6:30 p.m. eastern time: 42
+ Penalty abatements from TIP.
Post after the close of Fedwire Funds
Service:
will occur at the same time each day for a particular
institution.
38 Institutions must choose one of two checkcredit posting options: (1) All credits posted at a
single, float-weighted posting time, or (2) fractional
credits posted throughout the day. The first option
allows an institution to receive all of its check
credits at a single time for each type of cash letter.
This time may not necessarily fall on the clock
hour. The second option lets the institution receive
a portion of its available check credits on the clock
hours between 11 a.m. and 6 p.m. eastern time. The
option selected applies to all check deposits posted
to an institution’s account. Reserve Banks will
calculate crediting fractions and float-weighted
posting times for each time zone based on surveys.
Credits for mixed cash letters and other Fed cash
letters are posted using the crediting fractions or the
float-weighted posting times for the time zone of the
Reserve Bank servicing the depositing institution.
For separately sorted deposits, credits are posted
using the posting times for the time zone of the
Reserve Bank servicing the payor institution.
39 Corrections are account entries made to correct
discrepancies detected by a Reserve Bank during
the initial processing of checks.
40 Adjustments are account entries made to
correct discrepancies detected by an institution
after entries have posted to its account and are
made at the request of the institution.
41 The Federal Reserve Banks will post debits to
institutions’ accounts for electronic check
presentments made before 12 p.m. local time at 1
p.m. local time. The Reserve Banks will post
presentments made after 12 p.m. local time on the
next clock hour that is at least one hour after
presentment takes place but no later than 3 p.m.
local time.
42 The Federal Reserve Banks will process and
post Treasury-authorized penalty abatements on
Thursdays. In the event that Thursday is a holiday,
the Federal Reserve Banks will process and post
Treasury-authorized penalty abatements on the
following business day.

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69935

± All other transactions. These
transactions include the following:
local Federal Reserve Bank checks
presented after 3 p.m. eastern time but
before 3 p.m. local time; noncash
collection; currency and coin
shipments; small-dollar credit
adjustments; and all debit
adjustments. Discount-window loans
and repayments are normally posted
after the close of Fedwire as well;
however, in unusual circumstances a
discount window loan may be posted
earlier in the day with repayment 24
hours later, or a loan may be repaid
before it would otherwise become
due.
Equals: Closing Balance.

The daily daylight overdraft charge is
reduced by a deductible, valued at the
effective daily rate for a 10-hour
operating day. The deductible equals 10
percent of a capital measure (see section
II.C.3., ‘‘Capital measure’’). Because the
effective daily rate applicable to the
deductible is kept constant at the 10hour-operating-day rate, any changes to
the scheduled Fedwire operating day
should not significantly affect the value
of the deductible.45 Reserve Banks will
waive fees of $25 or less in any twoweek reserve-maintenance period.
Certain institutions are subject to a
penalty fee and modified daylight
overdraft fee calculation as described in
section II.E.

B. Pricing

C. Net Debit Caps

Reserve Banks charge institutions for
daylight overdrafts incurred in their
Federal Reserve accounts. For each twoweek reserve-maintenance period, the
Reserve Banks calculate and assess
daylight overdraft fees, which are equal
to the sum of any daily daylight
overdraft charges during the period.
Daylight overdraft fees are calculated
using an annual rate of 36 basis points,
quoted on the basis of a 24-hour day. To
obtain the effective annual rate for the
standard Fedwire operating day, the 36basis-point annual rate is multiplied by
the fraction of a 24-hour day during
which Fedwire is scheduled to operate.
For example, under a 21.5-hour
scheduled Fedwire operating day, the
effective annual rate used to calculate
daylight overdraft fees equals 32.25
basis points (36 basis points multiplied
by 21.5/24).43 The effective daily rate is
calculated by dividing the effective
annual rate by 360.44 An institution’s
daily daylight overdraft charge is equal
to the effective daily rate multiplied by
the institution’s average daily daylight
overdraft minus a deductible valued at
the deductible’s effective daily rate.
An institution’s average daily daylight
overdraft is calculated by dividing the
sum of its negative Federal Reserve
account balances at the end of each
minute of the scheduled Fedwire
operating day by the total number of
minutes in the scheduled Fedwire
operating day. In this calculation, each
positive end-of-minute balance in an
institution’s Federal Reserve account is
set to equal zero.

1. Definition

43 A change in the length of the scheduled
Fedwire operating day should not significantly
change the amount of fees charged because the
effective daily rate is applied to average daylight
overdrafts, whose calculation would also reflect the
change in the operating day.
44 Under the current 21.5-hour Fedwire operating
day, the effective daily daylight-overdraft rate is
truncated to 0.0000089.

