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F ederal R eserv e Bank
OF DALLAS
WILLIAM H. WALLACE
F IR S T V IC E P R E S ID E N T
June 4, 1985
DALLAS, TEXAS 7 5 2 2 2
Circular 85-75
TO:
The Chief Executive Officer of all
depository institutions and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Federal Reserve policy statement on the control and reduction of risks to depository
institutions participating in large-dollar wire transfer systems, together with four related
requests for public conment.
DETAILS
After extensive comment from the public, the Federal Reserve Board has adopted a policy to
control and reduce the risks to depository institutions which participate in large-dollar wire
transfer systems. The policy calls on private networks and depository institutions to reduce their
own credit risks, particularly from daylight overdrafts. It also makes use of the examining,
monitoring, and counseling role of the Federal Reserve and other financial institution regulators.
The policy takes effect March 27, 1986, but depository institutions which incur daylight
overdrafts on Fedwire or participate in private large-dollar wire networks are encouraged to adopt
voluntarily by December 31, 1985, a cross-system sender net debit cap following guidelines
established by the Board.
At the same time the Board requested public comment on four related issues:
--Docket No. R-0515A, on reducing risks from the transfer of book-entry securities on
Fedwire (comments to be received by August 15, 1985);
--Docket No. R-0515B, on reducing risks from automated clearing house (ACH) transactions
(comments to be received by August 15, 1985);
--Docket No. R-0515C, on reducing risks from the provision of net settlement services to
other than large-dollar transfer systems (comments to be received by August 15, 1985); and
--Docket No. R-0515D, on a proposed data collection request for ex post monitoring of
automated clearing house transactions (comments to be received by June 17, 1985).
Comments should be addressed to Mr. William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, Washington, D. C. 20551. All correspondence should refer to the appropriate
docket numbers and should be received by the appropriate deadlines.
In the near future the Federal Reserve Bank of Dallas will hold educational meetings
concerning the implementation of this new policy for the depository institutions most likely to be
affected. Additional details on these meetings will be provided to the institutions concerned at a
later date.
ATTACHMENTS
The Board's press release, the Board's policy statement (with appendix) as published in the
Federal Register, and the four requests for public comment are attached.
MORE INFORMATION
(214)
For further information, please contact George C. Cochran, III, Senior
Neil B. Ryan, Senior Vice President, at (214) 651-6330.
VicePresident, at
6 5 1 - 6 2 5 7 , or
Sincerely yours,
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL RESERVE pressrelease
For immediate re le a s e
May 17, 1985
The Federal Reserve Board today issued a statement of i t s policy to
control and reduce th e r is k s to depository i n s t i t u t i o n s p a r t i c i p a t i n g in l a r g e - d o l l a r
wire t r a n s f e r systems.
The policy c a l l s on p r i v a t e networks and depository i n s t i t u t i o n s to reduce
t h e i r own c r e d i t r i s k s .
I t a ls o depends, in p a r t , on the ro le of the Federal Reserve
and o th e r f in a n c ia l i n s t i t u t i o n re gu la to rs in examining, monitoring, and counseling
institutions.
La rg e -d o ll ar networks are an in tr e g a l p a rt of the payments and c l e a ri n g
mechanism.
Current data i n d i c a t e t h a t t o t a l daylight ov e rd ra fts average $110 to
$120 b i l l i o n per day.
A da yli gh t ov e rd ra ft occurs when an i n s t i t u t i o n has sent funds
over Fedwire (the Federal Reserve wire t r a n s f e r system) in excess of the balance in i t s
reserve or c l e a ri n g account, or i t has sent more funds over a p r i v a t e wire network than
i t has received.
Because a f a i l u r e of a p a r t i c i p a n t to s e t t l e i t s net p o si tio n on a p r iv a te
l a r g e - d o l l a r network could cause s u b s ta n ti a l dis rup tio n in f in a n c ia l markets, one of
the Board's major ob je c tiv e s in e s t a b l i s h i n g i t s policy i s to reduce the p o s s i b i l i t y
of a s e tt le m en t f a i l u r e .
This would be accomplished primarily through a reduction in
the volume of o v e rd ra ft s and by encouraging i n s t i t u t i o n s to e x er cis e b e t t e r control
over exposures t h a t remain.
In e s t a b l i s h i n g i t s po lic y, the Board made i t c l e a r t h a t I t is not condoning
th e use of t h i s p r a c t i c e by depository i n s t i t u t i o n s .
While some degree of in tr a- day
c r e d i t may be necessary t o keep the payments mechanism operating smoothly, the Board
expects t o s ee, over time, a reduction in both the t o t a l volume of daylight over
d r a f t s and the number of i n s t i t u t i o n s with a pa tt e rn of s u b s t a n t i a l re li a n c e on
such c r e d i t .
-2 After reviewing the i n i t i a l impact of the new polic y, the Board
may adopt additional guidelines to reduce f u r t h e r the volume and incidence of
daylight ov e rd ra fts and other use of in tr a - d a y c r e d i t .
The Board's policy becomes e f f e c t i v e March 27, 1986.
The Board encourages each depository i n s t i t u t i o n t h a t incurs daylight
o ve rd ra fts on Fedwire or p a r t i c i p a t e s on p r i v a t e l a r g e - d o l l a r wire networks
v o lu n ta ri ly to adopt by December 31, 1985, a cross-system sender net debit
cap
(a sender net de bit cap t h a t applies across a l l wire t r a n s f e r systems as a
total)
following th e guidelines t h a t the Board e s t a b l i s h e d . 1/
The Board's policy also s t a t e s t h a t no l a r g e - d o l l a r payment network will
be e l i g i b l e for Federal
1.
Reserve net settlement services unless i t :
requires each p a r t i c i p a n t to e s t a b l i s h a maximum net amount i t is w il li n g
to receive from any sender ( b i l a t e r a l net c r e d i t l i m i t ) .
2.
e s t a b l i s h e s a maximum c e i l i n g on the amount of in tr a- day c r e d i t a sender
may incur (sender net de bit cap) reasonably designed to reduce the risks
to p a r t i c i p a n t s on t h a t network;
3.
develops and implements a system t h a t will r e j e c t or hold any payment
t h a t would exceed e i t h e r b i l a t e r a l net c r e d i t lim it s or the network's
sender net debit cap; and
4.
agrees to provide tr a n s a c ti o n data to i t s Reserve Bank on request.
In addition t o i t s policy a c t io n , the Board also requested comment
by August 15, 1985 regarding:
— the treatment of Fedwire overdr af ts r e s u l t i n g from t r a n s f e r of book-entry
securities;
— automated c le ari ng house is sue s; and
— net settlem ent is su e s .
The Board also requested comment by June 17, 1985 on a proposed data
c o l l e c t i o n for ex post monitoring of authomated c le ar i ng house t r a n s a c t i o n s .
The Board's notices are at tached.
Attachments
“0-
"H The cross-system cap selec ted should have two components: a c e i l i n g on the net
debit p o si tio n t h a t an i n s t i t u t i o n could incur on any si n g le day, and a limit that
the i n s t i t u t i o n could incur on average over a two-week period. For example, i f an in
s t i t u t i o n rated i t s e l f as "average" under the Board's g uid el ine s, i t would nbt allow
i t s net de bit p o s iti on to exceed 1.5 times i t s c ap it al on any s ing le day or 1.0
times i t s c ap it al on average over a two-week period.
21120
Federal Register / Vol. 50, No. 99 / W ednesday, May 22, 1985 / Notices
FEDERAL RESERVE SYSTEM
[Docket No. R-0515]
Policy Statement Regarding Risks on
Large-Dollar Wire Transfer Systems
Board of Governors of the
Federal Reserve System.
a c t i o n : Policy statement.
agency:
In March, 1984, the Board
requested public comment on several
proposed methods of reducing the risks
to depository institutions associated
with their participation on large-dollar
electronic funds transfer systems. After
studying the public comments and
recent data on the exposure of
institutions using such systems, the
Board has formulated a policy to reduce
these risks. The policy relies in part on
the efforts of depository institutions to
reduce their own exposures through the
use of bilateral net credit limits and
sender net debit caps, and in part on the
role of the Federal Reserve and other
financial institution regulators in
examining, monitoring, and counseling
institutions.
Effective March 27,1986, no largedollar payment network will be eligible
for Federal Reserve net settlement
services unless it (1) requires each
participant to establish bilateral net
credit limits vis-a-vis each other
participant on that network, (2)
establishes a sender net debit cap that is
reasonably designed to reduce the risks
to participants on that network, (3)
develops and implements a system that
will reject or hold any payment that
would breach either bilateral net credit
limits or the network’s sender net debit
cap, and (4) agrees to provide
transaction data to its Reserve Bank on
request.
The Board also strongly encourages
each institution that runs daylight
overdrafts on Fedwire or participates on
a private large-dollar wire network to
adopt voluntarily by December 31.1985,
a cross-system sender net debit cap
following the guidelines set out in an
appendix to the Board’s policy
statement.
EFFECTIVE d a t e : March 27,1986.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Edward C. Ettin, Deputy Director (202-
Federal Register / Vol. 50, No. 90 / Wednesday, May 22, 1985 / Notices
452-3368), David B. Humphrey;
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-4522444), Division of Research and
Statistics; Elliott C. McEntee, Associate
Director (202-452-2231), Nancy R.
Wesolowski, Operations Analyst (202452-3437), Division of Federal Reserve
Bank Operations; Joseph R. Alexander,
Attorney (202-452-2489), Legal Division;
Jeffrey C. Marquardt, Economist (202452-2360), Division of International
Finance; Anthony G. Cornyn, Assistant
Director (202-452-3354), Division of
Banking Supervision and Regulation; or
Joy W. O’Connell, TDD (202-452-3244).
SUPPLEMENTARY INFORMATION: The
Federal Reserve Board has issued the
following policy statement concerning
reducing risks on large-dollar electronic
funds transfer systems:
Reducing Risks on Large-Dollar
Electronic Funds Transfer Systems
Over the past several years, the Board
has become increasingly concerned
about the risks that participation on
largerdollar payment networks1 present
to the depository institutions that
participate on them, to the banking
system, and to other sectors of the
economy. Because private wire
networks operate by the transmission of
payment messages throughout the day
with settlement of net positions at the
end of the day, the network is exposed
to the possibility that a participant could
be unwilling or unable to settle a large
net debit position. A failure of one
participant to settle could seriously
jeopardize the financial positions of its
net creditors on that network, with
serious repercussions spreading from
those participants to their creditors.
Thus, an unexpected settlement failure
could result in serious disruptions of
money and financial markets.
On March 29,1984, the Board
requested public comment on possible
components of a risk reduction policy,
including both the goals that such a
policy should seek to attain and several
possible methods for controlling and
reducing risk. 49 FR13186 (Apr. 3,1984).
After considering the comments,
together with recent data on the
1 In a changing technological and regulatory
environment, it is not possible or desirable to adopt
an all inclusive and permanent definition of a
"large-dollar payment network" for the purpose of
Federal Reserve risk control policy. In determining
whether any particular network or system is a
'‘large-dollar’’ system, the Board will consider any
of the following four factors: (1) The employment of
multilateral netting arrangements, (2) the use of
same-day settlement, (3) the routine processing of a
significant number of individual payments larger
than $50,000, and (4) the possibility that any one
participant could be exposed to a net debit position
at the time of settlement in excess of its capital.
activities and exposures of institutions
on large-dollar networks and the
recommendations of its staff,* the Board
has developed a risk reduction policy.
In fashioning this policy, the Board’s
first concern was reducing the
possibility of a settlement failure. This is
accomplished primarily through a
reduction in the volume of intra-day
credit exposures and by encouraging
institutions to exercise better control
over exposures that remain. Reduction
and control of credit exposures are also
important in attaining a second primary
goal: containing the effects of a
settlement failure should one occur.
The Board is well aware that largedollar networks are an integral part of
the payments and clearing mechanism
and that it is.of vital importance to keep
the payments mechanism operating
without significant disruption. Indeed, it
is precisely because of the importance of
avoiding such disruptions that the Board
is seeking to reduce the risks of
settlement failures that could cause
these disruptions. The Board is also
aware, however, that some intra-day
credit may be necessary to keep the
payments mechanism running smoothly
and efficiently. While it is essential to
reduce and control intra-day credit, this
must be done in a manner that will
minimize disruptions to the payments
mechanism. The Board anticipates that
in relying largely on the efforts of
individual institutions to identify,
control, and reduce their exposures, 5nd
by establishing guidelines for use by
institutions, the goal of reducing and
controlling risks will not unduly disrupt
the smooth operation of the payments
mechanism.
In establishing such a policy, the
Board underlines that it is not condoning
daylight overdrafts. While, as noted,
some intra-day credit may be necessary,
the Board anticipates that as a result of
its policy, there will not be an increase
in the number of institutions
consistently relying on daylight
overdrafts or other intra-day credit to
conduct their business, and expects to
see, over time, a reduction in both the
volume of intra-day credit and the
number of institutions with a pattern of
substantial reliance on such practices.
