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Federal R eserve Bank
OF DALLAS
W ILLIAM

H. WALLACE

DALLAS. TEXAS 75222

FIRST V IC E P R E S ID E N T
AND C H IE F O P ER A TIN G O FFIC ER

July 11, 1989
Circular 89-41

TO:

The Daylight Overdraft Coordinator
or the Chief Executive Officer of
the financial institution addressed
SUBJECT
Proposals for Modifying the Payments System Risk Reduction Program
DETAILS

On May 31, 1989, the Board of Governors of the Federal Reserve System
considered a series of proposed modifications to its Payments System Risk
Reduction Program. The Board has decided to seek public comment on the
proposed modifications. Comments will be due on November 17, 1989. Several
policy statements, however, were adopted by the Board and are effective at
once.
Attached is a copy of the Federal Register notice that provides more
detail about the public comment period and the proposals. Also included is a
set of highlights of the proposals that are of most interest to and consistent
with your institution's activities. Beginning in early August, you will also
receive a series of reports that will indicate how the proposals will affect
your institution.
OTHER MATTERS
If you wish to update the name of your daylight overdraft coordinator
on our mailing list, please send a letter containing the name of the new
coordinator to the attention of Robert G. Feil, Manager, Reserve Maintenance
Division, Federal Reserve Bank of Dallas, Station K, Dallas, Texas 75222.
ATTACHMENTS
The Board's press release and the material as published in the
Federal Register are attached.

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

MORE INFORMATION
For more information about the proposals, please contact Paul Elzner
at (214) 698-4439, Virginia Rodriguez at (214) 698-4228, or James Smith at
(214) 651-6140.
Sincerely yours,

FEDERA^RESERVEpressrelease

For immediate release

June 16, 1989

The Federal Reserve Board today issued for public comment proposed
changes to its Large Dollar Payment System Risk policy designed to reduce risk
to the Federal Reserve and the payments system in general.
Comments must be submitted to the Board by November 17, 1989.
The requests for comment are detailed in three Dockets.
Docket No. R-0668 contains proposals that would provide for a fee of
25 basis points, phased in over three years, for consolidated funds and
book-entry average daily Fedwire overdrafts in excess of a deductible of 10
percent of risk-based capital.
To accommodate pricing, the Board is also proposing various changes to
the posting and cap procedures,

including a proposal that will exempt depository

institutions with a low level of overdrafts from filing for a cap or performing
a self-evaluation.

In view of the proposed deductible and cap exemption, the

Board anticipates that a relatively small number of depository institutions
would be subject to either pricing or caps.
Docket No. R -0 6 6 9 requests comment on a proposed policy to include
both book-entry and funds overdrafts in a combined Fedwire overdraft
measurement under the existing cap structure.

Unlike the pricing proposal,

which deals with average Fedwire overdrafts, the caps continue to apply to peak
overdrafts.
(OVER)

A . W n ’E R S A R T
FEDERAL RESERVE S r S T E M

-2The proposal would require depository institutions that frequently or
routinely exceed their Fedwire cap by material amounts solely because of
book-entry transfers to collateralize their total Fedwire exposure.

The proposal

sets guidelines on the types of collateral preferred and how collateral should
be identified and would also establish guidelines for Reserve Banks to implement
the policy.
Docket No. R-0670 requests comment on a proposed risk reduction policy
that would require collateralization of the total amount of Fedwire overdrafts
(funds and book-entry) of foreign banks operating through U.S. agencies and
branches if such overdrafts exceed the banks' Fedwire cap.
The Board's notices are attached.
-

Attachments

0

-

26090

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
collateral and identification of collateral
and also establishes guidelines for the
Reserve Banks to implement the policy.
OATES: Comments must be submitted on
or before November 17,1989.
a d d r e s s e s : Comments, which should
refer to Docket No. R-0669, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551,
Attention: Mr. William W. Wiles,
Secretary; or may be delivered to Room
B-2223 between 8:45 a.m. and 5:00 p.m.
All comments received at the above
address will be included in the public
file and may be inspected at Room B1122 between 8:45 a.m. and 5:15 p.m.
FOR FURTHER INFORMATION CONTACT:

FEDERAL RESERVE SYSTEM
[D o c k et N o. R -0669]
RIN 7100-A A 76

Proposals to Modify the Payments
System Risk Reduction Program;
Book-Entry Securities Transfers
a g e n c y : Board of Governors of the
Federal Reserve System.
a c t i o n : Request for comment.

The Board is requesting
comment on a proposed policy to reduce
the risks to the Federal Reserve arising
from daylight overdrafts associated with
transfers or book-entry securities on
Fedwire. This policy is proposed in
conjunction with the other requests for
comments and policy statements
regarding the Board’s payments system
risk reduction program, published
elsewhere in today's Federal Register.
The proposed policy would require
depository institutions that frequently
exceed their Fedwire caps by material
amounts solely because of book-entry
transfers to collateralize their total
Fedwire overdrafts. The proposal sets
guidelines regarding preferred types of

su m m a ry :

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368): Florence Young, Assistant
Director, Division of Federal Reserve
Bank Operations (202/452-3926); Oliver
I. Ireland, Associate General Counsel
(202/452-3625) or Stephanie Martin,
Attorney (202/452-3198), Legal Division;
for the hearing impaired only.
Telecommunications Device for the
Deaf, Eamestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: This is
one of three proposals regarding
payments system risk that the Board is
issuing for public comment today. The
others concern pricing of overdrafts on
the Federal Reserve's wire transfer
system (“Fedwire”) and related
overdraft measurement and cap
proposals (Docket No. R-0668) as well
as the daylight overdraft policy for U.S.
branches and agencies of foreign banks
(Docket No. R-0670). The Board
encourages all interested parties to
comment on each of these proposals.
The Board urges that in filing comments
on these proposals, commenters prepare
separate letters for each proposal,
identifying the appropriate docket
number on each. This procedure will
facilitate the Board's processing and
analysis of the comments on these
proposals by ensuring that each
comment is quickly brought to the
attention of those responsible for
analyzing each specific proposal. In
addition, the Board encourages entities
that plan to submit identical comments,
such as affiliated institutions within a
holding company, to consolidate their
efforts; the Board will give equal
consideration to one letter signed by a
number of commenters as it would to
numerous identical letters submitted by
those commenters. Comments are due
November 17,1989, and the Board does
not intend to extend the comment period
beyond that date.
In addition to its requests for
comment, the Board is also issuing

today three risk-related policy
statements regarding private deliveryagainst-payment systems (Docket No.
R-0665), offshore clearing and netting
systems (Docket No. R-0666), and
rollovers and continuing contracts
(Docket No. R-0667).
Background
The Board’s current payments system
risk reduction program establishes a
maximum amount of intraday funds
overdrafts that depository institutions
are permitted to incur over both Fedwire
and private large-dollar payments
systems. The maximum, or cap, is a
multiple of a depository institution's
adjusted primary capital and is based
on a self-evaluation of a depository
institution’s creditworthiness, credit
policies, and operational controls. Since
the initiation of the policy in 1986, the
daylight overdrafts on Fedwire
associated with book-entry transfers
have been exempt from the cap limit3,
pending development of procedures to
bring these extensions of credit by
Reserve Banks within the ambit of the
policy. (For additional background on
the Board’s payments system risk
reduction program, see Docket No. R0668, elsewhere in today’s Federal
Register.) For depository institutions
that are major clearers of government
securities, however, such caps would
have to be sizeable to cover the
overdrafts associated with the
operations of an efficient market for U.S.
government securities.1 As described
more fully below, the Board proposes
changes to its payments system risk
reduction program that will more fully
secure the Reserve Banks, while
continuing to provide flexibility to
depository institutions engaged in
clearing U.S. government securities.

Proposed policy regarding book-entry
securities transfers. The Board is
requesting comment on the following
multi-faceted proposal to deal with
book-entry overdrafts:
• To combine book-entry overdrafts
with funds overdrafts to create a
combined Fedwire overdraft within the
existing cap structure;
1 For foreign banks, caps that reflect their world­
wide capital would allow overdrafts of a size that
would be inappropriate given their U.S. assets
subject to U.S. supervision and their U.S. funding
capacity. (For the Board's proposals regarding
foreign banks see Docket No. R-0670, elsewhere in
today’s Federal Register.) In the case of foreign
banks, collateral has been looked to as the means to
secure overdrafts above the cap level and has been
considered in the past as a means of securing bookentry related overdrafts. In reviewing this policy,
the Board has concluded that partial
collateralization of Fedwire overdrafts is not
desirable.