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To limit the aggregate amount of
daylight credit that the Reserve Banks
extend, each institution incurring
daylight overdrafts in its Federal
Reserve account must adopt a net debit
cap, that is, a ceiling on the
uncollateralized daylight overdraft
position that it can incur during a given
interval. If an institution’s daylight
overdrafts generally do not exceed the
lesser of $10 million or 20 percent of its
capital measure, the institution may
qualify for the exempt-from-filing cap.
An institution must be financially
healthy and have regular access to the
discount window in order to adopt a net
debit cap greater than zero or qualify for
the filing exemption.
An institution’s cap category and
capital measure determine the size of its
net debit cap. More specifically, the net
debit cap is calculated as an
institution’s cap multiple times its
capital measure:
net debit cap = cap multiple × capital
measure
Cap categories (see section II.C.2.,
‘‘Cap categories’’) and their associated
cap levels, set as multiples of capital
measure, are listed below:

NET DEBIT CAP MULTIPLES
Two-week
average

Cap category

Single day

High ..............
Above average.
Average ........
De minimis ...
Exempt-fromfiling46.

2.25 ..............
1.875 ............

1.50
1.125

1.125 ............
0.40 ..............
$10 million or
0.20.

0.75
0.40
$10 million or
0.20

45 Under the current 21.5-hour Fedwire operating
day, the effective daily deductible rate is rounded
to 0.0000042.

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Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices

NET DEBIT CAP MULTIPLES—
Continued
Cap category

Single day

Zero ..............

0.0 ................

Two-week
average
0.0

46 The

net debit cap for the exempt-from-filing category is equal to the lesser of $10 million or 0.20 multiplied by the institution’s capital measure.

An institution is expected to avoid
incurring daylight overdrafts whose
daily maximum level, averaged over a
two-week period, would exceed its twoweek average cap, and, on any day,
would exceed its single-day cap.47 The
two-week average cap provides
flexibility, in recognition that
fluctuations in payments can occur from
day to day. The purpose of the higher
single-day cap is to limit excessive
daylight overdrafts on any day and to
ensure that institutions develop internal
controls that focus on their exposures
each day, as well as over time.
The Board’s policy on net debit caps
is based on a specific set of guidelines
and some degree of examiner oversight.
Under the Board’s policy, a Reserve
Bank may limit or prohibit an
institution’s use of Federal Reserve
intraday credit if (1) the institution’s use
of daylight credit is deemed by the
institution’s supervisor to be unsafe or
unsound; (2) the institution does not
qualify for a positive net debit cap (see
section II.C.2., ‘‘Cap categories’’); or (3)
the institution poses excessive risk to a
Reserve Bank by incurring chronic
overdrafts in excess of what the Reserve
Bank determines is prudent.
While capital measures differ, the net
debit cap provisions of this policy apply
to foreign banking organizations (FBOs)
to the same extent that they apply to
U.S. institutions. The Reserve Banks
will advise home-country supervisors of
the daylight overdraft capacity of U.S.
branches and agencies of FBOs under
their jurisdiction, as well as of other
pertinent information related to the
FBOs’ caps. The Reserve Banks will also
provide information on the daylight
overdrafts in the Federal Reserve
accounts of FBOs’ U.S. branches and
agencies in response to requests from
home-country supervisors.
2. Cap Categories
The policy defines the following six
cap categories, described in more detail
below: high, above average, average, de
47 The two-week period is the two-week reservemaintenance period. The number of days used in
calculating the average daylight overdraft over this
period is the number of business days the
institution’s Reserve Bank is open during the
reserve-maintenance period.