The policy presented below is purposely
designed to minimize initial disruptions
and permits the Board to monitor the
impact of its policy on financial markets.
The Board fully expects that it will, after
review of the initial impact of its
2 The staff recommendations are contained in a
study, Reducing Risk on Large Dollar Transfer
Systems (May, 1985). Copies of this study are
available from each of the Federal Reserve Banks or
the Secretary of the Board.
21121
policies, be adopting guidelines
designed to reduce further the volume
and incidence of daylight overdrafts and
other uses of intra-day credit. If
institutions appear not to be cooperating
with the spirit of the Board’s current or
future policies, the Board will consider
its other options—including regulatory
restraints.
The elements of the Board’s risk
reduction policy are set out below:
I. Bilateral Net Credit Limits
In its earlier statement announcing an
interim risk-reduction policy, 49 FR at
13191, the Board stated that any largedollar network obtaining net settlement
services from a Federal Reserve Bank
would have to require each of its
participants to establish bilateral net
credit limits vis-a-vis each other
participant on that network. In setting
bilateral net credit limits, each
participant determines for itself the
maximum dollar amount of net transfers
(i.e., the value of receives in excess of
the value of sends) that it is willing to
accept from each other participant on a
network. The Board believes that
bilateral net credit limits reduce risk by
enabling an institution to identify and
control the exposure it could face in the
event of a settlement failure.
Accordingly, the Board has decided to
continue this requirement and
strengthen it.
After the effective date of this policy
(March 27,1986), no private large-dollar
payment network will be eligible for
Reserve Bank net settlement services
unless it (1) requires each participant to
establish bilateral net credit limits vis-avis each other participant on that
network, and (2) establishes a system
that will reject or hold any payment that
would exceed such a limit. (Bilateral net
credit limits do not apply to Fedwire
since the Federal Reserve, under
Regulation J provides irrevocable credit
to the receiver when advice of credit is
given for the transfer. Reserve Banks,
however, may take action to reduce
their credit exposure.
The federal bank regulators have
agreed that examiners will, during
regular examinations, review and
comment on the procedures used by
each institution in establishing,
monitoring, reviewing, and modifying
bilateral net credit limits, and ensure
that institutions understand their
potential exposures with each other
participant over more than one network
and in more than one market.
II. Sender Net Debit Caps
Bilateral net credit limits are not
sufficient by themselves to reduce
21122
Federal Register / Vol. 50, No. 99 / W ednesday, May 22, 1985 / Notices
aggregate risk on large-dollar payment
networks. The volume of daylight
exposure that each institution is willing
to accept from each other institution is
likely to be quite large when aggregated
across all receivers. Moreover, each
institution is unaware of the credit made
available to a given sender by other
potential receivers. For this reason, the
Board believes that bilateral net credit
limits must be Supplemented by a limit
on the aggregate amount of risk that an
institution can present to the payments
system. Accordingly, the Board strongly
urges that the board of directors of each
institution either participating on a
large-dollar network or incurring
daylight overdrafts on Fedwire adopt a
sender net debit cap (a ceiling or "cap"
on the aggregate net debit position—the
value of all sends in excess of the value
of all receives—that it can incur during a
given interval).
Sender net debit caps—expressed as
multiples of capital—should be applied
across all large-dollar systems, i.e., to
the aggregate position of an institution
at a moment in time on all large-dollar
transfer systems combined. With this
“cross-system” sender net debit cap, net
debit positions on one system can be
offset by credit positions on other
systems.3 In addition to the cross
system sender net debit cap, the Board
has extended its interim policy on
private network sender net debit caps.
As of the effective date of this policy,
each private network will, as a
condition for access to the Federal
Reserve net settlement service, be
required to develop and impose on its
participants a network sender net debit
cap reasonably designed to reduce
individual institution risk exposure on
that network. In addition, each network
will be required to develop and apply a
mechanism for rejecting or holding those
transfers that would cause an institution
to exceed its cap.
In developing its policy toward cross
system sender net debit caps, the Board
noted the views of commenters strongly
urging that new regulations be avoided
and that voluntary self-policing
techniques be at least tried. In addition,
the Board is uncertain about the impact
of regulatory controls on the payments
mechanism. Moreover, the Board is
sensitive to the practical difficulties of
selecting regulatory caps for thousands
* As noted below, however, Reserve Banks will
not permit daylight overdrafts on Fedwire to exceed
the cross-system cap established by an institution;
i.e., net credits on private wire systems will not be
able to be used to increase the Fedwire cap. A
similar arrangement will exist for private network
participants where net credits on Fedwire and other
private networks cannot be used to increase a
participant’s cap on a given private network.
of depository institutions, each with
differing abilities to deal with risk. At
the same time, the Board is concerned
that voluntary sender net debit caps
might provide no discipline, end up
treating similarly situated institutions
differently, place no effective limit on an
individual institution's risk exposure,
and provide no remedy for the Federal
Reserve should it find a particular cap
excessive.
Consequently, the Board's policy calls
for a voluntary cross-system sender net
debit cap board on a specific set of
guidelines and some degree of examiner
oversight.4The Board’s policy has no
regulatory dimension except (1)
potential responses to an actual level of
aggregate daylight credit exposure at an
individual institution deemed by the
institution’s examiner to be unsafe or
unsound, (2) elimination of access to
daylight overdrafts on Fedwire by
institutions not engaging in the selfevaluation process, and (3) control of
Fedwire overdrafts of individual
institutions determined by a Reserve
Bank to expose it to excessive risk. If
events subsequently demonstrate that
senior management and the boards of
directors of depository institutions do
not take the proposed guidelines and
procedures seriously, the Board will
reconsider its options, including the
adoption of regulations designed to
impost; explicit limits on daylight credit
exposure.
A. Determining Cap Category
The first step for an institution in
establishing its cross-system sender net
debit cap is to determine its own cap
category by evaluating its
creditworthiness, credit policies, and
operational controls and procedures.9
4The Board acknowledges with appreciation that
its policy draws heavily on the Final Report of the
Risk Control Task Force, Payments System
Committee, Association of Reserve City Bankers,
prepared with the assistance of the Bank
Administration Institute and Robert Morris
Associates (October, 1984).
■This evaluation should be done on an individual
institution basis—treating as separate entities each
commercial bank, each Edge (and its branches),
each thrift institution, etc. While the Board realizes
that depository institution holding companies
usually act as integrated entities and that
performing the self-evaluation on an individual
institution basis may result in some increased costs,
consolidation presents to the Federal Reseve and
other financial institution regulators a number of
operating and policy complexities that must be
resolved. The Board will continue to review this
issue, but notes that many of the benefits of
consolidation can be obtained directly by intra
family wire transfers.
An exception is made in the case of U.S. agencies
and branches of foreign banks. Since these entities
have no existence separate from the foreign bank,
all the U.S. offices of foreign banks (excluding U.S.
chartered bank subsidiaries and U.S. chartered
Edge subsidiaries) should be treated as a
The guidelines to be used by each
institution in establishing its cap
category are detailed in the Appendix to
this policy statement.
In applying these guidelines, each
institution would be expected to
maintain a confidential file for examiner
review that includes (1) worksheets and
supporting analysis developed in its
self-evaluation of its own risk category,
(2) copies of senior management reports
to the institution's board of directors
regarding that self-evaluation, and (3)
copies of the minutes of the discussion
of the board of directors concerning the
institution's adoption of a cap category.
The process of self-evaluation, with
board of director review, should be
conducted at least once in each six
month period.
As part of its normal examination, the
depository institution examiners will
review the contents of the selfevaluation file.* The objective of this
review will be to assure that the
institution has seriously and diligently
applied the guidelines, that the
underlying analysis and methodology
were reasonable, and that the resultant
self-evaluation was generally not
inconsistent with the examination
report. Examiner comments, if any,
would be expected to be forwarded to
the board of directors of the institution.
Consistent with the voluntary nature of
the Board’s policy with regard to sender
net debit caps, however, it should be
emphasized that the examiner cannot
require a modification of the selfevaluation cap category unless the level
of daylight credit used by the institution
constitutes an unsafe or unsound
banking practice.
B. Establishing Sender Net Debit Cap
The cap category resulting from the
self-evaluation process should be used
by each institution to establish its cross
system sender net debit cap. The cap
levels, set as multiples of adjusted
primary capital,’ would be as follows:
Dual sender net debit cap
Cap class
Two week
average
2.0
1.5
1.0
0.0
Plus
single day
3.0
2.5
1.5
0.0
consolidated family relying on the foreign bank's
capital.
*ln the interim between examinations, examiners
may contact an institution about its cap if statistical
or supervisory reports or ad hoc information suggest
that there may have been a change in the
institution's position.
7See Section U-C on capital, infra.
Federal Register / Vol. 50, No. 99 / W ednesday .M a y 22,1985 / Notices
An institution would be expected to
avoid incurring cross-system net debits
that, on average over a two week
period* exceeded the two week average,
cap and, on any day, exceeded the
single day cap. The two week average
cap provides some flexibility for
institutions and recognizes that
fluctuation 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
assure that institutions develop internal
controls that focus on the exposures
each day, as well as over time.
The two-week average overdraft
volume to be measured against the cap
is the average over a two-week reserve
maintenance period of an institution's
daily maximum net debit position across
all network. In calculating the two week
average, individual days on which an
institution is in an aggregate net credit
position across all systems throughout
the day should be treated as if the
institution was in a net position of zero.
The number of days to be used in
calculating the average should be the
number of business days the
institution’s Reserve Bank is open during
the reserve maintenance period.
It should be noted that the Board has
purposely set the recommended caps to
be associated with each catagory at
relatively high levels so that institutions
and their examiners can gain experience
with caps while maintaining a margin of
flexibility for most institutions. The
Board will evaluate these caps
continuously, and expects to have
enough data on their impact to
recommend new, lower cap levels by
March, 1987. The Board may also
recommend reducing the averaging
period, and may ultimately recommend
a single day cap only.
c. Capital
Sender net debit caps should be
multiples of “adjusted primary capital.”
Primary capital includes common stock,
perpetual-preferred stock, surplus,
undivided profits, contingency and other
capital reserves, qualifying mandatory
convertible instruments, allowances for
possible loan and lease losses
(exclusive of any allocated transfer risk
reserves),8and minority interests in
equity accounts of consolidated
subsidiaries, but excludes limited-life
preferred stock. “Adjusted” primary
capital is defined as the sum of these
* Allocated transfer risk reserves ("ATRR”) are
reserves against certain assets whose value has
been found by the federal bank regulatory agencies
to have been significantly impaired by protracted
transfer risk problems. Such reserves are not
considered capital by the agencies.
primary capital components less ail intangible assets and deferred net losses
on loans and other assets sold. Adjusted
primary capital for thrift institutions
would include any capital assistance
provided by. the Federal Deposit
Insurance Corporation in the form of net
worth certificates pursuant to 12 U.S.C.
1729(f) or 1823(i).
Any institution with negative adjusted
primary capital will be permitted to
incur daylight overdrafts on Fedwire
only with the permission of its Reserve
Bank, and all such overdrafts will have
to be Collateralized.
In some instances, further adjustments
will be required. For example, virtually
all Edge Act and agreement
corporations are subsidiaries of
depository institutions that may
themselves use intra-day credit. The
same capital would be double-counted if
both the parent and the Edge Act or
agreement corporation subsidary used
such credit based on their own capital
bases. Accordingly, if a parent elects to
permit its Edge Act or agreement
corporation subsidiary to use daylight
credit, any adjusted primary capital
attributable to its Edge Act or agreement
corporation subsidiary that is reflected
on the parent’s balance sheet should be
subtracted from the parent's capital. The
parent could choose, however, not to
permit its Edge Act or agreement
corporation subsidiary t6 use intra-day
credit, and use all of its (the parent’s)
capital for its own cap.
In determining cross-system sender
net debit cap levels, U.S. branches and
agencies of foreign banks should use the
world-wide capital of the foreign bank
establishing the branches and/or
agencies, not that bank's parent.
Further, the adjusted primary capital of
any U.S. bank subsidiaries of the foreign
bank should be subtracted from the
foreign bank’s adjusted primary capital
to avoid double counting.
Determining world-wide capital for
U.S. agencies and branches of foreign
banks provides considerable
definitional and measurement problems.
Under current procedures, data are
collected through the Y-7 report, which
is submitted annually and is due four
months after the close of a foreign
banking organization’s fiscal year.
These procedures result in the Federal
Reserve’s foreign bank capital data
being more than one year old at certain
times in the reporting cycle. Without
more current data, timely monitoring of
U.S. agency or branch adherence to
overdraft limitations would prove
difficult.
In order to alleviate these problems,
the Board has directed its staff to devise
2112a
a reporting form that would allow the
Federal Reserve to collect more timely
information on the world-wide
shareholder equity capital of foreign
banks that use intra-day credit. To
reduce reporting burden, the report
would likely allow a foreign banking
organization that had not experienced
losses during a reporting period simply
to warrant that fact rather than to
provide more frequent quantitative
capital information. Organizations that
had experienced losses would be asked
to provide updated equity capital data.