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
• To require depository institutions
that frequently exceed their Fedwire cap
by material amounts solely because of
book-entry transfers to collateralize
their total Fedwire exposure;
• To use discount window collateral
not in use for that purpose held either by
the Reserve Bank or the depository
institution as the first preferred source
of collateral and other assets held by the
depository institution as the second
preferred source of collateral; and
• To use as a final source of
collateral, book-entry securities being
transferred, in the interim marked on the
depository institution’s own books, and,
in the long run, segregated and valued in
real time on the books of the Reserve
Bank.
As previously noted, the Board’s
current payments system risk reduction
program exempts book-entry related
daylight overdrafts from cross-system
net debit caps. In making this decision,
the Board realized that, for the vast
majority of depository institutions,
book-entry overdrafts are small in size
and present limited risk to the Federal
Reserve System. By far, the majority of
book-entry overdrafts are concentrated
in a few clearing banks which serve the
major dealers and brokers in
government securities. Restricting the
overdrafts of these banks could impede
the smooth functioning of the
government securities market.
On two previous occasions the Board
has issued for public comment proposals
that would deal with the risks arising
from book-entry overdrafts by requiring
that such overdrafts be collateralized
(50 FR 21132, May 22,1985, and 51 FR
45048, December 16,1986). On both
occasions, commenters have agreed that
the Federal Reserve should be protected
by collateral but have argued that the
means proposed to do so were too
restrictive and rigid in nature. The
previous proposals focused on the use of
those book-entry securities in transit
that give rise to the overdraft as
collateral rather than on other possible
types of collateral. Commenters argued
that reliance on this collateral would
burden book-entry processing with
complex and costly control processes.
As a result, a collateralization policy
has not been adopted, though the
underlying causes of book-entry
overdrafts have been at least partially
addressed by a limit on transaction size,
increased secrutiny of dealer clearing
practices, and issuance of guidelines for
dealer clearance behavior.
These measures to control book-entry
overdrafts have had some success,
particularly as they relate to the value of
overdrafts per dollar of securities
transferred and to the size and timing of

peak overdrafts at large clearing banks.
Book-entry related overdrafts, however,
still account for 60 percent of all
Fedwire peak intraday overdrafts and
have an average peak value of
approximately $60 billion per day.
Further, these overdrafts continue to be
highly concentrated at a small number
of depository institutions, primarily
clearing banks located in New York
City. The four largest clearing banks,
while reducing their overdrafts for the
reasons noted above, still account for
about two-thirds of all book-entry
related daylight overdrafts. The ten
largest clearing banks account for
approximately 80 percent of all such
overdrafts. The government securities
markets could be seriously disrupted if
these institutions were significantly
restricted in their ability to provide
intraday credit to their customers. On
the other hand, if one of these
institutions were to experience a
problem requiring overnight funding, the
overdrafts involved could present
considerable risk to its Reserve Bank.
Thus, there continues to be a need to
develop a program that will protect the
Federal Reserve by collateralizing large
book-entry overdrafts while at the same
time recognizing the wide disparity
among depository institutions incurring
overdrafts and the types of business
such overdrafts reflect
In response to this need, the Board
has developed a proposal that integrates
book-entry overdrafts with funds
overdrafts for measurement purposes
and provides for flexible treatment of
the relatively few institutions that incur
very large overdrafts. This proposal has
several aspects. First it recognizes that
book-entry overdrafts are similar to
those created by funds transfers in that
both expose the Federal Reserve to the
risk of loss. Thus, there seems to be little
reason to continue the policy of
separating the two types of overdrafts
and creating, at times, misleading the
two types of overdrafts and creating, at
times, misleading overdraft data for
individual depository institutions. For
the vast majority of depository
institutions, combining book-entry and
funds overdrafts under the current oap
structure would have little effect. In the
last quarter of 1988, only six depository
institutions with assets over $1 billion
and 41 with assets under $1 billion
would have experienced increases in
their cap utilization rates of more than
25 percent under such a program. Of
those 47 depository institutions, only 15
would have exceeded their caps as a
result of the inclusion of book-entry
overdrafts. Five large depository
institutions whose total overdrafts
exceeded their caps because of their

26091

book-entry overdrafts are major clearing
banks. The total Fedwire overdrafts of
these depository institutions (all of
which would be collateralized under the
proposal, as discussed below) account
for almost 40 percent of the aggregate
Federal Reserve direct credit risks
resulting from daylight overdrafts. The
ten remaining banks that would exceed
their cap due to book-entry overdrafts
account for only 0.2 percent of total
Fedwire overdrafts.
The Board believes that book-entry
and funds overdrafts should be
combined under the current cap
program. The Board does not believe,
however, that the few depository
institutions severely affected should be
required to reduce overdraft levels, as
they would be if caps had been
exceeded as a result of funds transfers.
Rather, the Board proposes that these
depository institutions be asked to
collateralize the total exposure they
create for Reserve Banks from funds and
book-entry overdrafts. This
collateralization policy will apply only
to these depository institutions that
frequently incur total Fedwire daylight
overdrafts that, solely because of bookentry related overdrafts, are materially
in excess of their Fedwire caps. All
other depository institutions will be
expected to manage their total
overdrafts (funds and book-entry)
within the existing cap system, with the
exception of occasional, modest daylight
overdrafts that are due solely to bookentry transfers.
A second aspect of the Board’s
proposal would provide that collateral
cover the entire daylight overdraft of an
affected depository institution, not just
that created by book-entry overdrafts.
This reflects the reality that, if Federal
Reserve lending at the discount window
is needed, the entire credit must be
collateralized, not just that portion
created by book-entry transfers or that
amount in excess of the depository
institution's cap.
The third aspect of the Board's
proposal involves the type of collateral
to be used to secure the overdraft. The
Board believes that discount window
and other pools of acceptable collateral,
held either by the Reserve Bank or by
the depository institution, should be
relied upon, to the extent possible, to
cover daylight overdrafts. Discount
window collateral and portfolio pools of
assets are more easily identified than
the book-entry securities being
transferred that are eligible for pledge to
secure overdrafts. Such collateral would
cover a large portion of many large
depository institutions’ overdrafts.
Moreover, using existing discount

28092

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1S89 / Notices

window collateral and asset pools as a
primary source of collateral for
overdrafts minimizes the need to rely on
book-entry securities being transferred
as collateral and would help to avoid
potential conflicting claims on these
securities. Some depository institutions
may be able to pledge the securities
being transferred by some customers,
primarily brokers and dealers, to cover
the depository institution’s book-entry
overdrafts, but depending on the
availability of discount window
collateral and asset pools this may not
be necessary in all cases. Any security
agreement between a Reserve Bank and
a depository institution will exclude
collateral that the institution is not
authorized to pledge. Each depository
institution subject to this
collateralization requirement will be
expected to work with its Reserve Bank
to develop the mix of discount window
collateral, other asset pools, and
incoming book-entry securities to be
used as collateral. The resulting program
of collateralization will thus be
customized to the depository institution
so as to accommodate its business
needs as well as to provide adequate
protection to the Reserve Bank.
The final aspect of the Board’s
collateralization proposal concerns the
manner in which rights to collateral in
the form of book-entry securities being
transferred will be conveyed to Reserve
Banks. Ideally, such securities would be
segregated in real-time on Reserve
Banks’ books, valued at market price
less appropriate haircuts, and released
from pledge to the Reserve Banks only
as daylight overdrafts are extinguished.
Such a process would involve extensive
operational changes at both depository
institutions and Reserve Banks,
requiring a long lead time for
development and implementation. Thus,
the Board believes that using incoming
book-entry securities as collateral
should be accomplished in two phases,
interim and long run. In the interim,
those depository institutions that would
find it necessary to repledge customer
securities to Reserve Banks would mark
the repledged collateral on their own
books and not segregate the collateral at
the Reserve Bank. Unfortunately, under
this arrangement, a Reserve Bank could
not assure on a real-time basis that the
total collateral actually pledged, i.e.,
discount window collateral, other asset
pools, and securities being transferred
and marked on the depository
institution's books, would be sufficient
to cover the depository institution’s
overdraft. However, as an interim
measure, the intraday pledge of bookentry securities, recorded on the books

of the overdrafting depository
institution, would reduce the unsecured
credit risk now incurred by the Reserve
Banks.
In the long run. intraday on-line
valuation and segregation capabilities,
similar to the services clearing banks
now provide their customers, will be
available as a result of the Reserve
Banks’ decision to design and develop a
new book-entry operating system. This
effort i3 expected to take threee to five
years to implement and will require
extensive changes by Reserve Banks,
depository institutions, and the major
government securities dealers.
Concurrently, the Department of the
Treasury is in the process of revising its
regulations that govern the legal transfer
of interests in U.S. government
securities. The Reserve Banks will be
working with all interested parties to
assure that the future book-entry
securities system not only provides the
means of efficiently and prudently
securing Fedwire book-entry daylight
overdrafts, but also includes the
capabilities, procedures, and protections
that will serve the future needs of the
clearing banks, the dealer community,
and their customers.
The Board expects the Reserve Banks
to implement the new book-entry
securities program with considerable
flexibility. Reserve Banks are to require
any depository institution that
frequently exceeds its Fedwire cap
because of book-entry overdrafts to
collateralize its entire overdraft
However, the specific application of the
collateral requirement is to be worked
out by the Reserve Bank and the
depository institution on a case-by-case
basis. Reserve Banks will determine the
definition of “frequently and materially"
on a flexible basis, and will work to
perfect an interest in the types of
collateral the depository institution can
most easily provide. It would be
expected that both the type and loan
value of the collateral would be
consistent with each Reserve Bank’s
discount window policies, even if the
collateral used is not routinely taken for
discount window purposes. Finally, if
book-entry securites being transferred
are needed as collateral. Reserve Banks
will work with each depository
institution to determine what internal
processes are needed to ensure the best
rspledge of securities that can be
effected.
To implement this proposal. Reserve
Banks will:
• Work flexibly with each depository
institution affected by the proposal;
• Accept only the type and loan value
of collateral that would be broadly

consistent with the Bank's discount
window policies;
• Develop model agreements for
pledging collateral held in the
possession of Reserve Banks, held for
discount window purposes by the
depository institution, or repiedged by
the institution as a result of customer
book-entry transfer business; and
• Develop a new book-entry system
that will provide the means for
segregation and valuation of book-entry
securities being transferred on Reserve
Bank books.
By order of the Board of Governors of the
Federal Reserve System. June 15,1989.
William W. Wiles,

Secretary o f the Board.
[FR Doc. 89-14640 Filed 6-20-09; 8:45 am]
BILLING CODE 6210-01-*»

(Docket No. R-0666]
RIN 7100-AA78
Interim Policy Statement on Offshore
Netting and Clearing Arrangements
AGENCY: Board

of Governors of the
Federal Reserve System.
a c t i o n : Interim Policy Statement.
The Board is issuing an
interim policy statement to establish
guiding principles for any offshore dollar
clearing or settlement system settling
directly or indirectly on Fedwire or
CHIPS. The Board believes that
adherence to the policy statement will
result in a reduction in risk on largedollar payments systems in the United
States. This interim policy statement is
issued in conjunction with the Board’s
requests for comments on proposals
regarding its payments system risk
reduction program and its policy
statements regarding private deliveryagain&t-payment systems and rollovers
and continuing contracts, published
elsewhere in today’s Federal Register.
EFFECTIVE DATE: June 15,1989.
su m m a ry :

FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368] or Jeffrey C. Marquardt.
Senior Economist Division of
International Finance (202-452-3697); for
the hearing impaired only:
Telecommunications Device for the
Deaf, Eamestine Hill or Dorothea
Thompson (202-452-3544).
SUPPLEMENTARY INFORMATION: The
Board of Governors of the Federal
Reserve System has issued the following
policy statement concerning offshore
netting and clearing arrangements. This
policy statement is being issued in

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
conjunction with the Board's requests
for comments on proposals regarding its
payments system risk reduction program
and its policy statements regarding
private delivery-against-payment
systems and rollovers and continuing
contracts, published elsewhere in
today’s Federal Register.
Interim Policy Statement on Offshore
Dollar Clearing and Netting Systems
For some time, the Board has been
sensitive to the risks associated with the
actual and potential development of
netting and clearing arrangements for
U.S. dollar payments located outside of
the United States. In particular, the
Board has been concerned that the steps
being taken to reduce systemic risk in
U.S. large-dollar payments systems may
themselves induce the further
development of “offshore" dollar
payments systems. These offshore
systems can settle through payments on
the Federal Reserve's wire transfer
system ("Fedwire") or the New York
Clearing House's Clearing House
Interbank Payments System (“CHIPS’’),
but may operate without adequate
procedures for the management of risks
and without any form of official
oversight However, the Board
recognizes that the development of
offshore clearing and netting
arrangements raises issues of concern
which go beyond the immediate
question of payment risks in the U.S.
banking system.
Banks in all countries have been
experiencing strong incentives to reduce
payment flows and credit exposures. As
an apparent consequence, there are an
increasing number of proposed or actual
interbank netting arrangements which
affect an offset or netting of amounts
due between banks, arising not only
from payment instructions but also from
the settlement of foreign exchange and
other financial contracts, on either a
bilateral or multilateral basis. When
located outside of the country of issue of
the currency subject to the netting, these
arrangements have the potential to alter
significantly the structure of the
international interbank clearing and
settlement process.
In response to these developments,
the Group of Experts on Payments
Systems from the G-10 central banks,
meeting at the Bank for International
Settlements (“BIS") in Basle,
Switzerland, studied a variety of
payment and currency netting
arrangements. The BIS Payments
Experts' “Report on Netting Schemes"
primarily addresses the allocation of
credit and liquidity risk in various
netting structures and draws general

conclusions as to whether these risks
are increased or decreased by the
different “institutional forms" of netting.
The Board believes th a t in so doing, the
Report of the Payments Experts provides
a valuable starting point for the
consideration of risk in the international
payment process.
In addition, the Report notes that a
number of broader monetary, financial,
and supervisory policy implications are
associated with the further development
of netting arrangements for interbank
markets. Netting systems for foreign
currency payments and contracts have
the potential to create changes in the
financial character of affected interbank
markets, as well as in the cross-border
relationships between national banking
systems. These changes, in turn, raise
questions about the extent and quality
of central banks' oversight and
supervision of settlements in their
respective currencies, including the
allocation of supervisory responsibility
among various central banks and
national supervisory authorities.
On the basis of this preliminary work,
the Governors of the G-10 central banks
have determined that a further study of
these broader issues be undertaken with
a view toward establishing an
international understanding of the
monetary, financial, and supervisory
issues raised by the development of
offshore or cross-border netting
arrangements. The Board welcomes the
development of a cooperative study of
netting and offshore payments issues by
the G-10 central banks. The Board
hopes that this work can provide the
foundation for a consensus, among
central banks and national supervisory
authorities, on the nature and extent of
supervision appropriate for netting
arrangements as well as on the
monetary and financial policy issues
associated with netting.
At the same time, however, the Board
recognizes that the technological,
m arket and regulatory incentives that
are giving rise to the growth of these
arrangements will continue to operate.
The Board believes that it is important
therefore, to begin to address the
potential policy concerns raised by the
further development of offshore netting
and clearing systems for U.S. dollar
payments and the risks that these
systems may create. This is particularly
the case in light of the significant steps
that have been and are being taken by
the Federal Reserve and the U.S.
banking industry to address payment
risk issues. These include both the
Board’s ongoing payments system risk
reduction program and the efforts of the
New York Clearing House Association

26093

to improve CHIPS participants’
awareness of payment risks, to control
the level of daylight exposures within
CHIPS, and now to adopt settlement
finality procedures.
Offshore clearing of U.S. dollar
payments, for subsequent net settlement
in the United States, may create
transaction and other efficiencies for
participants in such offshore systems. If.
however, the allocation of credit and
liquidity risks associated with the
netting and settlement is not clearly
understood or defined, offshore dollar
clearing arrangements may well
obscure, or even increase, the level of
systemic risk in U.S. large dollar
payments systems as well as in the
international dollar settlement process
generally. The BIS Report notes that this
shifting of risk “can be particularly
troubling where the transaction cost
efficiencies are enjoyed by banks
located in one country, but the credit
and liquidity risks associated with the
settlement of payments resulting from
that netting system may be experienced
in the banking system of another
country.” This is precisely what can
happen when U.S. dollar payments are
netted in systems outside of the United
States and subsequently settled through
CHIPS or Fedwire.
Because of the potential for offshore
dollar clearing systems both to shift risk
to U.S. large-dollar payments systems
and to be used to avoid the Board’s
domestic risk reduction policies, the
Board believes that it is appropriate for
it to provide preliminary guidance on the
framework within which offshore dollar
systems should operate. The Board
recognizes that the question of the
degree of oversight and supervision of
offshore clearing and netting systems
can only be fully addressed on a
cooperative basis among central banks
and national bank supervisory
authorities. However, pending the
conclusion of the study of netting by the
G-10 central banks and the outcome of
any further international consultations,
the Board’s approach to offshore dollar
clearing and netting systems will be
guided by the following general
principles:
1. An offshore dollar clearing or
netting system, which settles directly or
indirectly through CHIPS or Fedwire,
should at a minimum be subject to
oversight or supervision, as a system, by
a relevant central bank or supervisory
authority.
2. The participants should be
responsible for clearly identifying the
operational, liquidity, and credit risks
created within the system and for

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Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices

assuring the prudent management of
these risks.
3. The system should have
arrangements in place which provide for
the finality of settlement obligations and
the practical means to assure the timely
satisfaction of these obligations.
4. The direct or indirect settlement of
the system’s obligations through CHIPS
or Fedwire should be conducted by an
identified settlement agent, in the United
States, so that satisfaction of the
settlement"obligations can be readily
ascertained by the participants, the
Federal Reserve, and other relevant
central banks and supervisory
authorities.
Consistent with the foregoing interim
principles, the Federal Reserve is
prepared to work with the central bank
and/or supervisory authorities of the
country in which an offshore dollar
clearing or netting system is located, on
a cooperative basis, to assure the
continuing adequacy of the system’s
procedures for controlling risk.
The Board believes that these interim
principles are consistent with the
concerns identified by the BIS Payments
Experts Group. The minimal conditions
that they would impose on offshore
clearing and netting systems are similar
to the risk-reduction procedures that
have been established for CHIPS. These
principles should not be regarded as
establishing a policy of either
encouraging or discouraging the
operation of offshore dollar payments
systems. Rather, they represent an
initial attempt by the Board to indicate
the m inim um structural features that the
Board believes are appropriate for
offshore dollar clearing arrangements.
These principles also presume a
cooperative international approach to
the supervision of offshore clearing and
netting arrangements.
By order of the Board of Governors of the
Federal Reserve System, June 15,1989.
William W. Wiles,

Secretary o f the Board.
[FR Doc. 14637 Filed 6-20-89; 8:45 amj
BILLING CODE 6210-01-M

[D o c k et No. R -0668]
RIN 7100-A A 76

Proposals To Modify the Payments
System Risk Reduction Program;
Pricing, Overdraft Measurement, and
Caps
AGENCY: Board

of Governors of the
Federal Reserve System.
ACTION: Request for comment.
The Board is requesting
comment on proposed changes to its

SUMMARY:

payments system risk reduction
program. The proposals would provide
for a fee of 25 basis points, phased in
over three years, for average daily
consolidated funds and book-entry
Fedwire overdrafts in excess of a
deductible of 10 percent of risk-based
capital. To accommodate pricing and
reduce the administrative burden to
depository institutions, the Board is also
proposing various changes to the
procedures used for measuring daylight
overdrafts and the current cap structure.
These proposals are being issued in
conjunction with the other requests for
comment and policy statements
regarding the payments system risk
reduction program published elsewhere
in today’s Federal Register.
d a t e s : Comments must be submitted on
or before November 17,1989.
ADDRESSES: Comments, which should
refer to Docket No. R-0668, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW., Washington, DC 20551,
Attention: Mr. William W. Wiles,
Secretary; or may be delivered to Room
B-2223 between 8:45 a.m. and 5:00 p.m.
All comments received at the above
address will be included in the public
file and may be inspected at Room B1122 between 8:45 a.m. and 5:15 p.m.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368); Bruce Summers, Associate
Director (202/452-2231) or Florence
Young, Assistant Director (202/4523926), Division of Federal Reserve Bank
Operations^ Oliver I. Ireland, Associate
General Counsel (202/452-3625) or
Stephanie Martin, Attorney (202/4523198), Legal Division; for the hearing
impaired only: Telecommunications
Device for the Deaf, Eamestine Hill or
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: This is
one of three proposals regarding
payments system risk that the Board is
issuing for public comment today. The
others concern daylight overdrafts
related to book-entry securities transfers
(Docket No. R-0669) and the daylight
overdraft policy for foreign banks with
U.S. branches and agencies (Docket No.
R-0670). The Board encourages all
interested parties to comment on each of
these proposals. The Board urges that, in
filing comments on these proposals,
commenters prepare separate letters for
each proposal, identifying the
appropriate docket number on each.
This procedure will facilitate the Board's
processing and analysis of the
comments on these proposals by
ensuring that each comment is quickly
brought to the attention of those