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minimis, exempt-from-filing, and zero.
The high, above average, and average
cap categories are referred to as ‘‘selfassessed’’ caps.
a. Self-assessed. In order to establish
a net debit cap category of high, above
average, or average, an institution must
perform a self-assessment of its own
creditworthiness, intraday funds
management and control, customer
credit policies and controls, and
operating controls and contingency
procedures.48 The assessment of
creditworthiness is based on the
institution’s supervisory rating and
Prompt Corrective Action (PCA)
designation.49 An institution may
perform a full assessment of its
creditworthiness in certain limited
circumstances, for example, if its
condition has changed significantly
since its last examination or if it
possesses additional substantive
information regarding its financial
condition. An institution performing a
self-assessment must also evaluate its
intraday funds-management procedures
and its procedures for evaluating the
financial condition of and establishing
intraday credit limits for its customers.
Finally, the institution must evaluate its
operating controls and contingency
procedures to determine if they are
sufficient to prevent losses due to fraud
or system failures. The ‘‘Guide to the
Federal Reserve’s Payments System Risk
Policy’’ includes a detailed explanation
of the self-assessment process.
Each institution’s board of directors
must review that institution’s selfassessment and recommended cap
category. The process of self-assessment,
with board-of-directors review, should
be conducted at least once in each
48 This assessment should be done on an
individual-institution basis, treating as separate
entities each commercial bank, each Edge
corporation (and its branches), each thrift
institution, and so on. An exception is made in the
case of U.S. branches and agencies of FBOs.
Because these entities have no existence separate
from the FBO, all the U.S. offices of FBOs
(excluding U.S.-chartered bank subsidiaries and
U.S.-chartered Edge subsidiaries) should be treated
as a consolidated family relying on the FBO’s
capital.
49 An insured depository institution is (1) ‘‘well
capitalized’’ if it significantly exceeds the required
minimum level for each relevant capital measure,
(2) ‘‘adequately capitalized’’ if it meets the required
minimum level for each relevant capital measure,
(3) ‘‘undercapitalized’’ if it fails to meet the
required minimum level for any relevant capital
measure, (4) ‘‘significantly undercapitalized’’ if it is
significantly below the required minimum level for
any relevant capital measure, or (5) ‘‘critically
undercapitalized’’ if it fails to meet any leverage
limit (the ratio of tangible equity to total assets)
specified by the appropriate Federal banking
agency, in consultation with the FDIC, or any other
relevant capital measure established by the agency
to determine when an institution is critically
undercapitalized (12 U.S.C. 1831o).

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twelve-month period. A cap
determination may be reviewed and
approved by the board of directors of a
holding company parent of an
institution, provided that (1) the selfassessment is performed by each entity
incurring daylight overdrafts, (2) the
entity’s cap is based on the measure of
the entity’s own capital, and (3) each
entity maintains for its primary
supervisor’s review its own file with
supporting documents for its selfassessment and a record of the parent’s
board-of-directors review.50
In applying these guidelines, each
institution should maintain a file for
examiner review that includes (1)
worksheets and supporting analysis
used in its self-assessment of its own
cap category, (2) copies of seniormanagement reports to the board of
directors of the institution or its parent
(as appropriate) regarding that selfassessment, and (3) copies of the
minutes of the discussion at the
appropriate board-of-directors meeting
concerning the institution’s adoption of
a cap category.51
As part of its normal examination, the
institution’s examiners may review the
contents of the self-assessment file.52
The objective of this review is to ensure
that the institution has applied the
guidelines appropriately and diligently,
that the underlying analysis and method
were reasonable, and that the resultant
self-assessment was generally consistent
with the examination findings.
Examiner comments, if any, should be
forwarded to the board of directors of
the institution. The examiner, however,
generally would not require a
modification of the self-assessed cap
50 An FBO should undergo the same selfassessment process as a domestic bank in
determining a net debit cap for its U.S. branches
and agencies. Many FBOs, however, do not have the
same management structure as U.S. institutions,
and adjustments should be made as appropriate. If
an FBO’s board of directors has a more limited role
to play in the bank’s management than a U.S. board
has, the self-assessment and cap category should be
reviewed by senior management at the FBO’s head
office that exercises authority over the FBO
equivalent to the authority exercised by a board of
directors over a U.S. institution. In cases in which
the board of directors exercises authority equivalent
to that of a U.S. board, cap determination should
be made by the board of directors.
51 In addition, for FBOs, the file that is made
available for examiner review by the U.S. offices of
an FBO should contain the report on the selfassessment that the management of U.S. operations
made to the FBO’s senior management and a record
of the appropriate senior management’s response or
the minutes of the meeting of the FBO’s board of
directors or other appropriate management group, at
which the self-assessment was discussed.
52 Between examinations, examiners or Reserve
Bank staff may contact an institution about its cap
if there is other relevant information, such as
statistical or supervisory reports, that suggests there
may have been a change in the institution’s
financial condition.