Any proposed information collection
procedure will be published for
comment prior to implementation.
D. Additional Considerations
The contents of the self-evaluation
cap category file will be considered
confidential by the institution's
examiner. Similarly, the actual cap level
selected by the institution will be held
confidential by the Federal Reserve and
the institution’s examiner. Finally, the
Board notes that exceptional
circumstances may require an institution
to incur overdrafts in excess of its cap.
Such a pattern of overdrafts should.be
discussed with the Reserve Bank, with
specific plans developed to reduce the
intra-day credit positions as soon as
possible to a level within the
institution’s cap.
III. Other Components of the Board’s
Policy
A. Daylight Overdrafts on Fedwire
The Board’s concern with risks on
large-dollar payment systems began
with its concern about daylight
overdrafts on Fedwire. In response to
this concern, the Board, in 1982, required
Reserve Banks to counsel institutions
that regularly incurred daylight
overdrafts on Fedwire in excess of 50
per cent of capital.
The Board is still concerned with
these overdrafts, and believes that it is
appropriate to take effective steps to
control risks to the Federal Reserve
Banks by placing more effective limits
on Fedwire daylight overdrafts.
Therefore, beginning on March 27,1986,
the Board will establish a Fedwire cap
for each depository institution. This cap
will be equal to the voluntary crosssystem cap adopted by the institution,
reduced by the institution’s actual net
debits on other networks as determined
in an after the fact measurement
process. This cap will thus be monitored
on an ex post basis. (Reserve Banks,
however, will monitor an institution’s
Fedwire positions on a real-time basis
when they believe that the institution is
21124
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1985 / Notices
exposing the Reserve Bank to excessive
risk. Real time monitors will permit
Federal Reserve Banks to reject funds
transfered by—and to pend or hold
book-entry securities received for—the
institution when such transactions
expose the Reserve Bank to excessive
risk.) The Fedwire cap will not be
increased by the institution's net credits
on other networks. Each Reserve Bank *'
will, of course, retain the right to protect
its risk exposure from individual
institutions by reserving the right to
reduce unilaterally Fedwire caps,
impose collateralization or clearing
balance requirements, hold or reject
Fedwire transfers during the day until
the institution has collected balances in
its Federal Reserve account, and—in
extreme cases—take the problem
institution off-line or prohibit it from
using Fedwire.
Institutions that incur Fedwire
overdrafts for the first time will be
subjected to a 50 per cent of capital limit
pending completion of the selfevaluation procedure described above.
Institutions that do not follow the selfevaluation procedure will not be
permitted to incur overdrafts on
Fedwire.9
B. Book-entry Securities Transfers
In formulating its daylight overdraft
policies, the Board has always been
concerned about the impact that
overdraft restrictions could have on the
U.S. government securities market and
on the Board’s ability to conduct
monetary policy through open market
operations. Accordingly the Board,
pending development of procedures for
collateralizing such overdrafts—or other
procedures for reducing the Reserve
Banks’ risk exposure—had provisionally
exempted from quantitative overdraft
control those Fedwire daylight
overdrafts resulting from the transfer of
book-entry securities.10
'Under the self-policing policy adopted by the
Board, an institution that does not adopt a cap for
itself would be able to use without limit all credit
available to it over ariy private network, unless use
of such credit were found to constitute an unsafe or
unsound banking practice by the institution's
examiner. Such behavior, however, would not be
consistent with the spirit of the Board’s policy.
10 Such overdrafts occur when the institution
receiving book-entry securities has received more
book-entry securities against payment at a point in
time than it has sent. Since receipt of a book-entry
security and Fedwire payment to the sender of
securities are simultaneous, the sender of the
security receives Fedwire payment regardless of the
securities overdraft position of the receiver of the
securities. The definition used for a book-entry
securities overdraft means that such an overdraft
could occur even while the receiver's funds account
was in credit balance.
In a related action (Docket No. R0515A), the Board is today requesting
comment on a series of proposals for
treating Fedwire daylight overdrafts
resulting from the transer of book-entry
securities. Until the Boardadopts a new
policy in this area, book-entry
overdrafts will remain unconstrained
and separate from any sender caps
adopted or placed on Fedwire funds
transfers, except at problem institutions.
C. Automated Clearing Houses
When the Board first became
concerned with risks on large-dollar
payment systems, automated clearing
houses (ACHs) were regarded as smalldollar systems. Recently, however, the
ACHs have been evolving in such a way
that they appear to be taking on many of
the characteristics of larger-dollar
transfer systems, and they therefore
present many of the same risks.
Accordingly, the Board has directed
its staff to undertake a study of ACH
risk. The study will focus on (1) whether
the ACH is an appropriate mechanism
for making large-dollar payments, (2)
what kind of controls should be
implemented if ACH is increasingly
used for large-dollar payments, and (3)
how depository institutions now control
the financial risk associated with ACH
debit and credit transactions. As part of
this study, the Board, in a related action,
requesting public comment on a series of
questions on ACH risk. (See Docket No.
B-0515B.)
Until the Board’s study of ACH risk is
complete and the Board has formulated
a new policy to deal with ACH risk, the
Board is modifying its ex post
monitoring or intra-day credit to (1)
recognize the potential risks associated
with ACH transactions processed by
both the Federal Reserve and privatelyoperated ACHs, and (2) inhibit the use
of ACHs to circumvent the risk
reduction policies the Board has
adopted for large-dollar funds transfer
networks. Specifically, for purposes of
ex post monitoring, gross debits
resulting from the origination of credit
transactions and the gross credits
resulting from the receipt of credit
transactions will be posted at the
Reserve Bank’s opening of business on
the settlement date, and gross credits
resulting from the origination of debit
transactions and the gross debits
resulting from the receipt of debit
transactions will be posted at the
Reserve Bank’s close of business on the
settlement date.11 As a condition of
11 This posting procedure is for ex post
monitoring purpose* and will, in no way change
when actual settlement entries are made or when
ACH transactions become final
obtaining net settlement services,
privately-operated ACHs will be
required to provide to the federal
Reserve the date necessary to include
such transactions processed over their
networks in the Federal Reserve’s ex
post monitoring system. In another
separate action, the Board is requesting
public comment on the parameters of
this data collection. (See Docket No. R0515D.) In addition, pending completion
of the ACH study, the Board has
suspended consideration of providing
same-day ACH settlement service by
Reserve Banks.
D. Net Settlement Services
While the Board has thus far been
concerned mainly with risks on largedollar funds transfer networks, the
Federal Reserve has long provided net
settlement services to a variety of other
private sector clearing arrangements. In
addition to large-dollar funds transfer
networks, today these include check
clearing houses, credit card processors*
ACHs, and small-dollar funds transfer
networks, such as automated teller
machine (ATM) and point-of-sale (POS)
networks.
Because the terms of the settlement
arrangements vary and because there
are questions regarding the risks that
these arrangements entail, the Board has
directed its staff to conduct a thorough
review of net settlement risk. In
conducting this study, the staff will
address (1) whether the terms of net
settlement arrangements should vary
based on the type of transactions being
settled, and (2) how depository
institutions treat or should treat net
settlement entries for the various types
of net settlement arrangements.
To facilitate the staffs study, the
Board is, in a related action (see Docket
No. R-0515C), today requesting public
comment on a series of questions on the
net settlement service.
E. Edge Act and Agreement
Corporations, U.S. Branches and
Agencies of Foreign Banks, and New
York Article X II Investment
Companies12
There are special risks associated
with the participation on large-dollar
transfer systems of these institutions.
Some of them are major participants in
such networks, often making and
receiving a large volume of payments on
behalf of affiliates and their parent
“ This section exdudes discussion of foreignowned U.S. banks, including U.S. banks that are
either subsidiaries of foreign banks or of foreign
bank holding companies. Tlieae entities have U.S.
bank charters and capital in the U.S., and are
treated identically to any other U& bank.
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1985 / Notices
organizations. The size of their payment
activities is generally quite large relative
to their U.S. capital (or capital
equivalent), and thus sender net debit
caps would tend to constrain severely
the ability of many of these institutions
to participate directly in the U.S. dollar
payments mechanism, forcing them to
deal eilker through their y.S. parent (in
the case of Edges) or through U.S.
correspondents or affiliates (in the case
of U.S. agencies, branches, Edge
subsidiaries of foreign banks, and some
New York investment companies).
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. In addition, the
principle of fair and equitable treatment
embodied in the U.S. policy of national
treatment for foreign banking
organizations was given explicit
consideration.
1. Edge Act and Agreement
Corporations. Under current Board
policy, all Fedwire overdrafts of Edge
and agreement corporations must be
fully collateralized. This policy reflects
the lack of access of these institutions to
the discount window and the possibility
that the parent of an Edge or agreement
corporation may befunable or unwilling
to cover its subsidiary’s overdraft on a
timely basis.
The Board believes that Edge Act and
agreement corporation subsidiaries of
U.S. banks can, together with their
parents, arrange their affairs in a way
that would allow them to continue to
service their customers at the same time
that risk exposures are reduced.
Specifically, the Board notes that the
parent of an Edge or agreement
corporation could fund its subsidiary
during the day over Fedwire and/or the
parent could substitute itself for its
subsidiary on private networks. Indeed,
data suggest that, in virtually all cases,
the consolidated Edge and parent
overdraft position would be within the
cap limits of the parent if it were
evaluated as an above average cap
institution, even though the Edge’s
overdrafts are very large in relation to
the Edge’s own capital. This suggests
that such an approach by the parent
could both reduce systemic risk
exposure and permit the Edge
corporation to continue to service its
customers.
With respect to Edge and agreement
subsidiaries of foreign banks, the Board
believes that because they lack access
to the discount window and ready
access to a U.S. affiliate that can
provide support, these institutions
should be treated in the same manner as
their domestically-owned counterparts.
The policy of national treatment also
supports this conclusion.
Accordingly, the Board has
determined that all Edge Act and
agreement corporations will continue to
be required to collateralize Fedwire
daylight overdrafts, and strongly urges
that each such corporation restrain its
use of intra-day credit by establishing
sender net debit caps based on its own
capital in the same manner as any other
domestic depository institution. In
addition, the Board urges parents of
Edge and agreement corporations to
substitute themselves for their Edge or
agreement subsidiaries on private largedollar networks.
For purposes of sender net debit caps,
the Board suggests that all branches of
the same Edge or agreement corporation
be consolidated. The consolidated
entity’s overdraft position will be
monitored by the Reserve Bank of the
Edge or agreement corporation's head
office.13 The monitoring Reserve Bank,
in consultation with those Reserve
Banks in which the Edge or agreement
branches operate and the management
of the consolidated entity, can either (1)
determine that Edge or agreement
branches outside its District will not be
permitted to run Fedwire overdrafts, or
(2) allocate part or all of the Edge or
agreement corporation’s Fedwire cap
(and the responsibility of administering
part or all of the collateral requirement)
to a Reserve Bank in which one or more
of the branches operate.
2. U.S. Branches and Agencies of
Foreign Banks. As noted previously, the
Board believes that U.S. branches and
agencies of foreign banks should
undergo the same self-evaluation
process as domestic depository
institutions, but that it be done on the
basis of all U.S. branch and agency
operations, rather than on a branch-bybranch, agency-by-agency basis. In
setting a cross-system sender net debit
cap, the Board believes that it is
appropriate that branches and agencies
develop a cap based on the world-wide
capital of the foreign bank (less any
adjusted primary capital attributable to
subsidiary U.S. banks and Edge Act or
agreement corporations reflected in the
foreign bank’s world-wide capital). The
Board has reached this conclusion
because public comments and other
data indicate that private market
participants view the intra-day credit
risk associated with U.S. offices of
21125
foreign banks in terms of the World-wide
creditworthiness of the entire foreign
bank.
In assessing the Federal Reserve’s
own risk, however, the Board is still
concerned about the lack of timely
information filed with Reserve Banks,
and the Federal Reserve’s inability to
monitor developments concerning each
foreign bank’s non-U.S. operations.
Accordingly, the Board has determined
that, only for purposes of determining
the volume of a foreign bank family’s
uncollateralized Fedwire overdrafts, the
multiples developed from the selfevaluation process (Section II-B, above)
will be multiplied by4he consolidated
U.S. capital equivalency of all of its U.S.
agencies and branches.14 Any Fedwire
overdrafts in excess of that amount will
have to be collateralized. Any use of
intra-day credit on private large-dollar
networks will be treated as any other
use of intra-day credit and, as noted
above, the total cross-system cap of a
foreign bank’s U.S. agencies and
branches will be based on the world
wide capital of the foreign bank (less the
noted adjustments).