responsible for analyzing each specific
proposal. In addition, the Board
encourages entities that plan to submit
identical comments, such as affiliated
institutions within a holding company,
to consolidate their efforts; the Board
will give equal consideration to one
letter signed by a number of commenters
as it would to numerous identical letters
submitted by those commenters.
Comments are due November 17,1939,
and the Board does not intend to extend
the comment period beyond that date.
In addition to its requests for
comment, the Board is also issuing
today three risk-related policy
statements regarding private deliveryagainst-payment systems (Docket No.
R-0665), offshore clearing and netting
systems (Docket No. R-0G66), and
rollovers and continuing contracts
(Docket No. R-0667).
Background
The Board has been concerned for
some time about the risks associated
with large-dollar payments systems. The
Federal Reserve Banks would face
direct risks of loss in the event that
Fedwire users are unable to cover their
intraday overdrafts by the end of the
business day. Moreover, on a private
large-dollar network that permits its
participants to transmit payment
messages throughout the day with
settlement of net positions at the end of
the day, the inability or unwillingness of
a participant to settle its net debit
position would expose the banking
system to systemic risk. Systemic risk
occurs when institutions unable to settle
on private large-dollar payments
networks cause their creditors on those
networks, in turn, to be unable to settle
their own commitments. As a result,
serious repercussions could spread to
other participants in the network, to
other depository institutions not
participating in the private network, and
to the nonfinancial economy generally.
In such circumstances, the Federal
Reserve would bear an indirect risk if it
sought to avoid or limit this systemic
risk. Finally, on both private wire
systems or Fedwire, depository
institutions will face risk by permitting
their customers, including other
depository institutions, to make
transfers against uncollected or
insufficient balances in anticipation of
their coverage before the end of the day.
In April 1985, the Board adopted a
policy to reduce the risks that largedollar payments systems, including
Fedwire, present to the Federal Reserve,
to the depository institutions using them,
to the banking system, and to other
sectors of the economy (50 FR 21120,

.

Federal Register / Vol. 54, No. 118 / W ednesday, June 21 1989 / Notices
May 22,1985). This policy, in effect
established a maximum amount of
intraday funds overdrafts, or intraday
credit extensions, that depository
institutions and other entitites. such as
Edge corporations and foreign banks
with U.S. branches and agencies
(hereafter “depository institutions”) are
permitted to incur over both Fedwire
and private large-dollar payments
systems. The maximum, or cap, is a
multiple of a depository institution's
adjusted primary capital and is based
on the depository institution’s selfevaluation of its own creditworthiness,
credit policies, and operational controls.
The guidelines for performing the selfevaluation were established by the
Board and the documentation
supporting each depository institution's
rating is reviewed by the institution’s
primary supervisory agency examiners.
In July 1967, the Board adopted a
number of modifications to its daylight
overdraft policy, including a two-step, 25
percent reduction in the cross-system
net debit caps, thus reducing the
maximum daylight overdraft permitted
to an individual depository institution
(52 FR 29255, August 6 , 1987).
The Board's policy was designed to be
binding only on depository institutions
with the largest overdrafts, and, even
after the reduction of caps that waseffective in 1988, the use of intraday
credit by virtually all depository
institutions remained generally
unconstrained. Only a very small
number of the depository institutions
required to file a cap incur overdrafts
that amount to as much as 80 percent of
their caps. However, overdraft levels
have remained relatively stable, and
overdrafts as a percentage of the dollars
transferred over Fedwire have declined.
Moreover, management of individual
depository institutions and the Board's
Large Dollar Payments System Advisory
Group have indicated that as a result of
the Board's policy, senior managers of
depositary institutuians have focused on
intraday credit risks. Reportedly, they
have taken steps to eliminate many of
the payment practices that had
presented risk to depository institutions,
the Federal Reserve, and the banking
and payments systems in general.
In 1987, the Board's Payments System
Policy Committee requested two studies
to assist in its consideration of future
payments system risk reduction policies.
The Board's Large Dollar Payments
System Advisory Group was specifically
asked to propose policy
recommendations, and a Federal
Reserve System staff task force was
asked to review options but to make no
policy recommendations. Both reports

were published by the Board in August
1988.1
To test the impact of pricing, posting
rules, and cap changes, the Board used
data from a survey for the two weeks
ending February 10,1988. This survey
provided detailed transactions data for
all depository institutions. Cap multiples
in force in 1989 were applied to survey
cap categories. The normal data flow for
monitoring daylight overdrafts is
reported only for depository institutions
incurring overdrafts under present
daylight overdraft measurement
procedures and includes only summary
level information on transactions
processed. During the comment period,
the Reserve Banks will provide
individual depository institutions with
information on their own overdraft
profiles under both the current and
proposed posting procedures as well as
information on any fees that would be
assessed to that each depository
institution can determine for itself how
the proposals would affect its position.
After reviewing the Advisory Group’s
and the staff’s reports as well as the
survey data, the Board developed a
series of proposals to reduce the
aggregate level of payments system risk
further. These proposals assume private
sector systemic risk will be reduced by
the implementation of settlement finality
on the New York Clearing House's
Clearing House Interbank Payments
System ("CHIPS’*) network and that
other sources of systemic risk will be
controlled by policy statements
regarding private-sector deliveryagainst-payment systems and offshore
netting and clearing arrangements (see
Docket Nos. R-0685 and R-0686,
elsewhere in today’s Federal Register).
Against this background, the Board’s
proposals seek to shift a higher
proportion of risk to the private sector,
reducing the share of such risk borne by
Reserve Banks. Presented in this docket
are proposals to establish a program for
pricing the daily average value of all
Fedwire overdrafts in excess of a
deductible, to facilitate pricing by
revising the defintion and measurement
of daylight overdrafts, to exempt from
caps those depository institutions with
relatively small overdrafts, and to
exclude from the cross-system net debit
1A Strategic Phm fo r Managing R isk in the
Paym entt System : Report o f the Large Dollar
Payments System A dvisory Group to die Payments
System Policy Comm ittee o f the Federal Reserve
System (Washington. 1988) and Controlling R isk in
the Paym ents System ; Report o f the Task Force on
Controlling Payments System R isk to the Payments
System Policy Comm ittee o f the Federal Reserve
System (Washington, U88) are available from the
Secretary of the Board at the address noted above or
from the Daylight Overdraft Liaison Officer of each
Federal Reserve Bank.

26095

cap net debits on CHIPS after settlement
finality is adopted on CHIPS.
Other proposals issued for comment
today would apply the existing cap
structure to all overdrafts, including
Fedwire book-entry overdrafts, and
would require collateral for all Fedwire
overdrafts for (1) any depository
institution whose total Fedwire
overdrafts frequently and materially
exceed its Fedwire cap solely because
of book-entry overdrafts and (2) any
foreign bank with a U.S. agency or
branch whose Fedwire overdrafts
exceed its cap multiple times its U.S.
capital equivalency. (See Docket Nos.
R-0669 and R-0670, elsewhere in today’s
Federal Register.)
As indicated above, all of these
proposals should be evaluated in the
context of settlement finality on CHIPS
and the adoption of systemic riskreducing policies on private-sector
delivery-against-payment systems for
securities activity, netting arrangements,
and offshore dollar clearing systems.
Moreover, proposed revisions in the
rules on finality for automated clearing
house (“ACH”) transactions processed
by the Reserve Banks should also be
considered (see the Board’s request for
comment on ACH finality, 54 FR 8822,
March 2,1989). Proposals regarding
daylight overdraft pricing, posting, and
caps are discussed in detail below.
Pricing Fedwire Overdrafts
The Board is'requesting public
comment on a change in its payments
system risk reduction policy that would
provide for a fee of 25 basis points,
phased in over three years in increments
of 10,10, and 5 basis points, for average
daily consolidated funds and book-entry
Fedwire overdrafts in excess of a
deductible of 10 percent of risk-based
capital. Explicit fees or charges for
Fedwire daylight credit are expected to
create incentives for depository
institutions to reduce Fedwire
overdrafts, thereby reducing direct
Federal Reserve risk and contributing to
economic efficiency. The Board expects
that payments system participants as a
result of the market incentives
established by the combination of
Fedwire daylight overdraft pricing and
settlement finality on CHIPS, will lower
the level and more efficiently allocate
the distribution of Fedwire and private
sector intraday credit flows.2
* The Board believe* that settlement finality and
other risk-oonsti»inmg steps on existing and
evolving U.S. and offshore clearing and settlement
systems will partially offset pricing-induced shifts
of payments away from Fedwire and will redace
overall systemic risk. See Docket Nos. R-06B5 and
R-0660 elsewhere in today's Federal Register.