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Federal Register / Vol. 69, No. 230 / Wednesday, December 1, 2004 / Notices
category, but rather would inform the
appropriate Reserve Bank of any
concerns. The Reserve Bank would then
decide whether to modify the cap
category. For example, if the
institution’s level of daylight overdrafts
constitutes an unsafe or unsound
banking practice, the Reserve Bank
would likely assign the institution a
zero net debit cap and impose
additional risk controls.
The contents of the self-assessment
file will be considered confidential by
the institution’s examiner. Similarly, the
Federal Reserve and the institution’s
examiner will hold the actual cap level
selected by the institution confidential.
Net debit cap information should not be
shared with outside parties or
mentioned in any public documents;
however, net debit cap information will
be shared with the home-country
supervisor of U.S. branches and
agencies of foreign banks.
The Reserve Banks will review the
status of any institution with a selfassessed net debit cap that exceeds its
cap during a two-week reservemaintenance period and will decide if
the cap should be maintained or if
additional action should be taken (see
section II.F., ‘‘Monitoring’’).
b. De minimis. Many institutions
incur relatively small overdrafts and
thus pose little risk to the Federal
Reserve. To ease the burden on these
small overdrafters of engaging in the
self-assessment process and to ease the
burden on the Federal Reserve of
administering caps, the Board allows
institutions that meet reasonable safety
and soundness standards to incur de
minimis amounts of daylight overdrafts
without performing a self-assessment.
An institution may incur daylight
overdrafts of up to 40 percent of its
capital measure if the institution
submits a board-of-directors resolution.
An institution with a de minimis cap
must submit to its Reserve Bank at least
once in each 12-month period a copy of
its board-of-directors resolution (or a
resolution by its holding company’s
board) approving the institution’s use of
daylight credit up to the de minimis
level. The Reserve Banks will review the
status of a de minimis cap institution
that exceeds its cap during a two-week
reserve-maintenance period and will
decide if the de minimis cap should be
maintained or if the institution will be
required to perform a self-assessment for
a higher cap.
c. Exempt-from-filing. Institutions that
only rarely incur daylight overdrafts in
their Federal Reserve accounts that
exceed the lesser of $10 million or 20
percent of their capital measure are
excused from performing self-

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assessments and filing board-ofdirectors resolutions with their Reserve
Banks. This dual test of dollar amount
and percent of capital measure is
designed to limit the filing exemption to
institutions that create only low-dollar
risks to the Reserve Banks and that
incur small overdrafts relative to their
capital measure.
The Reserve Banks will review the
status of an exempt institution that
incurs overdrafts in its Federal Reserve
account in excess of $10 million or 20
percent of its capital measure on more
than two days in any two consecutive
two-week reserve-maintenance periods.
The Reserve Bank will decide if the
exemption should be maintained or if
the institution will be required to file for
a cap. Granting of the exempt-fromfiling net debit cap is at the discretion
of the Reserve Bank.
d. Zero. Some financially healthy
institutions that could obtain positive
net debit caps choose to have zero caps.
Often these institutions have very
conservative internal policies regarding
the use of Federal Reserve daylight
credit or simply do not want to incur
daylight overdrafts and any associated
daylight overdraft fees. If an institution
that has adopted a zero cap incurs a
daylight overdraft, the Reserve Bank
counsels the institution and may
monitor the institution’s activity in real
time and reject or delay certain
transactions that would cause an
overdraft. If the institution qualifies for
a positive cap, the Reserve Bank may
suggest that the institution adopt an
exempt-from-filing cap or file for a
higher cap if the institution believes that
it will continue to incur daylight
overdrafts.
In addition, a Reserve Bank may
assign an institution a zero net debit
cap. Institutions that may pose special
risks to the Reserve Banks, such as those
without regular access to the discount
window, those incurring daylight
overdrafts in violation of this policy, or
those in weak financial condition, are
generally assigned a zero cap (see
section II.E.5., ‘‘Problem institutions’’).
Recently-chartered institutions may also
be assigned a zero net debit cap.
3. Capital Measure
As described above, an institution’s
cap category and capital measure
determine the size of its net debit cap.
The capital measure used in calculating
an institution’s net debit cap depends
upon its chartering authority and homecountry supervisor.
a. U.S.-chartered institutions. For
institutions chartered in the United
States, net debit caps are multiples of
‘‘qualifying’’ or similar capital measures