The cross-system sender net debit cap
for families of branches and agencies of
the same foreign bank will be monitored
by the Reserve Bank which exercises
the Federal Reserve’s oversight
responsibilities under the International
Banking Act. The administering Reserve
Bank can, in consultation with Reserve
Banks in which oilier U.S. agencies and/
or branches of the same foreign bank
are located and the management of the
foreign bank’s U.S. operations,
determine that branches and agencies
outside its District either will not be
permitted to incur Fedwire overdrafts or
will allocate part or all of the foreign
family’s Fedwire cap (and the
responsibility for administering part or
all of the collateral requirement) to a
Reserve Bank in which one or more of
the foreign offices operate.18
14 "Capital equivalency” will be defined as the
greater of (1) the sum of the amount of capital (but
not surplus) which would be required of a national
bank being organized at each branch or agency
location, or (2) the sum of S per cent of the total
liabilities of each branch or agency, including
acceptances, but excluding (A) accrued expenses
and (B) amounts due and other liabilities to offices,
branches, and subsidiaries of the foreign bank.
16 As in the case of Edge and agreement
corporations and their branches, with the approval
of the deisgnated administering Reserve Bank, a
second Reserve Bank may assume the responsibility
of managing and monitoring the cross-system
sender net debit cap of particular foreign branch
and agency families. This would often be the case
when the payments activity and national
13 With the consent of the parties, a Reserve Bank administrative office of the foreign branch and
agency family is located in one District, while the
other than that of an Edge head office can assume
Continued
the management of these responsibilities.
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Federal Register / Vol. 50,N e.9 9 / Wednesday, May 22, 1985 / Notices
The Board believes that this approach
will limit the Federal Reserve’s risk
while giving U.S. branches and agencies
of foreign banks open access to the U.S.
payments mechanism in keeping with
the policy of national treatment.
3. New York Investment Companies.
Investment companies chartered Under
Article XII of the New York Banking
Law are not subject to reserve
requirements and do hot have access to
the discount window. Because they
cannot maintain accounts with the
Federal Reserve, they cannot use
Fedwire. Some are, however, active
participants on private networks, and
therefore introduce risk in the payments
system much like other participants.
Accordingly, the Board urges that
investment companies that participate
on private large-dollar networks
establish for themselves a cross-system
sender net debit cap using the
procedures and guidelines the Board has
established for depository institutions.
F. Bankers’Banks
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. To
protect Reserve Banks from potential
loss resulting from daylight overdrafts
incurred by bankers’ banks, the Board
adopted, in 1982, a policy that bankers*
banks should refrain from incurring
overdrafts and post collateral to cover
any overdrafts they do incur. Bankers’
banks may voluntarily give up their
exemption from reserve requirements,
thus gaining access to the discount
window and avoid having to post
collateral.
The Board has determined to
continued the present policy.
G. Monitoring
The Board believes that ex-post
monitoring is consistant with the
voluntary, flexible approach it has
adopted. Under ex-post monitoring, an
institution with a cross-system net debit
position in excess of its cap will be
contacted by a Federal Reserve Bank.16
oversight responsibility under the Intemaitonal
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.
16 Even if the institution is not a state member
bank, the Reserve Bank can make this contact
because fen overdraft is occurring on Fedwire or
because the institution is in a net debit position on a
wire system settling on the books of the Federal
Reserve.
The Reserve Bank will counsel with
such institutions, discussing ways to
reduce their excess use of intra-day
credit. No regulatory action will be
taken, but the Reserve Bank may
• Advise the appropriate examiner,
who may recommend supervisory action
if the volume of cross-system overdrafts
are deemed unsafe or unsound, and/or
• Take appropriate action to limit its
own risk exposure on Fedwire.
A Federal Reserve Bank will apply
real-time monitoring to ah individual
institution’s Fedwire position when the
Reserve Bank believes that it faces
exessive risk exposure, e.g. for problem
banks or from institutions with chronic
overdrafts in excess of what the Reserve
Bank thinks is prudent. In such a case,
the Reserve Bank will control its risk
exposures by monitoring the institution’s
position, rejecting Fedwire transfers of
funds, and pending Fedwire book-entry
securities transfers that would result in
overdrafts in excess of a level the
Reserve Bank judges to be prudent.
In order that Reserve Banks may
properly monitor the use of intra-day
credit, no future or existing large-dollar
network will be permitted to settle on
the books of a Reserve Bank unless its
members authorize the network to
provide position data to the Reserve
Bank on request.
H. Avoidance o f Risk Reduction
Measures
In its March 29,1984, policy
statement, the Board stated that “use of
Fedwire for the avoidance of Federal
Reserve or private sector risk reduction
measures is not appropriate.” The Board
adopted this policy to prevent
institutions from participating in
bilateral netting arrangements whereby
they would exchange gross payment
messages during that day and settle at
the end of the day by using Fedwire to
adjust net positions bilaterally. Such
arrangements would be difficult for
Reserve Banks to detect and would be
outside of Federal Reserve and privatesector risk control measures. They still,
however, present the same risks to the
payments mechanism that other net
settlement arrangement present
because settlement failures are still
possible, and such failures would have
the same deleterious consequences as
any other settlement failures.
The Board, therefore, reaffirms its
policy that institutions may not use
Fedwire or other payments networks as
a method of avoiding risk reduction
measures.
The Board realizes, however, that
certain netting arrangements are not
intended to avoid risk reduction
measures. Indeed, they can themselves
reduce risk. For example, institutions
may net gross obligations prior to
settlement, with each participant legally
obligated only for the resultant net
position. This arrangement reduces risk
because it replaces gross obligations
with the smaller net obligatiorvand
failures to settle would almost always
involve smaller exposures (and less
systematic risk) than with bilateral net
settlement. The Board's policy on
limiting avoidance techniques is not
intended to restrict this kind of netting
arrangement.
/. Large-Dollar Payment System
Advisory Group
During the course of their studies on
large-dollar payment system risk, the
Board and Reserve Bank staff have met
with individual depository institutions,
advisory groups, and trade associations
to obtain information and assistance in
understanding the risk issue and the
implications of various risk reduction
options. Such contacts and discussions
have been invaluable. The Board also
found invaluable the work of the
Federal Advisory and Thrift Institution
Advisory Councils’ Committee on
Payment System Risk, and the Payment
System Committee of the Association of
Reserve City Bankers. The Board has
therefore decided tojbrmalize this
contact and, with the consultation of the
Federal Advisory Council and the Thrift
Institutions Advisory Council, will
appoint knowledgeable representatives
of depository institutions active in the
large-dollar payments market to serve
on a joint advisory committee with
Board staff representatives.
When the Study Group is impaneled,
the Board requests that it study:
• The need for settlement finality
and/or payments finality to customer
receivers on private wire networks;
• The costs and benefits of
consolidation of holding company
affiliates for purposes of determining
sender net debit caps;
• the effectiveness of voluntary
sender net debit caps in controlling and
reducing risk exposure;
• the need for intra-day funding
mechanisms, including a Federal
Reserve overline facility and or other
special Fedwire services;
• the best timing for reductions in cap
levels;
• the need for a federal funds
settlement window; and
• .other matters of mutual interest.
/. Implementation Date
The Board believes that an
implementation date of March 27,1966,
Federal Register / Vol. 50, No* 99 / W ednesday, May 22% 1985 / Notices
will provide ample time for depository
institutions and the Federal Reserve to
develop plans and procedures to
implement the Board's policy. The Board
stongly recommends that institutions
establish their sender net debit caps no
later than December 31,1985, to enable
the Federal Reserve Banks to provide
institutions with a three month trial run
of the new polices. During this interval
the agencies may also consult with
institutions that the former may believe
have chosen inappropriate caps.
No implementation date is proposed
for any change in Board policies
regarding overdrafts arising from the
transfer of book-entry securities, and
transactions or net settlement services
generally. Such policy changes, if anyv
and their effective date will be
determined after further staff study and
public comment.
By order of the Board of Governors of the
Federal .Reserve System, May .17.1985.
William W. Wiles,
Secretary of the Board.
Appendix—Guidelines for Establishing Risk
Categories
This appendix presents the Board’s
guidelines to be used by institutions in
determing their own classifications for
purposes of setting their own sender net debit
caps. The Board policy recognizes that
individual institutions may perceive that
special or unusual circumstances not
adequately captured in these guidelines may,
in the view of the institution’s management
and board of directors, be consistent with a
higher grade classification and higher sender
net debit cap. Such a position should be fully
supported by analysis and evidence included
in the file for examiner review. Examiners
will be critical if such special factors are not
fully documented, and will be especially
sensitive to evidence that special positive
factors are being emphasized and adverse
factors ignored or downplayed.
The guidelines address creditworthiness;
operational controls, policies, and
procedures; and credit policies and
procedures. The last section suggests how the
self-evaluation in each of these three areas is
to be combined into an overall assessment
which is then to be the basis for determining
a sender net debit cap.
I. Creditworthiness
Self-assessment of creditworthiness should
begin by reference to an institution's most
recent examination report and, where
applicable, to peer group statistics contained
in the most recent Uniform Bank Performance
Report (UBPR) and to the most recent Bank
Holding Company Performance Report
(BHCPR). Additional data from other reports
and analyses should, of course, be used.
Major emphasis should be placed on asset
quality, capital, and earnings where an
institution's relative standing can be
determined based upon quantifiable
measures. Liquidity and holding company
strength should be added in as modifying
should be given to the adequacy of transfers
to the valuation reserve and the extent to
which extraordinary or nonrecurring items,
securities transactions, and tax effects
contribute to net income.
The self-grading for asset quality, capital,
and earnings should be combined into a
signie preliminary grade of creditworthiness
based on an average of the three components.
This preliminary grade would be affected by
two final considerations, which are graded
positive (+), neutral (0), or negative (—).
d. Liquidity: In most instances, an analysis
of liquidity will indicate a stable funding
base with a reasonable cushion of assets or
untapped funding sources available to meet
contingencies. In such instances, liquidity ,
should be regarded as a neutral (0) factor in
assessing creditworthiness. Evidence of
frequent, unplanned borrowing from the
Federal Reserve's discount window or
deterioration in the normal funding base
would be regarded as negative (—), and,
depending upon the severity of the situation,
the preliminary grade might be downgraded.
Extremely liquid findings (+) could cause an
upgrading of the preliminary rating but such
findings would usually need to demonstrate
asset liquidity as well as sound liability
management practices.
e. Holding company and affiliates: The
relative strength of other depository
institutions within the holding company, the
aparent company itself, and nondepository
institution subsidiaries within the company
can also marginally affect the preliminary
grade. In general, if the regulators have
characterized the consolidated holding
company as in satisfactory condition in its
most recent inspection, the influence should
be regarded as neutral (0). If it was regarded
as less than satisfactory, the influence should
be regarded as negative (—). Downgrading of
the preliminary grade would be expected if
significant losses were being incurred or
anticipated at the parent .or nondepository
institution subsidiary level, if consolidated
capital was materially less than that of the
subsidiary institution(s), or if holding
company debt service necessitated excessive
dividends from the depository institution
subsidiaries. If the parent had a
demonstrated record of capital contributions
and other support for the depository
institution subsidiary, its influence would be
regarded as positive (+) and could raise the
preliminary grade upward.
These five factors become the initial and
minimum benchmark for the self-assessment.
Other considerations, such as major changes
in management or pending litigation that is
material, may be significant when evaluating
an institution. Further, in using any ratio in
the analysis of the first three factors, the
limitations of using a single ratio or even a
few ratios must be recognized. To the extent
that other factors or mitigating circumstances
are factored into the final grade on
creditworthiness, the reasoning for special
consideration should be dearly laid out for
‘ A rating of “A" means “high" or "strong;” “B"
the examiner’s review. Also, in a voluntary
means "above average;” “C” means "average;” and
self-assessment program, management should
“D” means "unacceptable."
* In the case of classified assets, reference should recognize its own natural predisposition to
identify and emphasize positive factors while
be made to nonperforming assets of peer group,
downplaying adverse ones. To the extent
institutions.
factors which, if strongly positive or negative,
could influence the overall assessment of
creditworthiness. For each of the
characteristics that become the primary
determinants of the initial benchmark
assessment of creditworthiness, each
institution should rank itself using a scale
from “A" to “D"-—with “A” being best and
“D’r being worst.* The institution’s files
maintained for examiner review of cap
determination should provide supporting
analysis for the self-ranking assigned for
each of the characteristics.
a. Asset quality: Asset quality should be
graded A through D in relation to (a) the
level, distribution, and severity of classified
assets; (b) the level and composition of non
accrual and reduced rate assets; (c) the
adequacy of valuation reserves; and (d)
demonstrated ability to administer and
correct problem credits. The self-analysis
should take peer group satisfies into
consideration.2Obviously, adequate
valuation reserves and a proven capacity to
police and collect problem credits mitigate to
some degree the weaknesses inherent in
given level of classified assets. In evaluating
asset quality, consideration should also be
given to any undue degree of concentration of
credits or investments, the nature and volume
of credits specially mentioned or classified,
lending policies, and the adequacy of credit
administration procedures. Evaluations of
asset quality significantly different from the
last examination report should be highlighted
and supported in the cap determination file.
b. Capital: In the self-evaluation of capital,
insititutions should, as a starting point, note
that the federal guidelines call for a minimum
primary capital-to-asset ratio, of 5.5 per cent
for commercial banks. In assigning an A to D
self-ranking for its capital position,
adjustments should be made for the volume
of risk assets; the level of off-balance sheet
risk; the volume of classified assets; and
bank growth experience, plans, prospects,
and peer group capital levels. Asset quality
should receive particular weight. Any
institution that ranks its capital more than
one grade above its asset quality has
significant burden of proof to justify such a
grade, and its cap file should contain specific
documentation.
c. Earnings: Earnings should also be graded
A to D with respect to (a) the ability to cover
losses and provide for adequate capital, (b)
earnings trends, (c) peer group comparisons,
and (d) quality and composition of earnings.