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Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices

Application o f Pricing to Total
Fedwire Overdrafts. The Board is
proposing that pricing apply to bookentry related overdrafts as well as funds
overdrafts. The Board is requesting
comment in a separate docket on the
inclusion of book-entry securities in the
total measure of overdrafts (see Docket
No. R-0669). As in the case of funds
overdrafts, pricing book-depository
institutions to reduce these overdrafts.
Moreover, failing to price book-entry
overdrafts while pricing funds
overdrafts would create incentives to
avoid charges for funds overdrafts
through manipulation of book-entry
transfers. For example, depository
institutions in funds overdraft could
deliver book-entry securities to. another
depository institution in order to receive
a credit from the Federal Reserve to
offset their priced funds overdrafts. If
book-entry overdrafts were not priced,
the receiver of the securities would incur
a book-entry overdraft that is free (but,
perhaps, requiring the posting of
collateral with the Reserve Bank) and
could charge the sender of the securities
any rate below the Federal Reserve
charge on funds overdrafts. The loan
could be secured by the securities being
transferred.
Pricing of book-entry overdrafts is
unlikely to disrupt the U.S. government
securities market, to constrain open
market operations, or to increase the
cost of Treasury financing. Each 10 basis
points of overdraft charge amounts to
only $2.70 per million per day, and, on
average, each dollar of book-entry
overdrafts is associated with six or
seven dollars of transfers. The increase
in the cost of the average transfer of less
than $10 million is thus consideably
smaller than the traditional minimum
market bid-ask spread for Treasury
securities, which is l/64th of a
percentage point or about $165 per
million dollars transferred.
Average Overdrafts. The Board is
proposing that pricing be applied to the
average level of total Fedwire
overdrafts. Overdrafts would be
measured at equally-spaced intervals
throughout the day, and the average
overdraft would be the sum of all of the
overdraft measurements divided by the
number of intervals.8 Average overdraft
5 Currently, overdraft values are measured at 15minute intervals for both average and peak
overdrafts. Federal Reserve staff is reviewing the
feasibility of measuring overdrafts at shorter
intervals (e.g„ by second or minute) and whether
the averaging period should be fixed (e.g., the
“normal" hour* over which Fedwire is open) or the
actual period Fedwire is open at each Reserve Bank.

pricing more closely reflects the Federal
Reserve credit actually used during the
day by individual depository
institutions. Average overdraft pricing is
also likely to induce depository
institutions to focus on managing their
overdraft positions more or less
continuously over the day rather than
concentrating on only the time periods
when overdrafts are at or close to their
peak. Average overdraft pricing also
permits more flexibility to the
depository institution in managing
overdraft levels, a particularly important
advantage if book-entry related
overdrafts are priced because the
overdrafting depository institution will
not be able to control when securities
are delivered and when such overdrafts
occur with the same precision as is
possible with funds overdrafts.
The Board considered but decided
against pricing peak rather than average
overdrafts. Peak pricing would levy a
fee on the Reserve Banks’ maximum
exposure and would also be consistent
with the debit caps applied to peak
overdrafts. Peak pricing, however,
would be unlikely to provide incentives
for depository institutions to reduce
their overdraft levels once the peak has
been reached, depending on the
dynamics of other depository
institutions’ responses to pricing. In
addition, if fees were assessed only for
the peak overdraft, the duration of the
Reserve Banks’ exposure would not be
considered.
The Board believes that average
overdraft pricing is, on balance, superior
to peak overdraft pricing and proposes
that the Reserve Banks assess daily fees
for average total intraday Fedwire
overdrafts. Daily and two-week average
debit caps would continue to apply to
peak intraday values of such overdrafts
in excess of $10 million and 20 percent
of capital (as discussed below).
Deductible. The Board proposes that
the amount of overdrafts subject to
pricing be decreased by a deductible of
10 percent of risk-based capital. The
deductible amount would be subtracted
from the average intraday total Fedwire
overdraft (funds and book-entry) each
day to determine the amount of such
overdrafts subject to pricing. An
important purpose of the deductible
would be to provide a certain amount of
free Fedwire overdrafts to offset,
partially or in full, those overdrafts
incurred due to circumstances beyond
the control of the depository institution.
The deductible would provide some
liquidity to the payments mechanism
and would address the inevitable lack of
synchronization of payments in a
complex economy.

The deductible would also offset, in
part, the Fedwire charge for overdrafts
that may be beyond the control of the
depository institution because of a
computer problem at a Reserve Bank.
The downtime associated with such
problems can artificially affect the
overdraft of a depository institution as
payments cannot be sent or received.
Reserve Bank operating problems affect
the distribution of daylight overdrafts
among institutions, benefitting some and
harming others. A fixed deductible, as
proposed, provided each day to address
unpredictable downtime would likely
overcompensate on some days and
undercompensate on others. Depository
institutions benefitting from a deductible
on some days may have to absorb any
downtime effects on other days for
which a charge might be levied. The
Board believes that, on average,
depository institutions would not be
unfairly charged and that Reserve Banks
could make adjustments in exceptional
circumstances. The Board proposes that
Reserve Banks be permitted to adjust
the amount of overdrafts subject to
pricing for individual depository
institutions on a ad hoc basis to deal
with unusual circumstances, such as
extended operational difficulties. In
general, however, the Reserve Banks
should assume that the deductible is
sufficient to offset all but very lengthy
operating outages at Reserve Banks and
other unusual events.
The deductible would also offset some
of the impact on individual depository
institutions of the loss of opening-of-day
non-wire net credits under the new
posting rules (see discussion below). For
example, a deductibe could offset the
end-of-day Federal Reserve recognition
of credits for checks and commerical
ACH, the proceeds of which depository
institutions may be required to make
available to their customers at the
opening of the business day according to
the provisions of Regulation CC (12 CFR
Part 229) or the guidelines of the
National Automated Clearing House
Association (“NACHA").
Regulation CC requires depository
institutions to make the proceeds of
certain categories of checks deposited
by 2:00 p.m. available to their customers
for withdrawal at the opening of
business on the business day following
the banking day of deposit. These “nextday availability” checks include
Treasury checks, Postal money orders,
checks drawn on Federal Reserve Banks
and Federal Home Loan Banks,
cashier’s, teller’s, and certified checks,
and state and local government checks.
Similarly, NACHA guidelines encourage
depository institutions to make ACH

Federal- Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
credit transactions available to
consumers for withdrawal by opening of
business on the settlement day.
Under the posting proposal, discussed
below, depository institutions generally
would not receive credit for overdraft
measurement pruposes for "next-day
availability” checks or for commercial
ACH credit transactions by the time that
the funds should be available to their
customers for withdrawal under
Regulation CC and NACHA guidelines.
Consequently, these depository
institutions may incur an overdraft. The
Board believes that these types of
overdrafts would be rare, in view of the
fact that most of the withdrawals of the
proceeds of “next-day availability”
checks and commercial ACH credits are
likely to be by check or by cash
withdrawal. Check withdrawals would
not affect a depository institution’s
intraday balance because the debits for
the check presentments would be
recognized after the close of Fedwire.
Furthermore, cash withdrawls would not
affect a depository institution's intraday
reserve balance. The proposal would*
cause depository institutions to incur
overdraft costs for these checks and
ACH credits only if the proceeds were
wired out on the settlement day. For
most depository institutions, these
overdraft costs would be covered by the
deductible.
Another reason for a deductible is to
exclude from pricing the large number of
mainly smaller depository institutions
that incur de minimis overdrafts. Among
the over 5,000 depository institutions
that incurred overdrafts on at least one
day during the final quarter of 1988
(measured by the current posting rules),
over 90 percent of total Fedwire (funds
and book-entry) average overdrafts
were incurred by the largest 50
overdrafters. The Board believes that
the burden of imposing charges on the
4,500 to 5,000 depository institutions that
present ony 1 or 2 percent of the risk
exceeds the benefit of reducing this
small amount of risk.
Depository institutions that choose to
access Fedwire through multiple
accounts would be required to allocate
their deductible in the same proportion
as the allocation of their caps. One
administering Reserve Bank would still
have overall risk management
responsibility, even though each
Reserve Bank would administer the
charges for each overdrafting account.
The Board considered the impact of
various deductibles (based on capital)
during the test period. If there were no
deductible, all 5,040 depository
institutions incurring overdrafts in the
test period would have been subject to
pricing on their total average overdrafts.

which amount to $37.3 billion. (During
the same period, these depository
institutions’ daily peak overdrafts
amounted to $120 billion.) A deductible
of 10 percent would exempt 4,821
depository institutions from pricing, and
only 219 would have been subject to
pricing. These 219 depository
institutions would have had $34.0 billion
of average overdrafts but would have
paid fees on only $25.5 billion of
overdrafts, the difference being
overdrafts at depository institutions
subject to pricing that would be
exempted by the deductible. The 4,821
totally exempt depository institutions
would have incurred $3.3 billion of
average overdrafts.
As the deductible rises, the number of
depository institutions subject to pricing
falls as do both the aggregate overdrafts
at depository institutions subject to
pricing and the amount of overdrafts
actually priced. At a 20 percent
deductible, for example, only 118
depository institutions would have been
subject to pricing in the test period;
these depository institutions would have
accounted for almost 80 percent of all
average overdrafts, but fees would have
been assessed on only 50 percent of all
average overdrafts.
The pricing deductible would be
independent and separate from the test
for exempotion from filing for a cap
(discussed below). The cap exemption
deals with intraday peak..values and
determines which depository
institutions would be exempt from filing
for a Fedwire net debit cap. The pricing
deductible determines the amount of
daily average intraday overdrafts
subject to fees (if any) by Reserve
Banks. A depository institution could be
subject to a cap and operate close to its
cap level for part of the day and not be
subject to fees, depending on its
intraday overdraft pattern. Similarly, a
depository institution could conceivably
be exempt from filing for a cap, but be
subject to pricing because it had
overdrafts for most of the day above the
10-percent-of-capital pricing deductible,
even though its peak overdraft remained
below the 20 percent of capital
exemption-from-filing-for-cap level.
The Board specifically requests
comment on whether deductible
schemes other than the one proposed
would be appropriate. In addition, the
Board requests comment on whether
there are any additional actions that
could be taken by Reserve Banks or
depository institutions to alleviate the
problems caused by overdrafts beyond
the control of depository institutions.
For example, would it be feasible to
accelerate lthe posting time, for
overdraft measurement purposes, of

26097

those "next-day availability” checks
that bear unique routing numbers, such
as Treasury, Federal Reserve Bank, and
Federal Home Loan Bank checks and
U.S. Postal Service money orders?
Size o f Charge. The Board is
proposing an initial Fedwire overdraft
charge of 25 basis points (annual rate) to
be phased-in over three years, with the
effective initial date 12 to 18 months
after the Board’s final adoption of a
program to price Fedwire overdrafts.'*
The Board intends to implement pricing
three to six months after new
procedures for measuring daylight
overdrafts are effective (see below). In
setting the level of the Federal Reserve
charge for priced Fedwire overdrafts,
the Board seeks a price that is high
enough to induce risk-reducing changes
by depository institutions and their
customers. The price should not be so
high, however, as to slow payments
flows or drastically increase the public’s
cost of making payments.
According to data collected during the
test period, a fee of 25 basis points for
daily average Fedwire overdrafts in
excess of a 10 percent of capital
deductible, before any response on the
part of depository institutions to reduce
their overdrafts, would result in the 15
largest overdrafters paying almost 90
percent of the total charges. (Sixty
percent of the fees would have been
levied against the four largest bookentry securities clearing banks.) By the
100th largest overdrafter, the annual fee
would be less than $3,000 and by the
150th it would be about $400.
The Fedwire overdraft price will be
applied only on business days; the
actual annual cost to a depository
institution of an explicit price is only a
fraction of the annual percentage rate.
The number of husiness days varies
each year, but the fraction is
approximately 251/365, or about 30
percent lower than an annual rate that
levies' fees for all calendar days. The
actual rate each day is 1/365 of the
annual rate fee. The Board requests
comment on the level of the proposed
fee as well as on the three-step phase-in
schedule.
Defining Overdrafts and Application of
Caps

Measuring Overdrafts
The Board’s daylight overdraft pricing
proposal would give funds an intraday
value and, therefore, would require
precision in measuring intraday
4 The Federal Reserve will retain its current
penalty for overnight overdrafts of 10 percent or the
federal funds rate plus 2 percentage points,
whichever is higher.