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69937

that consist of those capital instruments
that can be used to satisfy risk-based
capital standards, as set forth in the
capital adequacy guidelines of the
Federal financial regulatory agencies.
All of the Federal financial regulatory
agencies collect, as part of their required
reports, data on the amount of capital
that can be used for risk-based
purposes—‘‘risk-based’’ capital for
commercial banks, savings banks, and
savings associations and total regulatory
reserves for credit unions. Other U.S.chartered entities that incur daylight
overdrafts in their Federal Reserve
accounts should provide similar data to
their Reserve Banks.
b. U.S. branches and agencies of
foreign banks. For U.S. branches and
agencies of foreign banks, net debit caps
on daylight overdrafts in Federal
Reserve accounts are calculated by
applying the cap multiples for each cap
category to the FBO’s U.S. capital
equivalency measure.53 U.S. capital
equivalency is equal to the following:
• 35 percent of capital for FBOs that
are financial holding companies
(FHCs).54
• 25 percent of capital for FBOs that
are not FHCs and have a strength of
support assessment ranking (SOSA) of
1.55
• 10 percent of capital for FBOs that
are not FHCs and are ranked a SOSA 2.
• 5 percent of ‘‘net due to related
depository institutions’’ for FBOs that
are not FHCs and are ranked a SOSA 3.
Granting a net debit cap, or any
extension of intraday credit, to an
53 The term ‘‘U.S. capital equivalency’’ is used in
this context to refer to the particular capital
measure used to calculate net debit caps and does
not necessarily represent an appropriate capital
measure for supervisory or other purposes.
54 The Gramm-Leach-Bliley Act defines a
financial holding company as a bank holding
company that meets certain eligibility requirements.
In order for a bank holding company to become a
financial holding company and be eligible to engage
in the new activities authorized under the GrammLeach-Bliley Act, the Act requires that all
depository institutions controlled by the bank
holding company be well capitalized and well
managed (12 U.S.C. 1841(p)). With regard to a
foreign bank that operates a branch or agency or
owns or controls a commercial lending company in
the United States, the Act requires the Board to
apply comparable capital and management
standards that give due regard to the principle of
national treatment and equality of competitive
opportunity (12 U.S.C. 1843(l)).
55 The SOSA ranking is composed of four factors,
including the FBO’s financial condition and
prospects, the system of supervision in the FBO’s
home country, the record of the home country’s
government in support of the banking system or
other sources of support for the FBO; and transfer
risk concerns. Transfer risk relates to the FBO’s
ability to access and transmit U.S. dollars, which
is an essential factor in determining whether an
FBO can support its U.S. operations. The SOSA
ranking is based on a scale of 1 through 3, with 1
representing the lowest level of supervisory
concern.

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institution is at the discretion of the
Reserve Bank. In the event a Reserve
Bank grants a net debit cap or extends
intraday credit to a financially healthy
SOSA 3-ranked FBO, the Reserve Bank
may require such credit to be fully
collateralized, given the heightened
supervisory concerns with SOSA 3ranked FBOs.
D. Collateralized Capacity
The Board recognizes that while net
debit caps provide sufficient liquidity to
most institutions, some institutions may
still experience liquidity pressures. The
Board believes it is important to provide
an environment in which payment
systems may function effectively and
efficiently and to remove barriers, as
appropriate, to foster risk-reducing
payment system initiatives.
Consequently, certain institutions with
self-assessed net debit caps may pledge
collateral to their administrative Reserve
Banks to secure daylight overdraft
capacity in excess of their net debit
caps, subject to Reserve Bank
approval.56,57 This policy is intended to
provide extra liquidity through the
pledge of collateral to the few
institutions that might otherwise be
constrained from participating in riskreducing payment system initiatives.58
The Board believes that requiring
collateral allows the Federal Reserve to
protect the public sector from additional
credit risk. Additionally, providing
extra liquidity to these few institutions
should help prevent liquidity-related
market disruptions.
An institution with a self-assessed net
debit cap that wishes to expand its
daylight overdraft capacity by pledging
collateral should consult with its
administrative Reserve Bank.
Institutions that request daylight
overdraft capacity beyond the net debit
cap must have already explored other
56 The administrative Reserve Bank is responsible
for the administration of Federal Reserve credit,
reserves, and risk management policies for a given
institution or other legal entity.
57 Institutions have some flexibility as to the
specific types of collateral they may pledge to the
Reserve Banks; however, all collateral must be
acceptable to the Reserve Banks. The Reserve Banks
may accept securities in transit on the Fedwire
book-entry securities system as collateral to support
the maximum daylight overdraft capacity level.
Securities in transit refer to book-entry securities
transferred over the Fedwire Securities Service that
have been purchased by an institution but not yet
paid for and owned by the institution’s customers.
58 Institutions may consider applying for a
maximum daylight overdraft capacity level for
daylight overdrafts resulting from Fedwire funds
transfers, Fedwire book-entry securities transfers,
National Settlement Service entries, and ACH credit
originations. Institutions incurring daylight
overdrafts as a result of other payment activity may
be eligible for administrative counseling flexibility
(59 FR 54915–18, Nov. 2, 1994).