Consideration must also be given to the inter
relationship that exist between the dividend
payout ratio, the rate of growth of retained
earnings, and the adequacy of bank capital.
A dividend payout rate that is excessive in
this context, would warrant a lower grade
despite a level of earnings that might
otherwise result in a more favorable
appraisal. Quality is also an important factor
in evaluating this dimension of an
institution's performance. Consideration
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1985 / Notices
U.S. Branches and Agencies of Foreign Banks
U.S. branches and agencies of foreign
banks pose special problems for assessing
creditworthiness because 4hey do not have a
corporate identity in the United States
separate from that of the world-wide
institution. Conceptually, however, the same
analytical approach is appropriate, although
special considerations are necessary to
address data limitations.
In many cases, branches and/or agencies
belonging to a single family will be found in
several different geographic regions and
subject to different supervisory authorities.
Because the strength of the foreign bank,
including all of its parts, will largely
determine the strength of each branch or
agency in the United States, a single overall
assessment is necessary. Thus, branches and
agencies of foreign banks should assess
creditworthiness on the basis of the entire
family—excluding any subsidiary U.S.
chartered banks or Edge corporations of the
foreign bank—rather than on an individual
branch or agency basis.
For capital and earnings, the same
approach and standards used for domestic
depository institutions are appropriate. In
general, the analysis should be done using
available data on the foreign parent.
Branches and agencies may restate their data
to identify undisclosed reserves that are
functionally equivalent to capital and to
adjust earnings to reflect additions to such
reserves. To the extent that the selfassessment relies on these factors, the file
availalbe to the examiner should provide
supporting documentation.
For assessment of asset quality, additional
difficulties are encountered. While
information on the overall organization is
clearly the data that should be used, asset
quality information on the foreign bank or on
the consolidated organization is generally not
avilable to either the manager of U.S.
operations or U.S. supervisory authorities.
Instead, only U.S. asset quality information is
available. Even then, organizations with
multiple branches or agencies will typically
have examinations of individual entities
conducted on different dates and by different
supervisors. Combining these results into a
single meaningful composite of U.S.
operations is therefore not easily
accomplished. Recognizing these
imperfections, the only practical approach
available in most cases is to extrapolate for
the overall family from whatever information
is available in the U.S. operations.
Recognition should be given to the
distortions that can arise when a single
international credit becomes problematic and
is booked entirely in or outside the U.S. for
control purposes. In instances where it »
booked in the U.S., the credit may unduly
overstate the severity of asset problems in
the U.S. by attributing it entirely to the U.S.
when it should more properly be attributed to
the overall family. Judgment is therefore
clearly appropriate in assessing asset quality.
As in the case fbrdomestic depository
institutions, asset quality, capital, and
earnings provide a benchmark for the
assessment of creditworthiness of the branch
or agency. Other factors, like liquidity or the
effect of affiliates, should be factored in as
appropriate. However, because the
assessment has already included the strength
of the foreign'bank in measuring capital and
earnings, extra care should be taken to avoid
double counting the foreign bank in the
assessment of its U.S. branches and agencies.
II. Operational Controls, Policies, and
Procedures
Two district components require analysis
in the operational area if an institution is to
be able to monitor its payments systems risk
effectively. These components are:
• monitoring of the position of the
institution on each payments system on
which it operates and across ail systems as
an overall net position: and
• monitoring of individual customers and
the extent to which the institition extends
credit by making funds available before they
are collected, both when the institition is a.
sender and a receiver of funds.
Both components are important to any
institition in its efforts to manage its
payments system risk. The significance of
monitoring the debit and credit flows to
determine one’s overall position and the
position of individual customers does not
decrease for smaller institutions. For both
components, the business activity is first
defined, areas of significant risk identified,
and the adequacy of controls reviewed.
Factors such as automation or the size of
the institution are not relevant except as they
affect the ability to monitor risks. References
to ‘‘real-time,’’ therefore, address the
timeliness of information, and not the degree
of automation. Indeed, a manual system in a
small institution that records every
transaction may be far more effective as a
real-time monitor than a fully automated and
integrated system in a major operation that
has yet to bring one area with substantial
risk exposure in the institution into the
monitored environment.
Based upon the analysis of the business
activities and the ^identification of existing,
monitoring capabilities, each component is
graded from “A” to “C" indicating a range of
“strong” to "satisfactory” to “unsatisfactory,"
using specific standards. These two separate
ratings of overall activity and individual
customers should then be combined into an
overall rating of operational controls,
policies, and procedures.
a. Monitoring Institution Positions Relative
to Net Debt Caps. Before evaluating its wire
transfer operations, each institution needs to
define the magnitude and relative importance
of each payment system in which it
participates. The table below seeks to define
the institutions’s funds transfer
environment.3
3 To the extent that an institution uses other
payments> systems with sente-day settlement, the
list should be expanded to include them.
Average Daily Volume
System
Dollars
sent
Percent
of total
Percent
of total
Dollars
received
2 CHESS
5. Other........
too
T o tal..
100
For each system in which the institution
participates, an acceptable level of risk
exposure needs to be identified against which
its position will be monitored. The monitoring
of each system should then be identified as
being: (1) On a real-time basis; (2) on a
periodic basis and at what periodicity; or (3)
not currently monitored or monitored only at
the end of the day. Completing the following
table summarizes the type of monitoring
activity for each system:
Individual S ystem Monitoring Capability
System
Real
Time
Periodic
1. CashWire..
2. CHESS....
3 CHIPS
(Frequen
cy)
(
(
(
(
<
5 Other .
No
Interim
Monitor
ing
)
)
)
)
>
For systems that are monitored, the extent
of cross-system monitoring can then be
determined. By identifying which systems
used by the institution are monitored on a
cross-system basis to determine a net
exposure, an overall risk exposure can be
obtained. As with the individual system, a
summary table of cross-system monitoring
capability can be completed like the one
below.4
Cro ss -S ystem Monitoring Capability
Systams
Monitored
Together
1 1
1 1
files da not document balanced analyses,
examiners should be critical.
1 1
1 1
21128
Real
Time
Periodic
(Frequen
cy)
(
(
(
No
Interim
Monitor
ing
)
)
)
Based upon the cross-system monitoring
capability and the volume of business
handled by each system, a rating for the
institution’s controls for its cross-system
exposure can be obtained as follows:
Rating for Monitoring Institution Positions
Strong
a* 95% of total dollars sent and received are
monitored on a real-time basis or at 15
minute intervals or less and
b. a cross-system calculation of the
institution’s net debit/credit position is
4 System may often be listed on more than one
line. For example, a real-time cross-system monitor
on Fedwire and CHIPS might be combined with a
periodic monitoring on CHESS and CashWire to
give a periodic cross-system monitor on all four
systems.
21129
Federal Register / Vol. 50, No. 99 / W ednesday, May 22, 1985 / Notices
computed and compared to established limits
on a real-time basis or at 15 minute intervals
or less.
Satisfactory
a. 80% of the total average daily dollar
volume sent is monitored on a real-time basis
or at 30 minute intervals or less; and
b. a pross-system calculation of the
institution's net debit/credit position,
utilizing these data is computed and
compared to established limits on a real-time
basis or at 30 minute intervals or less.
Unsatisfactory—Any other condition.
b. Monitoring Customer Positions. Each
institution should have the capability of
monitoring the effect of all significant
transactions on the funds positions of
customers as the transactions occur during
the business day. At a minimum, the
institution should be aware of the positions
of customers that have a high-dollar volume
of funds transfer activity in relation to each
customer's funds position or to the
institution's capital. Customer position should
reflect the collected status of funds sent and
received over payments systems, as well as
the effect of other activities, such as loan
advances, loan payments, and book transfers
(transfers between customers on the
institution's own books] which may result
from instructions developed internally or
received over message systems, such as
Bankwire or S.W.I.F.T. Some customers
require frequent monitoring because the
volume of their daily transactions is large.
Others need to be monitored only as a result
of particularly large and unusual
transactions.
For customers that are significant users of
the payments system, three questions are
important:
Yes
No
1. Has the Institution isolated its customers
which participate to a significant degree
in funds transfer systems as either send-,
ers or receivers of funds?............................
2. Can the institution monitor the positions
of these customers taking into account
the source of significant transactions?........
3. Does the monitoring system include the
opening collected balance?..........................
In monitoring customers for compliance
with intra-day overdraft position limits
established by credit policy and/or in
approving over-limit payments, transactions
other than those being transmitted and
received over payments systems need to be
considered ass they directly affect the intra
day position. Among the transaction sources
that should be considered are message
systems such as Bankwire, S.W.I.F.T., and
Telex; internal book transfers; and the
institution’s own lending, investment, and
check processing operations. While it may
not be feasible or reasonable to monitor all
transactions from all areas, material
thresholds should be established by the
institution as criteria for monitoring
individual transactions or aggregate
transactions for a single customer that could
put the institution at risk. The files should
clearly document the reasons for including or
excluding other areas and justify threshold
limits sets.
Once customers have been identified and
individual transaction limits set, the
institution's ability to monitor and control the
funds positions of its customers can be
determined. The following checklist identifies
the adequacy of controls:
Yes
No
and procedures puts all participants in the
payments system at risk, and should predude
a satisfactory overall rating and its
associated debit cap limit regardless of the
ratings for creditworthiness or monitoring
capabilities.
The following checklist identifies the
adequacy of credit policies and procedures:
1. Does the system for monitoring positions
of customers cover
a. AN significant sources generating
Yes
1. Does the institution have a written credit
policy detailing normal and exception ap
proval and reporting procedures for all
loans and credit commitments, including
daylight overdraft and M aterial limits and
b. Tdtal transactions over an estab-
2. Does the system halt any transaction in
excess of established limits from further
processing until appropriate action is
2. Are all facilities and exposures approved
as part of acknowteged aggregate expo
sures to individual bank and commercial
3. If documentation of action taken with
regard to over-limit transactions reflects
consistent exceptions attributed to a cus
tomer. is analysis of those accounts in-
3. Does the institution use monitoring sys
tems which identify usage in excess of
approved facilities and provide adeqate
information for review and evaluation of
4. Are reviews of the funds transfer environ
ment conducted by internal or external
auditors at least annually? (These reviews
should conform to the standards estab
lished by the Bank Administration Institute
and the Federal Financial Institutions Ex-
4. Does the institutions have exception
identification and approval systems which
are tailored to the speed, volume, and
size of credit approvals required by its
payment system generated exposures?.... ...
5. Are the institution's review systems
geared to single out and take action on
Institutions must be able to respond
positively to all questions in this section on
monitoring customer positions if they are
honestly to evaluate their control as
satisfactory or strong. These ratings should
be obtained as follows:
Rating for Customer Monitoring System and
Controls
1. Strong—Responses to all of the above
are positive and comprehensive customer
monitoring is in force for both debits and
credits on a real-time basis Qr at intervals of
15 minutes or less.B
2. Satisfactory—Responses to all of the
above are positive and comprehensive
customer monitoring is in force for all debit
transactions greater than or equal to the
monitoring threshold on a real-time basis or
at intervals of 30 minutes or less.
3. Unsatisfactory—Any other condition.
O verall Rating for O perational
Controls, P olicies, and P rocedures
Monitoring
Institution Positions
Monitoring
Customer
Positions and
Controls
Strong........................ Strong.....................
Strong........................ Satisfactory............
Satisfactory................ Strong......................
Satisfactory............... Satisfactory............
Either Rated Unsatisfactory........................
No
Overall Rating
Strong.
Satisfactory.
Satisfactory.
Satisfactory.
Unsatisfactory.
III. Credit Policies and Procedures
A simple two-way classification system for
credit policies and procedures should be
used. All institutions should have explicit,
written credit policies and the necessary
internal procedures in place to implement
these policies. Failure to have such policies
6 If an institution monitors on a worst case basis,
that is debits only, a strong rating may still be
justified if the limits established are no higher than
those appropriate for monitoring a net position.
6. Does senior management periodically
review and take action on aggregate ex7. Are all controls and procedures reviewed
and tested by the institution’s internal
8. is adequate training available and re
quired for operations, credit and account
officer staff responsible for monitoring the
intra-day overdraft exposure system of
In completing the checklists,'negative
responses should not be explained away in
order to obtain a satisfactory self assessment
except under extremely unusual
circumstances. Institutions that attempt to
explain shortcomings will be scrutinized very
closely by the examiners.
IV. Overall Assessment
The three component evaluations can be
combined into a single overall assessment
using the following table:
Credit policies
and
procedures
Operational
controls
policies and
procedures
Credit
worthiness
Satisfactory....,
Do............