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Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / N otices

overdrafts. Such precision requires
fixing the time at which all payment
transactions by Reserve Banks are
recognized to have occurred for daylight
overdraft measurement purposes. The
Board proposes that, for purposes of
measuring daylight overdrafts, a
depository institution's opening balance
at the Reserve Bank be adjusted by (1)
credits for U.S. Treasury and
government agency book-entry
securities interest payments; (2) credits
for U.S. Treasury and government
agency book-entry securities redemption
proceeds; (3) credits for U.S. Treasury
ACH recurring credit transactions; and
(4) debits for new issues of U.S.
Treasury book-entry securities. During
the day, this adjusted opening balance
would be adjusted for Fedwire funds
and book-entry securities transactions
as they occur. At 23)0 pan. local time of
the Reserve Bank, Treasury direct and
special direct investment credits would
be reflected. After the close of Fedwire,
all non-wire and commercial ACH
transactions would be included,
regardless of whether the net of those
transactions were a credit or A debit.*
This overdraft measurement proposal
would apply equally to all depository
institutions with Reserve Bank accounts,
including U.S. chartered banks, foreign
banks with U.S. agencies and branches,
thrifts, bankers' banks, limited purpose
trust companies, nonbank banks,• and
any other such entities.
The precise measurement of daylight
overdrafts requires a set of rules to
determine when during the day debits
and credits to a depository institution’s
account at a Reserve Bank are
determined to have occurred "Posting"
for the purpose of measuring daylight
overdrafts is not necessarily
synonymous with the time at which
payments become final or the time at
which the current rights to receive funds
accrue, although finality of payment is
one of the criteria the Board used to
develop the daylight overdraft
measurement rules. The actual timing of
entering transactions on the Reserve
Banks’ books varies depending on
operational procedures. Fedwire
5 Generally, credit for, and repayment of, discount
window loans for healthy depository institution*
would be included among the non-wire transactions
posted for daylight overdraft measurement purposes
ai the end of the day. This treatment would assure
that the discount window loans were not used to
fund
daylight overdrafters and would
make the discount rate a price for a 24-hour credit
and, hence, more relevant for monetary policy
purposes ill conjunction with a 24-hour federal
funds rate.
‘ The posting changes would not affect the
overdraft restrictions forno&bank banks
established by the Competitive Equality Banking
Act of 1987.

transactions, whether funds or bookentry transfers, are debited or credited
as they are processed and are
considered to be final payments when
the receiver of funds is advised by the
Reserve Bank of the credit Rules
governing non-wire payments
transafers, however, generally are
provisional for some period of time and
refer to a particular “day” as the
measuring unit of availability, without
indicating the time during the day at
which payment participants are either
entitled to the use of the funds received
or have been relieved of their payments
obligation to the Federal Reserve.
Even if the Federal Reserve were not
contemplating pricing Fedwire
overdrafts, it would be desirable to
clarify the time at which the debtorcreditor relationship between a
depository institution and its Reserve
Bank changes as the result of the
recognition of a payment. Independent
of overdraft pricing or cap policies in the
United States, technology and the
globalization of financial instruments
and transactions are increasingly
causing money, securities, and capital
markets to operate on a 24-hour basis. In
such an environment, trading in dollar
instruments and dollar payments in one
part of the world occurs while US.
markets and Reserve Banks are closed
and vice versa. In a 24-hour global
m arket depository institutions in the
United States and abroad need to know
more precisely the time of day that
dollar payments are recognized to have
occurred by the Federal Reserve. Even if
such global developmetns were not in
progress, a clarificaiton would permit
depository institutions to ascertain their
intraday rights and responsibilities visa-vis Reserve Banks and to evaluate
their risks accordingly.
Under the current deiiiution of
daylight overdrafts, all non-ACH, nonwire transactions are netted at the end
of the banking day; if the net is a
crew dit and if that net is a d ebit the
debit is deducted from the end-of-day
position. The net of ail ACH
transactions is posted as if the
transactions occurred at the opening of
business, regardless of whether the net
is a debit or a credit. This ex post
measure thus allows a depository
institution to use all of its non-wire net
credits to offset any wire debits during
the day, but postpones the need to cover
non-wire, non-ACH net debits until the
close of the day.
The current transitional, system of
posting debits and credits for daylight
overdraft measurement purposes gives
the benefit of the doubt to depository
institutions. Two drawbacks of this

system are that it creates intraday float
in the measurement of daylight
overdrafts in that depository institutions
with net credits can use them before
those with net debits are charged and
many depository institutions are unable
to monitor their overdraft levels
effectively during the banking day.
Because the Board’s payments system
risk reduction program is reaching
maturity, the Board believes that the
initial transaction posting procedures
must be modified now.
In developing a proposal to establish
the time at which non-wire transactions
would be recognized for daylight
overdraft measurement purposes (herein
after referred to as "posting changes ’),
the Board w as guided by a desire to
eliminate intraday float and to keep the
posting rules simple and easy to use.
The Board believes that measurement
procedures shoud not provide intraday
float to payments system participants.
Thus, the processing of a payment
transaction should not result in a
reduction of one depository institution’s
measured overdraft (or an increase in its
credit balance) before another
depository institution’s overdraft is
increased (or its credit balance
reduced).
The principle of eliminating aggregate
Federal Reserve intraday float is
independent of the credit risk arising
from the transactions. For example,
there may be only minimal Federal
Reserve risk resulting from granting
early-in-the-day credit for checks
collected through the Federal Reserve,
even though the Reserve Banks do not
charge paying institutions until late on
the presentment day. However, by
providing early-in-the-day credit to the
collecting institution without an
offsetting debit to the paying institution,
the Federal Reserve would b e permitting
the collecting institution to use Federal
Reserve credit without regard to that
depository institution’s cap, deductible,
or any Reserve Bank fee. Furthermore, if
explicit fees for overdrafts are adopted,
and if the timing of debits and credits
for each transaction were not nearly
simultaneous at Reserve Banks,
depository institutions would have an
incentive to create float by writing each
other checks to create free overdraft
capacity. As intraday credit begins to
have value, eiiher through pricing or the
evolution to 24-hour global markets,
intraday Federal Reserve float becomes
a taxpayer subsidy. Similar concerns
were one reason that the Congress
mandated, in Section 11A of the Federal
Reserve Act, that Federal Reserve Banks
should charge for float

Federal Register / Vol. 54, No. 118 /' W ednesday, June 21, 1989 / Notices
In addition, the new daylight
overdraft measure should be simple to
understand and to use in controlling
intraday overdrafts. If depository
institutions are to be charged a fee for
incurring a Fedwire overdraft, the
procedures for measuring overdrafts
should facilitate their ability to control
their positions and determine their
intraday balances accurately. Measures
that would include transactions
retroactively after the transaction day is
complete do not meet this test.7
Treasury transactions. The proposed
opening-of-day credits and debits for
certain U.S. Treasury transactions
reflect Treasury obligations and tha
mechanics of the book-entry system.
Interest and redemption payments on
the debt are due at the opening of
business on the payment date. Similarly,
institutions purchasing Treasury
securities receive title to the securities
at the opening of business on the
settlement date and should pay for the
securities upon receipt
Treasury Department regulations for
recurring ACH payments require
depository institutions to make federal
government direct deposit ACH
payments available to consumers at the
opening of business on the payment
date, and the Board has provided for
such credits to depository institutions in
the proposal. Reserve Banks would
modify their accounting systems to
separate Treasury and commercial ACH
credit transactions. Because the
Treasury’s account will be debited for
ACH credit transactions at the same
time that depository institutions will be
credited for those transactions, this
posting rule will not create intraday
float. Treasury ACH payments can be
distinguished from certain next-day
availability checks, discussed'above,
which are also required by regulation to
be made available for withdrawal by
the opening of business. Unlike the
Treasury ACH payments, posting the
next-day availability check credits at
the opening of the day would create
intraday float because the checks will
not have been presented to the paying
institutions the opening of the day.
Under the Treasury’s direct and
special direct investment programs,
excess balances are placed with
designated depositories that pay interest
on the deposits to the Treasury from the
day of receipt until the day of
withdrawal. Because depository
institutions must pay interest from the
1 The Large Dollar Payment* System Advisory
Group noted that the inability of depository
institution* to control their overdraft position
accurately would be inconsistent with a program of
either binding caps or overdraft pricing.