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alternatives to address their increased
liquidity needs.59 The Reserve Banks
will work with an institution that
requests additional daylight overdraft
capacity to determine the appropriate
maximum daylight overdraft capacity
level. In considering the institution’s
request, the Reserve Bank will evaluate
the institution’s rationale for requesting
additional daylight overdraft capacity as
well as its financial and supervisory
information. The financial and
supervisory information considered may
include, but is not limited to, capital
and liquidity ratios, the composition of
balance sheet assets, CAMELS or other
supervisory ratings and assessments,
and SOSA rankings (for U.S. branches
and agencies of foreign banks). An
institution approved for a maximum
daylight overdraft capacity level must
submit at least once in each twelvemonth period a board-of-directors
resolution indicating its board’s
approval of that level.
If the Reserve Bank approves an
institution’s request, the Reserve Bank
approves a maximum daylight overdraft
capacity level. The maximum daylight
overdraft capacity is defined as follows:
maximum daylight overdraft capacity =
single-day net debit cap +
collateralized capacity.60
An institution that has a self-assessed
net debit cap and that has also been
approved for a maximum daylight
overdraft capacity level has a two-week
average limit equal to its two-week
average net debit cap plus its
collateralized capacity, averaged over a
two-week reserve-maintenance period.
The single-day limit is equal to an
institution’s single-day net debit cap
plus its collateralized capacity. The
institution should avoid incurring
daylight overdrafts whose daily
maximum level, averaged over a twoweek period, would exceed its twoweek average limit, and, on any day,
would exceed its single-day limit. The
Reserve Banks will review the status of
any institution that exceeds its singleday or two-week limit during a twoweek reserve-maintenance period and
will decide if the maximum daylight
overdraft capacity should be maintained
or if additional action should be taken
(see section II.F., ‘‘Monitoring’’).
59 Some potential alternatives available to an
institution to address increased intraday credit
needs include shifting funding patterns, delaying
the origination of funds transfers, or transferring
some payments processing business to a
correspondent bank.
60 Collateralized capacity, on any given day,
equals the amount of collateral pledged to the
Reserve Bank, not to exceed the difference between
the institution’s maximum daylight overdraft
capacity level and its single-day net debit cap.

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Institutions with exempt-from-filing
and de minimis net debit caps may not
obtain additional daylight overdraft
capacity by pledging collateral without
first obtaining a self-assessed net debit
cap. Likewise, institutions that have
voluntarily adopted zero net debit caps
may not obtain additional daylight
overdraft capacity by pledging collateral
without first obtaining a self-assessed
net debit cap. Institutions that have
been assigned a zero net debit cap by
their administrative Reserve Bank are
not eligible to apply for any daylight
overdraft capacity.
E. Special Situations
Under the Board’s policy, certain
institutions warrant special treatment
primarily because of their charter types.
As mentioned previously, an institution
must have regular access to the discount
window and be in sound financial
condition in order to adopt a net debit
cap greater than zero. Institutions that
do not have regular access to the
discount window include Edge and
agreement corporations, bankers’ banks
that are not subject to reserve
requirements, limited-purpose trust
companies, government-sponsored
enterprises (GSEs), and certain
international organizations.61
Institutions that have been assigned a
zero cap by their Reserve Banks are also
subject to special considerations under
this policy based on the risks they pose.
In developing its policy for these
institutions, the Board has sought to
balance the goal of reducing and
managing risk in the payments system,
including risk to the Federal Reserve,
with that of minimizing the adverse
effects on the payments operations of
these institutions.
Regular access to the Federal Reserve
discount window generally is available
to institutions that are subject to reserve
requirements. If an institution that is not
subject to reserve requirements and thus
does not have regular discount-window
access were to incur a daylight
overdraft, the Federal Reserve might end
up extending overnight credit to that
institution if the daylight overdraft were
not covered by the end of the business
day. Such a credit extension would be
contrary to the quid pro quo of reserves
for regular discount-window access as
reflected in the Federal Reserve Act and
in Board regulations. Thus, institutions
that do not have regular access to the
discount window should not incur
daylight overdrafts in their Federal
Reserve accounts.
Certain institutions are subject to a
daylight-overdraft penalty fee levied
61 See

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against the average daily daylight
overdraft incurred by the institution.
These include Edge and agreement
corporations, bankers’ banks that are not
subject to reserve requirements, and
limited-purpose trust companies. The
annual rate used to determine the
daylight-overdraft penalty fee is equal to
the annual rate applicable to the
daylight overdrafts of other institutions
(36 basis points) plus 100 basis points
multiplied by the fraction of a 24-hour
day during which Fedwire is scheduled
to operate (currently 21.5/24). The daily
daylight-overdraft penalty rate is
calculated by dividing the annual
penalty rate by 360.62 The daylightoverdraft penalty rate applies to the
institution’s average daily daylight
overdraft in its Federal Reserve account.
The daylight-overdraft penalty rate is
charged in lieu of, not in addition to, the
rate used to calculate daylight overdraft
fees for institutions described in section
II.B. Institutions that are subject to the
daylight-overdraft penalty fee do not
benefit from a deductible and are
subject to a minimum fee of $25 on any
daylight overdrafts incurred in their
Federal Reserve accounts.63
1. Edge and Agreement Corporations 64
Edge and agreement corporations
should refrain from incurring daylight
overdrafts in their Federal Reserve
accounts. In the event that any daylight
overdrafts occur, the Edge or agreement
corporation must post collateral to cover
the overdrafts. In addition to posting
collateral, the Edge or agreement
corporation would be subject to the
daylight-overdraft penalty rate levied
against the average daily daylight
overdrafts incurred by the institution, as
described above.
This policy reflects the Board’s
concerns that these institutions lack
regular access to the discount window
and that the parent company may be
unable or unwilling to cover its
subsidiary’s overdraft on a timely basis.
The Board notes that the parent of an
Edge or agreement corporation could
62 Under the current 21.5-hour Fedwire operating
day, the effective daily daylight-overdraft penalty
rate is truncated to 0.0000338.
63 While daylight overdraft fees are calculated
differently for these institutions than for
institutions that have regular access to the discount
window, overnight overdrafts at Edge and
agreement corporations, bankers’ banks that are not
subject to reserve requirements, limited-purpose
trust companies, GSEs, and international
organizations are priced the same as overnight
overdrafts at institutions that have regular access to
the discount window.
64 These institutions are organized under section
25A of the Federal Reserve Act (12 U.S.C. 611–631)
or have an agreement or undertaking with the Board
under section 25 of the Federal Reserve Act (12
U.S.C. 601–604(a)).