Strong........
...d o ............
A ............
Do............
Do............
Satisfactory....
....do......
....do.... - ....
Satisfactory
C ............
D ............
A or B...
Do............
Do............
Satisfactory....
..
....do............
Unsatisfac
tory.
Unsatisfactory. Strong or
Satisfac
tory.
Unsatisfactory. Unsatisfac
tory.
Overall
assessment
D ............
Any.......
High cap.
Above average.
cap.
Average cap.
No cap.
Above average
cap.
Average cap.
No cap.
No cap.
Any.... ..
No cap.
Any.......
No Cap
B....—
C
....
In completing the assignment for U.S.
branches and agencies of foreign banks that
are part of a single family operating in more
than one state, a single assessment for the
2 im
Federal Register / VoL 50, No. 99 / Wednesday, May 22, 1985 / Notices
family should be conducted. If more tints one
branch or agency has access to a large*
payments system, the adequacy of
operational controls for each access point
should be assessed separately and combined
into a single assessment. A single cap should
then be determined and divided among the
entities having access. The file documenting
the assessment and its division among the
separate entities should be available to
examiners in the office through which the
Federal Reserve exercises its oversight
responsibilities under the International Bank
Act.
[FR Doc. 85-12113 Filed 5-21-85; 8:45 am]
BILLING CODE 6210-01-M
[D o c k et No. R -0515B ]
Request for Qomments on Proposals
Regarding Automated Clearing Houses
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Request for comments.
In a related action today
(Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
large-dollar electronic funds transfer
systems. The Board did not, however,
resolve the issues of risks arising from
automated clearing house (ACH)
transactions. The Board is requesting,
therefore, comment on issues relating to
risks inherent in such transfers.
d a t e : Comments must be received by
August 15,1985.
ADDRESS: Comments, which should refer
to Docket No. R-05158 should be
addressed to Mr. William W. Wiles,
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW, Washington, D.C. 20551, or
delivered to room B^2223 between 8:45
A.M. and 5:15 P.M. Comments received
may be inspected in room B-1122
between 8:45 A.M. and 5:15 P.M., except
as provided in § 261.6(a) of the Board’s
Rules Regarding Availability of
Information, 12 CFR 261.6(a).
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Edward C. Ettin, Deputy Director (202452-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-4522444), Division of Research and
Statistics; Elliott C. McEntee, Associate
Director (202-452-2231), Florence M.
Young, Adviser (202-452-3955), Nancy
R. Wesolowski, Operations Analyst
(202-452-3437), Division of Federal
Reserve Bank Operations; Joseph R.
Alexander, Attorney (202-452-2489),
Legal Division; Jeffrey C. Marquardt,
Economist (202-452-2360), Division of
International Finance; Anthony G.
Cornyn, Assistant Director (202-452-
3450), Division of Banking Supervision
and Regulation; or Joy W. O’Connell,
TDD (202-452-3244).
SUPPLEMENTARY INFORMATION: Over the
past several years, the Board has
become increasingly concerned with the
risks that large-dollaf payments systems
present to depository institutions using
them, to the banking system, and to
t)ther sectors of the economy. In March,
1984, the Board issued for public
comment a series of proposals to reduce
and control these risks. In a related
action today (Docket No. R-0515), the
Board issued a statement of the policy it
has formulated to reduce these risks.
The Board’s policy, reflecting the need
for flexibility and the desires of those
who commented, relies heavily on the
efforts of participants to identify,
control, and reduce their own risks.
Since the automated clearing house
(ACH) mechanism was designed in the
early 1970s, it has been considered to be
a substitute for. recurring consumer
payments that are typically made by
paper check. All ACH payments are
value dated, with settlement occurring
one or two days after transactions are
submitted to a Federal Reserve Bank or
a privately-operated ACH. In addition,
to encourage consumer acceptance,
credit transactions,1 such as salary and
pension payments, are generally treated
as irrevocable payments on the
settlement date, that is, the credits are
made available to the receiving
depository institutions at the opening of
business on the settlement date and
cannot generally be revoked. In this
respect, ACH credit transactions are
like Fedwire transfers. Federal Reserve
ACH debit transactions,8 such as
mortgage and insurance premium
payments, are treated as provisional
payments and, like checks, they may be
returned if funds are not in the account.
It should be noted that ACH
participants appear to treat both ACH
debit and credit transactions processed
by privately operated ACHs like
transactions processed by the Federal
Reserve.
Because the ACH has been viewed as
a small-dollar payment system, the issue
of financial risk to ACH participants
and operators had not been a serious
concern. The characteristics of the ACH
mechanism, however, are beginning to
change. Improvements in automated
systems have resulted in shorter
processing times. Further, both the
Federal Reserve and privately operated
1 When credit transactions are sent through the
ACH, funds are transferred from the originator to
the receiver.
1 When debit transactions are proceased, funds
are transferred to the originator from the receiver.
ACHs have been considering offering
same-day ACH services with
considerably more attractive deposit
times than are presently available.
Besides the improvements being made m
processing times, the types of payments
made through the ACH are changing.
Corporations are now using fhe ACH to
concentrate balances at lead banks, to
fund accounts of geographically
dispersed operating units, to repay
loans, and to make vendor-payments.
These new uses for the ACH mechanism
have contributed to the increasing
number of large-dollar payments
processed.
Currently, payments amounting to $1.0
million and more are regularly
processed through the ACH. Based on a
one-week survey conducted during
January, 1985, approximately 900 ACH
transactions amounting to $1.0 million or
more were processed daily. While these
transactions represented only about 0.1
percent of the daily average number of
commercial ACH payments, they
accounted for nearly 50 percent of the
daily average dollar value of such ACH
payments. The majority of these
transactions were revocable debit
transactions. Only 5 percent were credit
transactions, and they accounted for
about 3 percent of the daily average
dollar value of commercial ACH
payments.
Some of the changes that are being
observed in the ACH have been
encouraged by the Federal Reserve and
ACH associations, because they
improve the efficiency of the nation’s
payments mechanism. For example, the
use of ACH cash concentration debits to
accumulate funds at corporations’ lead
banks is more timely, more reliable, and
less costly than the use of paper
depository transfer checks. Similarly,
the use of ACH corporate trade
payments is expected to lead to
significant operating efficiencies. Both
cash concentration debits and corporate
trade payments tend to be fairly high
value payments.
The difference between the Federal
Reserve's fees for ACH and Fedwire
transactions also provides incentives for
depository institutions to use the ACH
for large-dollar transfers that are not
time-critical. The Federal Reserve
assesses depository institutions
transaction fees of 1.0 cent and 1.8 cents
to originate ACH intra- and
interregional payments, respectively,
and 55 cents to send a Fedwire. Fixed
fees are also assesses to originators of
ACH and Fedwire transactions.
Therefore, the total cost of originating
either type of payment varies across
depository institutions based on
Federal Register / Vol. 50, No. 09 / W ednesday, May 22, 1985 / Notices
transaction volumes, but is typically
much lower for ACH transactions.
Finally, the proposed ex post
monitoring procedures for large-dollar
funds transfer systems are likely to
provide incentives for some depository
institutions to use the ACH as a
substitute for funds transferred over
large-dollar networks. Specifically, the
ex post monitoring procedures for
daylight overdrafts measure only wire
transfers of funds as they occur. All
other “off-line” transactions, including
check, ACH, and definitive securities,
are netted and are posted ex post at
either the opening or closing of business.
To give depository institutions the
greatest benefit or least disadvantage, if
the sum of “off-line” transactions results
in a net credit, the net credit is posted in
the ex post monitoring system as though
it occurred at the opening of business. If
the sum results in a net debit, it is
posted as though it occurred at the close
of business. Therefore, if a depository
institution repaid federal funds
borrowings or originated other largedollar credit payments over the ACH—
all of which are irrevocable to the
receiver—the debits to the originator’s
reserve account would be measured in
the ex post monitoring system with
other “off-line” transactions. If the net of
these transactions were a debit, it would
be posted at the end of the day, with no
impact on the intra-day debit position of
the sender. As a result, the procedures
would enable depository institutions to
circumvent the sender net debit caps
placed on wire transfer systems.
Thus, it appears that the ACH may be
evolving into a payments mechanism
with many similarities to large-dollar
funds transfer systems. The financial
risks, however, are difficult to quantify.
In cases where depository institutions
make funds available to customers for
ACH credit transactions before the
payments are final, they are exposed to
temporal risk because they may not be
able to collect from the sender at the
time of settlement. In addition, ACH
participants may be exposed to risk in
handling ACH debit transactions. While
ACH debit transactions are treated as
provisional payments by the Federal
Reserve, it is not clear that originators of
debit transactions always treat the
funds received as provisional to their
customers. If depository institutions
treat the funds as final and make diem
available to their customers, they may
not be able to recover die funds if the
receiving institution returns the
transaction. If a depository institution
were unable to recover funds from a
customer for a return of a large cash
concentration debit, it could affect the
institution’s liquidity and its ability to
settle for other payments or other
settlement arrangements.
Because of the changes occurring in
the ACH mechanism and the increasing
use of the ACH for large-dollar
payments, the Board believes that it
should undertake a thorough review of
ACH risk. Pending completion of the
study, the Board has decided to
postpone further consideration of sameday finality for ACH services. In
addition, until this study‘is completed,
the Board believes its ex post
monitoring procedures to calculate
depository institutions’ intra-day net
debit positions should be modified in
order to (1) recognize the potential risks
associated with ACH transactions
processed by both the Federal Reserve
and privately operated ACHs, and (2)
inhibit the use of the ACH to circumvent
risk reduction policies. Specifically, the
Board plans to make the following
modifications to its ex post monitoring
procedures: (1) Post the gross debits
resulting from the origination of ACH
credit transactions and the gross credits
resulting from the receipt of credit
transactions at the opening of business
on the settlement date, and (2) post the
gross credits resulting from the
origination of debit transactions and the
gross debits resulting from the receipt of
debit transaction at the close of
business on the settlement date.3 This
procedure would result in posting the
net of ACH credit transactions in the ex
post monitoring system at the opening of
business on the settlement date and in
posting the net of ACH debit
transactions at the close of business on
the settlement date.
In order to assist the Board in its
consideration of ACH risk, the public is
requested to respond to the following
questions:
1. Should the ACH be used for
handling large-dollar payments?
(a) If it should not be, what controls
should be implemented to limit its use to
8mall-dollar payments? For example,
(1) Should restrictions on the dollar
amount of ACH credit and/or debit
transactions processed by the Federal
Reserve and privately operated ACHs
be imposed?
(i) Should restrictions be set for the
gross dollar amounts of all transactions,
the daily overage dollar amount of all
transaction, the dollar value per deposit
or file, the dollar value per batch, or the
dollar value of individual transactions?
’ This posting procedure is for ex poet monitoring
only and will in no way change the time that actual
settlement entries are made or the time that ACH
transactions become final.
21131
(ii) At what dollar value should the
cut-off be?
(iii) Should implementation of
procedures to limit large-dollar
payments be a condition of the Federal
Reserve’s granting net settlement
services to privately operated ACHs?
(2) Should restrictions be placed on
the types of transactions processed
through the ACH?
(i) Should returns of federal funds be
prohibited?
(ii) Should corporate-to-corporate
payments, which are frequently largedollar payments, be prohibited?
(3) How effective would restrictions
on dollar amounts and transaction types
be?
(b) If the ACH should be used for
large-dollar payments, what controls
should be implemented?
(1) Should ACH transactions be
included in monitoring institutions’
sender net debit caps? If so, should ACH
credit and debit transactions be treated
differently?
(2) Should participants in privately
operated ACHs be required to
“guarantee” settlement? Should the
“guarantee” apply to consumer/smalldollar payments only and/or to
corporate/large-dollar payments, or
both?
(3) Should controls be placed on largedollar ACH transactions only, that is,
transactions over $25,000, over $100,000,
or $500,000?
2.
Currently, funds provided to
receivers of ACH credit transactions
processed by Reserve Banks are
generally treated as final payments at
the opening of business on the
settlement date. Funds provided to
originators of ACH debit transactions
processed by the Reserve Banks are
posted on the settlement date but are
considered provisional payments until
the business day following the
settlement date. Net settlement entries,
reflecting the net of both debit and
credit transactions, for privately
operated ACHs are posted on the
settlement date, but are generally
considered provisional payments until
the business day following the
settlement date.
(a) How does your institution treat
credits received as the result of
originating debit transactions for
customers? Are the funds treated as
provisional or final payments? Are there
differences in the treatment of retail and
wholesale payments or in the treatment
of small-dollar and large-dollar
payments? Are holds placed on the
funds?
(b) If your institution participates in a
privately operated ACH, are funds
21132
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1985 / Notices
treated as provisional or final payments
to customers before the Federal Reserve
net settlement entries become final? Are
credit payments received for consumers
and corporations treated differently?
(c) Should the Federal Reserve change
the way it treats ACH credit
transactions, that is, treat credit
transactions as provisional until the
business day following the settlement
date rather than as final at the opening
of business on the settlement date?