transfer date, they should receive credit
for the transafer early enough to be able
to invest the funds that day without
incurring an overdraft. Some
depositories are advised of direct
investments the day before the deposits
are received, and others are advised on
the day of deposit. While it might be
feasible to grant credit for deposits
known in advance at the opening of
business, it is generally not possible to
grant credit for same-day deposits until
2:00 p.m. local time. Because one posting
time would be less complex and should
not disadvantage depository
institutions, the Board believes the
credits for Treasury direct and special
direct investments should be posted at
2:00 p.m. local time of the Reserve Bank.
The repayment of these investments is
effected by Treasury calls, and the
Board proposes that debits for calls be
posted after the close of Fedwire on the
day of the Treasury call. To ensure that
no intraday float is created, the
Treasury’s account would be debited or
credited for book-entry, ACH, and direct
investment transactions at the same
time that depository institutions receive
the corresponding debit and credit
entries in their accounts.
Other Non-wire Transactions. For
purposes of measuring daylight
overdrafts, the Board proposes that all
other non-wire and commercial ACH
transactions be posted simultaneously,
which eliminates the creation of
intraday float, after the close of
Fedwire. In addition to eliminating float
posting non-wire transactions at the end
of the day would assure that the
depository institutions on either side of
a transaction would have complete
information as to the amount and
account to be debited or credited and
that depository institutions would not
incur daylight overdrafts subject to
charges and caps that are due to debits
that are only provisional and may not be
binding if the institution fails.
The Board considered and rejected
various other arguments for posting nonwire debits and credits earlier in the
day. For example, although commercial
ACH credit transactions are generally
known in advance of settlement day and
both the debit and credit for these
transfers could be posted at the opening
of business, the Board did not propose
such a rule, in part because the openingof-day debit might disadvantage
originators that no longer obtain
opening-of-day net credit for other nonACH, non-wire transfers. Moreover,
consumers typically withdraw cash or
write checks on the proceeds of
commercial ACH credit payments on
settlement day, which, unlike funds

260S9

tran sfers, w ould n ot affect a d epository
in stitu tio n 's in tra d ay reserv e b alan ce.
Thus, crediting receiving depository
institu tio ns at the close of Fedw ire
should n ot create significant costs.

Posting check transactions to the
collecting and paying depositor}'
institutions' accounts after the close of
Fedwire on the availability date is
consistent with the elimination of
intraday float and providing banks with
information to enable them to manage
their accounts. Although Reserve Banks
present most checks to paying
depository institutions in the morning,
they present some checks as late as 2.-00
p.m. for same-day paym ent If an earlier
posting time were established, paying
depository institutions in the western
time zones (Alaska, Hawaii, and the
West Coast) might be debited before
checks were presented to them and,
therefore, before they were aware of the
amount of the debit. Further, to avoid
intraday float, if check debits and
credits were to be recorded earlier than
after the close of Fedwire, the time
established must be a standard time
nationwide. If the timing of the credits
and debits were based on the local time
of the Reserve Bank holding the
depository institution’s account float
would be created due to time zone
differences. In addition, it is not
operationally feasible to credit some
checks, i.e., those that have been
presented to paying depository
institutions, earlier than other checks
that are presented later in the day.
In addition, the Board believes it is
important to establish a time at which a
paying depository institution becomes
obligated for a debit. Regulation ] (12
CFR Part 210) requires a depository
institution to pay for checks presented
by a Reserve Bank by the close of the
banking day on which the checks are
presented. Debiting the paying
depository institution for checks
presented at an earlier time during the
day might require a depository
institution to pay for checks before they
have been presented and before the
depository institution has had an
opportunity to verify the charge.
Moreover, private sector collecting
depository institutions are often not able
to obtain same-day payment for checks
presented to paying depository
institutions without payment of a
presentment fee; in some cases they are
unable to do so even if presentment fees
are offered. For these reasons, the Board
does not believe that debiting
institutions for checks presented earlier
than the close of business would be an

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Federal Register / Vol. 54, No. 118 / W ednesday, June 21. 1989 / Notices

equitable solution for either paying or
collecting depository institutions.8
The new posting rules are intended to
facilitate pricing of Fedwire overdrafts
by allowing depository institutions to
determine with certainty their account .
balance at the Reserve Bank at any time
during the day.. The Board does not
anticipate that these posting rules will
significantly increase the pricing
burden on depositor institutions,
particularly given the deductible equal
to 10 percent of risk-based capital,
which will provide some compensation
for overdrafts directly caused by the
new positing rules.
The Board recognizes that it is
common practice for depository
institutions to extend credit to
creditworthy corporate customers by
permitting them to use non-wire credits,
such as check credits, on the
availablility/settlement date to cover
funds transfers during the day. In such
cases, depository institutions have
determined that their customers are
sufficiently creditworthy to recover any
funds should the non-wire transactions
be returned or not paid. Under the
proposal, most depository institutions
will have the option to continue their
current practices of providing credit to
customers in anticipation of later cover
or collection of final funds. A small
number of depository institutions,
however, may incur a cost in the form of
a Federal Reserve fee on average
overdrafts above a deductible amount
for using intraday Federal Reserve
credit to finance the transactions. As
discussed above, given the 10 percent
pricing deductible proposed by the
Board, the incidence of that higher cost
is likely to extend to very few
depository institutions.
In view of the lack of finality of most
non-wire payments and the goals to
■ In April 1988, the Board published for comment
a same-day payment concept, which would enable
private sector collecting depository institutions to
receive payment for checks presented to paying
depository institutions prior to 2:00 p.m. in same-day
funds, without the imposition of presentment fees.
Adoption of the concept would provide private
collecting depository institutions with the same
presentment abilities Reserve Banks currently have
(53 FR 11911. April 11.1988). Board staff is currently
analyzing the comments received and reviewing
alternatives suggested by several commenters. If a
viable alternative is developed and proposed for
public comment it could incorporate payment
options, chosen at the discretion of the paying
depository institution, that would provide for
payment to the collecting bank after the close of
Fedwire on the day of presentment Thus, paying
depository institutions would not be obligated to
pay for checks presented by private collecting
depository institutions earlier in the day than they
would be debited for checks presented by Reserve
Banks. The Board could also propose a similar
change to Regulation CC regarding the timing of
payment by a depositary bank for returned checks.

eliminate Federal Reserve float and to
provide depository institutions with an
accurate measurement of their overdraft
position throughout the day, the Board
requests comment on whether it would
be desirable to post certain non-wire
transactions, such as commercial ACH,
local clearinghouse, or other
transactions earlier in the day.

Application o f Cap
The Board is proposing that the
current cap system continue, with
certain modifications that would exempt
small depository institutions from the
requirement to file for a cap and make
the de minimis cap more useful for some
larger institutions. In addition, the Board
proposes that CHIPS net debits be
excluded from the cross-system debit
cap once settlement finality is
implemented on CHIPS. These changes
are intended to facilitate compliance
with the Board's overall risk policy. In a
related proposal issued for comment
today (see Docket No. R-0669 elsewhere
in today's Federal Register) the Board
has proposed that book-entry overdrafts
be included within the current debit
caps. While the Board believes that
pricing should reduce Fedwire
overdrafts significantly, until more
experience is gained, it would be
premature to remove caps or the selfevaluation process for depository
institutions.
Exemption o f small overdrafters. The
Board proposes that depository
institutions that only very rarely incur
daily total peak Fedwire (funds and
book-entry) overdrafts in excess of the
lesser of $10 million or 20 percent of
their risk-based capital be excused from
performing self-evaluations or filing
board-of-director’s resolutions with their
Reserve Banks. This exemption would,
however, be granted at the discretion of
each Reserve Bank. Reserve Banks
would be expected to take the necessary
steps (e.g., coordination and
consultation with supervisory personnel
within the Reserve Bank and at other
agencies) to limit their risk exposures to
those depository institutions under
financial duress or in any other way
presenting unusual risk to the Reserve
Banks. This risk-exposure control could
include real-time monitoring and
imposition of lower caps or zero caps.
Depository institutions, of course, would
continue to be free to file for a cap if
they chose to do so and would be
required to do so if they began to exceed
the exemption limits.
Currendy, a depository institution that
incurs Fedwire funds overdrafts
infrequendy is only required to file an
annual board-of-directors resolution

with the Reserve Bank authorizing the
depository institution to incur
occasional Fedwire overdrafts up to
$500,000 or 20 percent of capital,
whichever is less (the de minimis cap).
All other depository institutions wishing
to incur Fedwire overdrafts must
conduct an annual self-evaluation,
based on Federal Reserve criteria,
obtain their board's resolution of
approval, and maintain supporting files
for examiner review. These procedures
have focused director and senior
management attention on the risks of
daylight credit exposure and the need to
adopt prudential internal control
procedures and policies. A number of
observers within and outside the
Federal Reserve System, however, have
questioned the need to apply the policy
to all overdrafters.
The Board does not believe it would
be prudent to excuse depository
institutions with a small absolute level
of overdrafts from the limits of the
overdraft policy if the overdrafts are
large relative to the depository
institution’s capital. Similarly, from a
Federal Reserve risk perspective, large
overdrafts should not be excluded from
the policy just because such overdrafts
are a small portion of the depository
institution’s capital. Both the prudential
and Reserve Bank risk concerns could
be addressed by a dual test that
considered both the size of the overdraft
and its relationship to the capital
position of the depository institution
incurring the overdraft.
Of the 5,040 depository institutions
that would have incurred an overdraft
under the proposed posting procedure in
the February 1988 test period, about
4,600 had overdrafts that were both less
than $10 million and 20 percent of the
depository institution’s capital. These
overdrafts were neither large relative to
the depository institution’s capital nor to
the risk exposure of Reserve Banks.
These 4,600 depository institutions
accounted for only $1.7 billion of
Fedwire overdrafts, less than 1.5 percent
of the total.9 This exemption greatly
reduces the administrative burden of the
Board's payments system risk reduction
policy, with only marginal increases in
potential direct Federal Reserve risk.
* Indicative of the large number of very small
overdrafters, the number of depository institutions
does not change significantly as the $10 million
overdraft threshold is increased to $25 million
(4,835), or decreased to $5 million (4,544). Similarly,
changing the capital ratio has modest impact at the
same dollar level: at a $10 million overdraft level, a
10 percent overdraft-to-capital ratio would exempt
4.383 depository institutions and a 50 percent ratio
would exempt 4.708 depository institutions.