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fund its subsidiary during the day over
Fedwire or the parent could substitute
itself for its subsidiary on private
systems. Such an approach by the
parent could both reduce systemic risk
exposure and permit the Edge or
agreement corporation to continue to
service its customers. Edge and
agreement corporation subsidiaries of
foreign banking organizations are
treated in the same manner as their
domestically owned counterparts.
2. Bankers’ Banks 65
Bankers’ banks are exempt from
reserve requirements and do not have
regular access to the discount window.
They do, however, have access to
Federal Reserve payment services.
Bankers’ banks should refrain from
incurring daylight overdrafts and must
post collateral to cover any overdrafts
they do incur. In addition to posting
collateral, a bankers’ bank would be
subject to the daylight-overdraft penalty
fee levied against the average daily
daylight overdrafts incurred by the
institution, as described above.
The Board’s policy for bankers’ banks
reflects the Reserve Banks’ need to
protect themselves from potential losses
resulting from daylight overdrafts
incurred by bankers’ banks. The policy
also considers the fact that some
bankers’ banks do not incur the costs of
maintaining reserves as do some other
institutions and do not have regular
access to the discount window.
Bankers’ banks may voluntarily waive
their exemption from reserve
requirements, thus gaining access to the
discount window. Such bankers’ banks
are free to establish net debit caps and
would be subject to the same policy as
other institutions. The policy set out in
this section applies only to those
bankers’ banks that have not waived
their exemption from reserve
requirements.
3. Limited-Purpose Trust Companies 66
The Federal Reserve Act permits the
Board to grant Federal Reserve
membership to limited-purpose trust
65 For the purposes of this policy, a bankers’ bank
is a depository institution that is not required to
maintain reserves under the Board’s Regulation D
(12 CFR part 204) because it is organized solely to
do business with other financial institutions, is
owned primarily by the financial institutions with
which it does business, and does not do business
with the general public. Such bankers’ banks also
generally are not eligible for Federal Reserve Bank
credit under the Board’s Regulation A (12 CFR
201.2(c)(2)).
66 For the purposes of this policy, a limitedpurpose trust company is a trust company that is
a member of the Federal Reserve System but that
does not meet the definition of ‘‘depository
institution’’ in section 19(b)(1)(A) of the Federal
Reserve Act (12 U.S.C. 461(b)(1)(A)).

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companies subject to conditions the
Board may prescribe pursuant to the
Act. As a general matter, member
limited-purpose trust companies do not
accept reservable deposits and do not
have regular discount-window access.
Limited-purpose trust companies
should refrain from incurring daylight
overdrafts and must post collateral to
cover any overdrafts they do incur. In
addition to posting collateral, limitedpurpose trust companies would be
subject to the same daylight-overdraft
penalty rate as other institutions that do
not have regular access to the discount
window.
4. Government-Sponsored Enterprises
and International Organizations
(Beginning July 20, 2006)
The Reserve Banks act as fiscal agents
for certain GSEs and international
organizations in accordance with federal
statutes. These institutions generally
have Federal Reserve accounts and issue
securities over the Fedwire Securities
Service. The securities of these
institutions are not obligations of, or
fully guaranteed as to principal and
interest by, the United States.
Furthermore, these institutions are not
subject to reserve requirements and do
not have regular access to the discount
window. GSEs and international
organizations should refrain from
incurring daylight overdrafts and must
post collateral to cover any daylight
overdrafts they do incur. In addition to
posting collateral, these institutions
would be subject to the same daylightoverdraft penalty rate as other
institutions that do not have regular
access to the discount window.
5. Problem Institutions
For institutions that are in weak
financial condition, the Reserve Banks
will impose a zero cap. The Reserve
Bank will also monitor the institution’s
activity in real time and reject or delay
certain transactions that would create an
overdraft. Problem institutions should
refrain from incurring daylight
overdrafts and must post collateral to
cover any daylight overdrafts they do
incur.
F. Monitoring
1. Ex Post
Under the Federal Reserve’s ex post
monitoring procedures, an institution
with a daylight overdraft in excess of its
maximum daylight overdraft capacity or
net debit cap may be contacted by its
Reserve Bank. The Reserve Bank may
counsel the institution, discussing ways
to reduce its excessive use of intraday
credit. Each Reserve Bank retains the
right to protect its risk exposure from