(d) If all ACH transactions, both
debits and credits, were treated as
provisional payments, how would use of
the ACH be affected? Would your
institution make any changes in the way
it currently handles incoming ACH
credit transactions, such as modifying
funds availability policies?
(e) Should net settlement services
provided to privately operated ACHs
provide same-day or next-day finality
for net settlement entries? If net
settlement entries are considered
provisional until the business day
following settlement date, what risks if
any would your institution face?
3. What is your institution's
perception of the degree of ACH risk
associated with cash concentration
debits.and disbursements, corporate
trade payments, and so forth? Do you
believe that there are different degrees
of risk associated with debit versus
credit transactions?
4. Does your institution monitor or
limit the dollar amounts and/or types of
ACH transactions that are originated for
your customers?
5. How does your institution see the
changes occuring in the ACH—such as
the use of the ACH for large-dollar
payments and the potential for sameday ACH—affecting the way it handles
ACH transactions?
6. In order to determine whether the
interim changes in the Board’s ex post
monitoring procedures should be
adopted as final procedures, please
indicate how the interim procedures
would affect your institution’s use of the
ACH and its operating costs?
7. What alternative methods for
controlling ACH risk should the Federal
Reserve consider in its analysis?
By order of the Board of Governors of the
Federal Reserve System, May 17,1985.
William W. Wiles,
Secretary of the Board.
[FR Dog. 85-12315 Filed 5-21-85; 8:45 am]
BILUNG CODE 6210-01-M
[Docket No. R-0515A]
Request for Comments on Proposals
Regarding Book-Entry Securities
Transfers
agency: Board of Governors of die
Federal Reserve System.
ACTION: Request for comments.
In a related action today
(Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
large-dollar electronic funds transfer
systems. The Board did not, however,
resolve the issues of risks arising from
the transfers of book-entry securities on
Fedwire. The Board is requesting,
therefore, comment on issues relating to
risks inherent such transfers.
d a t e : Comments must be received by
August 15,1985.
a d d r e s s : Comments, which should refer
to Docket No. R-0515A should be
addressed to Mr. William W. Wiles,
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, D.C. 20551, or
delivered to room B-2223 between 8:45
A.M. and 5:15 P.M., except as provided
in § 261.6(a) of the Board’s Rules
Regarding Availability of Information,
12 CFR 261.6(a).
S u m m ary :
FOR FURTHER INFORMATION CONTACT:
Edward C. Ettin, Deputy Director (202452-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-4522444), Division of Research and
Statistics; Elliott C. McEntee, Associate
Director (202-452-2231), Florence M.
Young, Adviser (202-452-3955), Nancy
R. Wesolowski, Operations Analyst
(202-452-3437), Division of Federal
Reserve Bank Operations; Joseph R.
Alexander, Attorney (202-452-2489),
Legal Division; Jeffrey C. Marquardt,
Economist (202-452-2360), Division of
International Finance; Anthony G.
Comyn, Assistant Director (202-4523450), Division of Banking Supervision
and Regulation; or Joy W. O’Connell,
TDD (202-452-3244).
SUPPLEMENTARY INFORMATION: Over the
past several years, the Board has
become increasingly concerned with the
risks that on large-dollar payments
systems present to depository
institutions using them, to the banking
system, and to other sectors of the
economy. In March, 1984, the Board
issued for public comment a series of
proposals to reduce and control these
risks. In a related action today (Docket
No. R-0515), the Board issued a
statement of the policy it has formulated
to reduce these risks. The Board’s
policy, reflecting the need for flexibility
and the desires of theme Who
commented, relies heavily on the efforts
of participants to identify, control, and
reduce their own risks.
In formulating its policies to reduce,
risks on large-dollar payments systems
and control daylight overdrafts of
Fedwire, the Board has always been
concerned about the impact that
overdraft restrictions could have on thie
U.S. government securities market. The
smooth functioning of this maket is vital
bdth to the conduct of monetary policy
through Federal Reserve open market
operations and to the efficient funding of
the federal debt. Consequently the
Board has thus far exempted from
quatiative overdraft controls those
Fedwire daylight overdrafts resulting
from the transfer of boOk-entry
securities.1The Board originally had
hoped to develop a plan whereby such
overdrafts would be collateralized with
the underlying securities being
transferred. It appears, however, that
depository institutions might not be
authorized to pledge all of these
securities because of arrangements they
may have with their customers.
Moreover, operational considerations
related to tracking the specific security
that caused, and therefore secured, a
particular overdraft amount rendered
this process unworkable.
The Board has developed, and is
requesting comment on, a proposal to
control the risks associated with
daylight overdrafts resulting from the
transfer of book-entry securities. The
plan would require institutions incurring
book-entry related overdrafts to select
one of three collateralization options:
Option 1. No Separate Collateral
Under this option, daylight overdrafts
on Fedwire resulting from book-entry
securities transactions would not be
differentiated from other daylight
overdrafts. Each institution’s sender net
debit cap would be applicable to the
sum of their securities overdrafts and
other ("funds”) daylight overdrafts
across all wire systems:
The Board expects that most of the
over 1,000 institutions that make bookentry secUHties transfers would elect
this option. Securities transfers
represent a small portion of most
1 Such overdrafts are defined to occur when the
institution receiving book-entry securities has
received more book-entry securities against
payment at a point in time than it has sent. Since
receipt of a book-entry security and Fedwire
payment to the sender are simultaneous, the sender
of the security receives Fedwire payment regardless
of the securities overdraft position of the receiver of
the securities. The definition used for a book-entry
securities overdraft means that such an overdraft
could odcur even while the receiver’s funds account
was in credit balance.
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1985 / Notices
institutions' business activity. Thus,
there would be little benefit for these
institutions in establishing the
collateralization and tracking
procedures associated with the other
options.
Option 2. Stable Pool of Collateral
This option would allow institutions
to establish a separate pool of
collateral2 held at the Reserve Bank to
secure any daylight overdrafts arising
from their book-entry securities
business. Collateral in this pool would
be pledged by the institution to the
Federal Reserve, and the pledged
securities or other assets in this account
would not be eligible for transfer during
the regular business day^Changes in the
account could be made overnight.
Securities overdrafts in excess of the
value of the stable pool would be
included with “funds” daylight
exposures and covered by the net debit
caps that apply to such exposures.
A separate pool of collateral would be
useful to correspondent banks that
engage in a sizeable securities transfer
business but may not have the right to
pledge customer book-entry securities
being transferred, as required by option
3, below. These institutions generally
separate their securities traffic and
related funds transactions from other
business activity, and their securitiesrelated overdrafts would be too large to
be accommodated within the caps that
will apply to their other daylight
exposures. Therefore, a separate
securities collateral pool would be
essential to controlling and managing
their securities related risks.
Option 3. Pledge Account
Under this option, each institution
would enter into an agreement with its
Reserve Bank providing for the creation
of a special book-entry securities
account for deposit of securities that the
institution would warrant it has
authority to pledge to the Reserve Bank
to secure daylight overdrafts.
Consequently, each institution would
have a minimum of two securities
accounts—one to hold pledged
securities (“Pledge Account”) and one to
hold securities ineligible for pledge to
the Reserve Bank. The Reserve Bank
would rely on the institution’s warranty
of authority to pledge, which would
cover both securities owned by the
institution and customer securities that
the institution has a right to pledge by
virtue of its intra-day credit agreements
with its customers. It would be the
2 Such as collateral already on deposit at Reserve
Banks to secure potential discount window
advances.
institution's obligation to instruct
customers to direct their senders to
deliver eligible securities to the Pledge
Account. It would also be the
institution’s responsibility to transfer
ineligible securites out of the Pledge
Account promptly upon learning of their
ineligibility.
On the basis of this agreement, the
Reserve Bank would permit the
institution to incur a securities-related
overdraft. To determine when an
overdraft occurs, a separate dollar
balance would be kept for securities
transactions. At the beginning of each
day, a separate securities dollar balance
of zero ($0) would be established for
each institution, and such balance
would be recorded separately from
other activity in the account while the
securities wire is open. A securitiesrelated overdraft would occur when the
payments for securities received
exceeds the dollar credits posted to the
securities dollar balance. The
occurrence of a securities-related
overdraft will automatically trigger the
pledge of securities deposited in the
Pledge Account.
During the day, the institution may
continue to run a securities-related
overdraft provided that the Pledge
Account contains securities of a value
equal to the overdraft. If an incoming
transfer of securities ineligible for
pledge would increase the securitiesrelated overdraft beyond the value of
the collateral, a separate pool of nontransferrable collateral provided
specifically for securities transfers could
be used to secure the remaining
exposure. Overdrafts above the sum of
the pledged book-entry and definitive
collateral pool would be included in
“funds only” overdrafts subject to the
institution’s sender net debit cap. In this
fashion, the entire securities-related
daylight overdraft would either be
secured by the pool of pledge-eligible
securities, by a separate nontransferrable pool of collateral, or
combined with “funds" daylight
exposures.
Of the three options presented, this
one relies most heavily on the quality of
a financial institution’s internal
management and control. In contrast to
the other two approaches, this option
does ot result in any de-facto cap on
daylight exposure; indeed, this approach
can yield a result in which such
exposures are limited only by the
capacity of banks to collateralize their
own credit extensions to dealers. This
option also does little to require changes
in market practices, such as the intra
day receipt/delivery matching process,
that clearly exacerbate the level of
21133
intra-day risk exposure. In that regard,
the Board proposes that institutions
selecting'this option be examined by the
Federal Reserve and other bank
supervisors to ensure that the
collateralization process is property
administered by participating banks.
Proper administration should both
protect the interests of third parties in
securities, and encourage changes over
time in market practices of large
clearing banks in ways that will reduce
Reserve Bank and systemic exposure.
Such changes and careful supervision of
depository institution management and
control of the securities clearing
business are necessary before the
Federal Reserve, federal and state bank
supervisors, market participants, and
investors can be truly comfortable with
this option.
This proposed option differs in a
major way from an approach favored by
the large clearing institutions. These
institutions maintain that the value of
the collateral in the Pledge Account will
almost certainly not cover securitiesrelated daylight overdraft amounts. This,
is because some portion of their daylight
overdrafts arises out of transactions for
trust accounts or involves securities that
cannot be pledged to the Reserve Bank.
The clearing banks maintain, however,
that they should have enough collateral
in the Pledge Account to secure about 90
percent of their securitries-related
daylight overdraft, and have argued that
option 3 should provide a percentage of
unsecured credit of at least 10 percent
for book-entry overdrafts. The purpose
of this unsecured credit would be to
provide flexibility to the large clearers,
and to avoid as much as possible any
mixing of their securities business with
other funding activity. They do agree,
however, that if collateral value in the
Pledge Account fell below 90 percent of
the overdraft, the remaining amounts
would be covered by a separate pool of
securities, or be combined with other
funds exposures under the applicable
net debit cap.
Another issue is whether it would be
necessary to perform a market value
check on the securities being transferred
by book-entry. Under the current
securities transfer process, there is no
check that the cash debit associated
with a securities transfer has any
relationship to the market value of the
securities. The transferring institution
specifies the purchase price, but it can
send securities against no payment, or
conceivably, for an amount much
greater than the value of the securities.
The cash credit for securities being
transferred is made simultaneously with
the transfer at the purchase price and
21134
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1985 / Notices
extension of the time that the securities
the receiving institution is immediately
wire must remain open?
debited for the same amount. This
2. What will it cost for an institution
procedure dates from the origins of the
to implement the option it would likely
book-entry process in the early 1960s.
The Federal Reserve assumed the risk of choose (please specify the option)? Will
the option chosen be costly to operate?
ensuring that the cash credits given to
If so, will this affect the efficiency of the
the originators of securities transfers
U.S. government securities market?
would be ultimately covered by the
3. Should institutions choosing option
recipient who would be debited. Clearly,
3 ("Pledge Account”) be allowed an
this process is in conflict with the
amount of unsecured credit on any
current emphasis on daylight exposure
overdraft amount as has been indicated
measurement and control.
is needed by the large clearing
The Federal Reserve has not
institutions? If not, could such
previously considered a market value
institutions supplement the Pledge
check necessary, but has relied upon
Account with non-transferrable
sending and receiving institutions to
collateral up to 100 percent of their
adjust under/and over-payments
book-entry securities overdraft? If not,
through the reversal process. However,
can the amount uncovered be included
the possibility that the purchase price
with all other daylight overdrafts and
and the value of securities being
subject to net debit caps? What are the
transferred could be seriously out of line costs and market implications of these
provides an opportunity for the seller of
approaches?
securities to acquire, at least
4. If the Federal Reserve adopts the
temporarily, cash in a fraudulent way.
proposed market value check on the
Moreover, this deficiency could
purchase price of securities being
seriously undermine the
transferee!, market participants may also
collateralization process recommended
have to adopt such a practice. Are such
under option 3, since the Reserve Banks
measures necessary? If so, how much
would have no assurance that collateral
would such a development effort cost?
amounts held in the Pledge Accounts
By order of the Board of Governors of the
were actually worth the funds extended
Federal Reserve System, May 17,1985.
to the purchaser for them in the form of
William W. Wiles,
a daylight overdraft. Thus, the Board
Secretary of the Board.