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individual institutions by unilaterally
reducing net debit caps, imposing
collateralization or clearing-balance
requirements, rejecting or delaying
certain transactions as described below,
or, in extreme cases, taking the
institution off line or prohibiting it from
using Fedwire.
2. Real Time
A Reserve Bank will, through the
Account Balance Monitoring System,
apply real-time monitoring to an
individual institution’s position when
the Reserve Bank believes that it faces
excessive risk exposure, for example,
from problem banks or institutions with
chronic overdrafts in excess of what the
Reserve Bank determines is prudent. In
such a case, the Reserve Bank will
control its risk exposure by monitoring
the institution’s position in real-time,
rejecting or delaying certain transactions
that would exceed the institution’s
maximum daylight overdraft capacity or
net debit cap, and taking other
prudential actions, including requiring
collateral.67
3. Multi-District Institutions
Institutions, such as those
maintaining merger-transition accounts
and U.S. branches and agencies of a
foreign bank, that access Fedwire
through accounts in more than one
Federal Reserve District are expected to
manage their accounts so that the total
daylight overdraft position across all
accounts does not exceed their net debit
caps. One Reserve Bank will act as the
administrative Reserve Bank and will
have overall risk-management
responsibilities for institutions
maintaining accounts in more than one
Federal Reserve District. For domestic
institutions that have branches in
multiple Federal Reserve Districts, the
administrative Reserve Bank generally
will be the Reserve Bank where the head
office of the bank is located.
In the case of families of U.S.
branches and agencies of the same
foreign banking organization, the
administrative Reserve Bank generally is
the Reserve Bank that exercises the
Federal Reserve’s oversight
responsibilities under the International
Banking Act.68 The administrative
Reserve Bank, in consultation with the
management of the foreign bank’s U.S.
operations and with Reserve Banks in
whose territory other U.S. agencies or
67 Institutions that are monitored in real time
must fund the total amount of their ACH credit
originations in order for the transactions to be
processed by the Federal Reserve, even if those
transactions are processed one or two days before
settlement.
68 12 U.S.C. 3101–3108.

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branches of the same foreign bank are
located, may determine that these
agencies and branches will not be
permitted to incur overdrafts in Federal
Reserve accounts. Alternatively, the
administrative Reserve Bank, after
similar consultation, may allocate all or
part of the foreign family’s net debit cap
to the Federal Reserve accounts of
agencies or branches that are located
outside of the administrative Reserve
Bank’s District; in this case, the Reserve
Bank in whose Districts those agencies
or branches are located will be
responsible for administering all or part
of the collateral requirement.69
G. Transfer-Size Limit on Book-Entry
Securities
Secondary-market book-entry
securities transfers on Fedwire are
limited to a transfer size of $50 million
par value. This limit is intended to
encourage partial deliveries of large
trades in order to reduce position
building by dealers, a major cause of
book-entry securities overdrafts before
the introduction of the transfer-size
limit and daylight overdraft fees. This
limitation does not apply to either of the
following:
a. Original issue deliveries of bookentry securities from a Reserve Bank to
an institution
b. Transactions sent to or by a Reserve
Bank in its capacity as fiscal agent of the
United States, government agencies, or
international organizations.
Thus, requests to strip or reconstitute
Treasury securities or to convert bearer
or registered securities to or from bookentry form are exempt from this
limitation. Also exempt are pledges of
securities to a Reserve Bank as principal
(for example, discount-window
collateral) or as agent (for example,
Treasury Tax and Loan collateral).
By order of the Board of Governors of the
Federal Reserve System, November 24, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04–26444 Filed 11–30–04; 8:45 am]
BILLING CODE 6210–01–P
69 As in the case of Edge and agreement
corporations and their branches, with the approval
of the designated administrative Reserve Bank, a
second Reserve Bank may assume the responsibility
of managing and monitoring the net debit cap of
particular foreign branch and agency families. This
would often be the case when the payments activity
and national administrative office of the foreign
branch and agency family is located in one District,
while the oversight responsibility under the
International Banking Act is in another District. If
a second Reserve Bank assumes management
responsibility, monitoring data will be forwarded to
the designated administrator for use in the
supervisory process.

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