Proposes that the securities transfer
[FR Doc. 85-12314 Filed 5-21-85; 8:45 am]
system used by Reserve Banks be
BILLING
CODE 6210-01-M
modified to include a reasonableness
check between the purchase price and
the market value of the securities being
[D o ck et No. R -0515C ]
transferred. This may be difficult
Request for Comments on Net
operationally and require market
Settlement Arrangements
changes. However, this control
deficiency will have to be addressed if
AGENCY: Board of Governors of the
the collateralization process is to be
Federal Reserve System.
meaningful.
ACTION: Request for comments.
The Board requests comments from
the public on all aspects of this
s u m m a r y : In a related action today
proposal; specifically:
(Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
1. Will the choice among the three
large-dollar electronic funds transfer
options proposed meet the needs of all
systems. The Board did not, however,
institutions involved in the book-entry
resolve the issues of risks arising from
securities market? Will any type of
the provision of net settlement services
institution or any particular institution
to other than large-dollar transfer
be seriously disadvantaged by the
systems. The Board is requesting,
collateralization proposal? If so, what
therefore, comment on issues relating to
further collateralization or other
option(s) might be proposed, recognizing risks inherent to such arrangements.
d a t e : Comments must be received by
that the aim is to secure daylight
August 15,1985.
exposures arising out of securities
transfers to the greatest degree
a d d r e s s : Comments, which should refer
possible—or to include such exposure
to Docket No. R-0515C should be
within an institution’s sender net debit
addressed to Mr. William W. Wiles,
cap—with the least impact on the
Secretary, Board of Governors of the
government securities markets? Will
Federal Reserve System, 20th and C
implementation of any of the proposals
Streets, N.W., Washington, D.C. 20551,
have any impact on the ability of market or delivered to room B-2223 between
participants to turn items around? Will
8:45 A.M. and 5:15 P.M. Comments
received may be inspected in room. Bthe proposals require any significant
1122 between 8:45 A.M. and 5:15 P.M.,
except as provided in § 261.6(a) of the
Board’s Rules Regarding Availability of
Information, 12 CFR 261.6(a).
FOR FURTHER INFORMATION CONTACT:
Edward C. Ettin, Deputy Director (202452-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-4522444), Division of Research and
Statistics; Elliott C. McEntee, Associate
Director (202-452-2231), Florence M.
Young, Adviser (202-452-3955), Nancy
R. Wesolowski, Operations Analyst
(202-452-3437), Division of Federal
Reserve Bank Operations; Joseph R.
Alexander, Attorney (202-452-2489),
Legal Division; Jeffrey C. Marquardt,
Economist (202-452-2360), Division of
International Finance; Anthony G.
Comyn, Assistant Director (202-4523450), Division of Banking Supervision
and Regulation; or Joy W. O’Connell,
TDD (202-432-3244).
SUPPLEMENTARY INFORMATION: Over the
past several years, the Board has
become increasingly concerned with the
risks that large-dollar payments systems
present to depository institutions using
them, to the banking system, and to
other sectors of the economy. In March,
1984, the Board issued for public
comment a series of proposals to reduce
and control these risks. In a related
action today (Docket No. R-0515), the
Board issued a statement of the policy it
has formulated to reduce these risks.
The Board’s policy, reflecting the need
for flexibility and the desires of those
who commented, relies heavily on the
efforts of participants to identify,
control, and reduce their own risks.
Currently, the Federal Reserve
provides net settlement services to a
variety of private sector clearing
arrangements in addition to large-dollar
funds transfer networks; e.g., check
clearing houses, credit card processors,
automated clearing houses (ACHs), and
small-dollar hinds transfer networks,
such as, automated teller machine
(ATM) and point-of-sale (POS)
networks.
The finality accorded net settlement
entries varies. In most cases, net
settlement entries that the Federal
Reserve processes for large-dollar funds
transfer networks are accorded sameday finality. Net settlement entries for
some check clearing house
arrangements are also treated as final
on the business day they are received.
Net settlement entries for ATM, POS,
and-some ACHs are considered
provisional until the business day
following the receipt of the settlement
data.
Federal Register / Vol. 50, No. 09 / Wednesday, May 22, 1985 / Notices
From the perspective of the Federal
Reserve, the potential for financial loss
is greater when settlement entries are
accorded same-day finality and lower
when next-day finality is provided. This
is because the risk of loss increases as
the time the Reserve banks have to
ensure that institutions possess
sufficient balances to cover net debit
positions is reduced. Conversely, for
depository institutions participating in
private clearing arrangements, financial
risk declines as the time between the
exchange of transaction data (or the
settlement date in the case of the ACH)
and the finality of settlement entries is
reduced. Therefore, same day finality
reduces temporal risk for participants in
private clearing arrangements, shifting
that risk to the Federal Reserve. As
private sector, temporal risk is reduced,
systemic risk is also reduced.
The second factor conoeming the risk
faced by depository institutions
participating in private clearing
arrangements is the treatment that they
accord the transactions that are
exchanged in these arrangements. If
funds are made available to customers
as the transaction data are received—a
common practice for participants on
funds transfer networks—or on a
specified settlement date—in the case of
participants in ACH networks—then the
timing of finality for settlement entries
directly affects the risk faced by the
participating institutions. On the other
hand, if the underlying transactions are
treated as provisional payments to
customers and funds are not made
available immediately, the timing of
finality of settlement entries may not
substantially increase participating
institutions’ risk.
Because the Board is reconsidering
certain aspects of risks associated with
providing net settlement services, it is
requesting public comment on the
following issues:
1. Should the terms of net settlement
arrangements vary based on the type of
transactions being settled?
(a) If they should, vary, should the
differences be reflected in the finality
accorded settlement entries (same-day
or next-day) or be reflected on the
controls imposed in the group of
depository institutions requesting net
settlement services?
(b) If they should vary, what types of
settlement should be provided to:
• Privately operated ACHs?
• ATM networks?
• POS networks?
• Check clearing houses?
• Credit card processors?
2. If they should not vary, please
explain why.
3. How do the terms of settlement
arrangements affect the way your
depository institution handles the
following underlying transactions, that
is, as final or provisional payments:
• ACH transactions?
• ATM transactions?
• POS transactions?
• Checks?
• Credit cards?
4. If the terms of net settlement
arrangements do not affect the way your
institution handles the underlying
transactions, what factors are
considered in determining the treatment
accorded:
• ACH transactions?
• ATM transactions?
• POS transactions?
• Checks?
• Credit cards?
5. Should institutions participating in
private clearing arrangements
“guarantee” settlement or provide a
means whereby settlement is assured,
such as, through the use of insurance,
indeminification, or collateral, in the
event that one or more participants may
be unable to settle? What type of
“settlement guarantee” arrangement
would be most effective?
By order of the Board of Governors of the
Federal Reserve System, May 17.1985.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 85-12316, Filed 5-21-85; 8:45 am]
BILLING CODE 6210-01-M
[Docket No. R-0515D]
Request for Comment on Information
Collection Request Directed to
Automated Clearing Houses
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Request for comments.
In related action today
(Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
large-dollar electronic funds transfer
systems. As part of this policy, the
Board has required that automated
clearing houses (ACHs) obtaining net
settlement services from the Federal
Reserve must, among other things,
provide the Federal Reserve with certain
information. Accordingly, the Board is
requesting comment on the parameters
of this information collection request.
d a t e : Comments must be received by
June 17,1985.
ADDRESS: Comments, which should refer
to Docket No. R-0515D should be
addressed to Mr. William W. Wiles.
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
su m m ary :
21135
Streets, N.W., Washington, D.C. 20551,
or delivered to room B-2223 between
8:45 A.M. and 5:15 P.M. Comments
received may be inspected in room B1122 between 8:45 A.M. and 5:15 P.M.,
except as provided in § 261.6(a) of the
Board’s Rules Regarding Availability of
Information, 12 CFR 261.6(a).
A copy of the comments may also be
submitted to the OMB desk officer for
the Board: Mr. Robert Neal, Office of
Information and Regulatory Affairs,
Office of Management and Budget, New
Executive Office Building, Room 3208,
Washington, D.C. 20503.
FOR FURTHER INFORMATION CONTACT:
Edward C. Ettin, Deputy Director (202452-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Division of Research'and Statistics;
Elliott C. McEntee, Associate Director
(202-452-2231), Florence M. Young.
Adviser (202-452-3955), Division of
Federal Reserve Bank Operations:
Joseph R. Alexander, Attorney (202-4522489), Legal Division; or Joy W.
O’Connell, TDD (202-452-3244).
A copy of the request for clearance
(SF 83), supporting statement,
instructions, and other documents that
will be placed into OMB’s public docket
files once the collection is approved
may be requested from the agency
clearance officer, whose name appears
below. Federal Reserve Board Clearance
Officer: Ms. Cynthia Glassman, Division
of Research and Statistics, Board of
Governors of the Federal Reserve
System, Washington, D.C. 20551 (202452-3829).
SUPPLEMENTARY INFORMATION: Over the
past several years, the Board has
become increasingly concerned about
the risks that large-dollar payments •
systems present to depository
institutions using them, to the banking
system, and to other sectors of the
economy. In a related action today
(Docket No. R-0515), the Board issued a
statement of the policy it has formulated
to reduce these risks.
The Board’s policy statement noted
that its concern with risks on largedollar payment systems did not
originally encompass the risks posed by
ACHs because the ACH was regarded
as a small-dollar payments system.
Recently, however, the ACH has been
evolving in such a way that it appears to
be taking on many of the characteristics
of large-dollar systems and
consequently presents many of the same
risks. Accordingly, the Board has
directed its staff to undertake a study of
ACH risk and is requesting comment on
various aspects of such risks. (See
Docket No. R-0515B.)
21136
Federal Register / Vol. 50, No. 99 / Wednesday, May 22, 1983 / Notices
Until the Board’s study of ACH risk is
complete and the Board has formulated
a new policy to deal with such risk, the
Board is modifying its procedures for ex
post monitoring of intra-day credit
exposures to (1) recognize the potential
risks associated with ACH transactions
processed by both the Federal Reserve
and privately operated ACHs, and (2)
inhibit the use of the ACH to circumvent
the Board’s risk reduction policies
adopted today. Specifically, the Board
intends that, for the purpose of ex post
monitoring, gross debits resulting from
the origination of credit transactions
and gross credits resulting from the
receipt of credit transactions will be
posted at the Reserve Bank’s opening of
business on the settlement date, and
gross credits resulting from the
origination of debit transactions and the
gross debits resulting from the receipt of
debit transactions will be posted at the
Reserve Bank’s close of business on the
settlement date.1 This procedure would
result in posting the net of ACH credit
transactions in the ex post monitoring
system at the opening of business on the
settlement date and in posting the net of
ACH debit transactions at the close of
business on the settlement date.
The Board has also determined that
privately operated ACHs will not be
eligible to receive Federal Reserve net
settlement services unless they agree to
provide the Federal Reserve with the
data necessary to include transactions
processed over their networks in the ex
post monitoring system. Under the new
ex post monitoring proceeding, the
information that will be required from
each ACH will be the total dollar value
for each ACH participant of the
following elements: (1) Gross debits
resulting from the origination of credit
transactions, (2) gross credits resulting
from the receipt of credit transactions,
(3) gross credits resulting from the
origination of debit transactions, and (4)
gross debits resulting from the receipt of
debit transactions. Beginning September
30,1985, the information is to be
provided to the Reserve Bank providing
the net settlement service.
The Board requests comment on the
following aspects of this information
collection request:
1This posting procedure ia for ex post monitoring
purposes only and will in no way change when
actual settlement entries are made and when ACH
transactions become final. Generally, funds
provided to receivers of ACH credit transactions
processed by Reserve Banks are treated as final
payments at the opening 0/ business on the
settlement date. Funds provided to originators of
ACH debit transactions processed by the Reserve
Banks are posted on the settlement date, but are
considered provisional payments until the business
day following the settlement date.
1. Which of the following would be
least costly or burdensome:
(a) to provide each of the four data
elements for each participant regardless
of the amount of each element?
(b) to provide for each participant
only the value of the data element when
it exceeds a specified amount, e.g.,
$5,000; $10,000; $25,000; $50,000; $100,000.
2. Given the Board’s objectives, is
there any way in which it could obtain
this information in any less costly or
burdensome manner for the purposes of
ex post monitoring?
In accordance with section 3507 of the
Paperwork Reduction Act of 1980,44
U.S.C. section 3507, and the regulations
issued thereunder, 5 CFR 1320.12, these
information collection requests will be
submitted to the Board for review under
delegated authority from the Office of
Management and Budget after
consideration of the comments received
during the 30 day comment period.
By order of the Board of Governors of the
Federal Reserve System, May 17,1985.
William W. Wiles,
Secretary of the Board.
[FR Doc. 85-12317 Filed 5-21-85; 8:45 am]
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