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
De Minimis Cap. Under the current de
minimis cap, a depository institution
may incur overdrafts up to the lesser of
?0 percent of adjusted primary capital
(or "U.S. capital equivalency” for foreign
banks’ overdrafts on Fedwire) or
$500,000, so long as the institution does
not incur daylight overdrafts on a
regular basis. The depository institution
must file a board-of-directors’ resolution
with its Reserve Bank approving its use
of a de minimis cap but need not engage
in a full self-evaluation process. The
Board is proposing a new de minimis
cap category with no frequency or
dollar-limit tests, but still requiring a
board-of-directors’ resolution to obtain
the 20 percent of capital cap.
A small number of depository
institutions would benefit if the existing
de minimis cap were modified to
remove the $500,000 limit and the
frequency test, retaining only the 20
percent of capital constraint This
modified cap category would differ from
the exempt category in two ways: (1)
While retaining a 20 percent of capital
constraint, it would have no $10 million
limit and, hence, would be of value only
to larger depository institutions; and (2)
it would, like the present de minimis
cap, require board-of-director filing, but
not a self-evaluation. The modified de
minimis cap would be a useful
transition grouping for larger depository
institutions between the proposed
exempt-from-cap-filing category and the
lowest cap requiring self-evaluation and
board-of-directors’ resolutions.

Exclusion o f CHIPS Net Debits.
Provided that settlement finality is
implemented on CHIPS, the Board
proposes that the cross-system sender
net debit cap be eliminated, with the
current cap multiples applied only to
total Fedwire overdrafts. Under current
procedures, Fedwire caps are reduced
by any net debit on CHIPS. When these
procedures were adopted, they were
intended to control not only the use of
Federal Reserve intraday credit, but also
to serve as a check on systemic risk.
With reasonable means of assuring
settlement finality, the system risk
associated with the potential failure of a
CHIPS participant to settle should be
reduced significantly. Each participant
would have an increased incentive to be
cautious in setting bilateral net credit
limits for other participants. Moreover,
shifts of Fedwire payments to CHIPS to
avoid Fedwire overdraft fees would be
likely to result in expanded exchanges
of payments among the few largest
CHIPs participants. If this assumption is
correct net debit positions subject to
cross-system caps should not change
significantly as participants both receive

and send more on CHIPS. Finally,
elimination of the cross-system cap
would be consistent with the policy
statement on private book-entry systems
that the Board issued today (see Docket
No. R-0665, elsewhere in today’s
Federal Register), which does not
impose the cross-system cap on those
systems that adhere to the policy
statement on risk control and settlement
finality.
CHIPS serves almost 140 participating
banks. Twenty-two of these participants
are settling banks, i.e., at the end of the
day, they settle the day’s transactions
on a net basis both for their own
account and as correspondents for non­
settling participants. Settlement is
effected at the end of the day when
Fedwire payments by those settling
depository institutions in debit position
are made to a settlement account at the
New York Reserve Bank, followed by
Fedwire transfers from the settlement
account to all settling depository
institutions in net credit position.
The payments volume on CHIPS, more
than three-quarters of which is
associated with foreign exchange and
Eurodollar transfers, is somewhat larger
than Fedwire funds transfers (about
$700 versus about $660 billion per day in
the fourth quarter of 1988). However, the
average aggregate peak intraday net
debit position on CHIPS is smaller than
Fedwire funds daylight overdrafts
(about $45 billion per day versus $60 to
$65 billion per day). Although less than
Fedwire, the net daylight credit
exposure on CHIPS still represents a
potential major systemic risk should a
CHIPS participant be unable to setde its
net debit position.
To reduce the systemic risk on CHIPS,
the Board in recent years has
encouraged the NYCH to adopt riskreducing measures. Thus, in 1984, the
NYCH implemented a system of
network bilateral credit limits, and in
1985 established CHIPS-specific sender
net debit caps. The former requires each
participant to make an assessment of
the creditworthiness of its counterparty,
and the latter establishes a limit on the
total exposure any one bank can create
on CHIPS.
Despite these steps, if a participant is
unable to settle its debit position at the
end of the day, the CHIPS rules provide
that payments to and from that
participant be “backed out” of the
settlement and new net positions
calculated for the remaining
participants; the calculation of the new
net positions could continue until
settlement is achieved. Despite this
potential for revised setdem ent
participants permit most of their

26101

customers to use credits for CHIPS
payments during settlement day, while
reserving the right to charge back such
credits if the transferring bank does not
settle its CHIPS position. Simulations of
the impact of a CHIPS participant’s
inability to settle suggest that such
failures to settle could drastically
change the net position of other
participants, inducing a series of failures
to settle by them. Thus, the current
CHIPS rules and the practices of
participants could lead to the systemic
failure of depository institutions and/or
pressure on the Federal Reserve to
provide liquidity assistance while losses
and solvency problems are determined.
The Federal Reserve has encouraged
the NYCH to adopt settlement finality
for CHIPS. Settlement finality would
assure that CHIPS payments will be
settled each day, even if one large, or
several smaller, participants are unable
to setde. Thus, liquidity pressures will
be dealt with immediately, while
allocation of losses can be resolved at a
later time. In response to these
concerns, the NYCH has developed a
plan to implement settlement finality in
late 1990 or early 1991 based on the
netting of payments and a.formula for
sharing the risk of the remaining
uncovered net debits.
Settlement finality on CHIPS does not
eliminate private direct credit risk.
Under the NYCH plan, specified CHIPS
participants must cover the net debit of
the failed participant, but that share is
of a size unlikely to cause the failure of
any one of them. Although the NYCH
plan would provide for settlement
finality on the day of a participant’s
failure to settle, there is some
uncertainty as to whether the calculated
multilateral net positions are legally
binding obligations. The FederaL
Reserve is encouraging the NYCH to
explore means of assuring that certainty,
but even with uncertainty, the proposed
CHIPS setdement finality will produce a
substantial reduction of systemic risk.
In addition, because of the added
settlement obligation aspects of the
NYCH plan for settlement finality on
CHIPS, CHIPS bilateral credit limits
may be reduced and some small
participants can be expected to
withdraw from CHIPS. The number of
transactions and the dollar volume of
payments on CHIPS is likely to decline
only moderately after settlement
finality, as long as those depository
institutions leaving CHIPS can find
correspondents willing to conduct
business for them. In fact, volume could
increase with shifts from Fedwire if
Fedwire overdrafts are priced

26102

Federal Register / Vol. 54. No. 118 / W ednesday, June 21. 1989 / Notices

The exclusion of CHIPS net debits
from caps would benefit the 35 CHIPS
participants that have large net debits
on that system. Elimination of the crosssystem cap would increase their ability
to conduct Fedwire activity within their
cap. The CHIPS activity of the remaining
105 participants does not generally
result in a high cross-system cap
utilization rate, and thus elimination of
the cross-system cap would not affect
these institutions.
The approximately 50 foreign banks
that incur net debits on CHIPS would be
virtually unaffected by the elimination
of cross-system caps. Currently, foreign
banks are allowed to incur Fedwire
overdrafts up to the amount o f their
Fedwire cap (based on U.S. capital
equivalency), regardless of CHIPS
debits. Foreign banks cross-system debit
caps are based on world-wide capital,
and they are permitted to incur Fedwire
overdrafts above their Fedwire caps (up
to their cross-system caps) by posting
collateral for the amount of such
overdrafts in excess of their Fedwire
caps. Under the proposed revisions to
the foreign bank overdraft policy,
however, foreign banks exceeding their
Fedwire cap woudihave to collateralize
the entire amount of their Fedwire
overdraft not just the amount over their
Fedwire cap. Under the proposal,
foreign banks could have Fedwire
overdrafts up to the amount of their cap
multiplied by their world-wide capital if
all of those overdrafts were
collateralized. (See Docket No. R-0670,
elsewhere in today's Federal Register.)

Capital
The Board proposes, for the purpose
of determining caps, that all domestic
depository institutions'use the samedefinition- o f "capital” that bank
supervisors will require U.S. commercial
banks to use for meeting their risk-based
capital requirements. Depository
institutions that choose to access
Fedwire through multiple accounts
would continue to be required to
allocate their capital for debit cap
purposes to each Reserve Bank at which
they incur overdrafts; one administering
Reserve Bank would still have overall
risk-management responsibilities.
If CHIPS overdrafts are excluded from
caps, foreign banks would be relieved of
reportiing worldwide capital for the
purpose of computing their cross-system
debit cap. Under the proposal, the only
foreign bank overdrafts subject to cap
would be Fedwire overdrafts based on
U.S. capital equivalency. £ however,
the foreign bank overdraft policy is
changedas discussed above, foreign
banks would b e required to report their
wordwide capital if they wished to incur

collateralized Fedwire overdrafts, which
would be limited to their cap multiplied
by their world-wide capital. In that case,
those foreign banks whose home
countries participated in the Basle
Accord might, in the name of reduced
burden, be given the option of reporting
either their lower (but easier to report)
world-wide equity capital for cap
purposes or their capital in accordance
with the Basle Accord as applied by
home country supervisors.
The "capital” concept that has been
used in the payments system risk
reduction policy to determine the
maximum permissible overdrafts (the
cap multiple times capital) is primary
capital less certain intangible assets.
This "adjusted” primary capital concept
for commercial banks is refined for
other types of depository institutions to
be consistent with the bank concept
given any special institutional
characteristics of these depository
institutions.10
In the past year, the U.S. bank
supervisory agencies have adopted new
risk-based capital requirements
consistent with the Basle Accord. (See
54 FR 4188, January 27,1989.) The new
requirements will be phased in from
1990 through 1992. For consistency, it
would be desirable if the capital base
used for the Board’s daylight overdraft
policy were the same as that used for
certain other supervisory purposes, such
as the computation of risk-based capital.
The new international risk-based
capital standard divides capital into two
tiers. Tier I is composed of “pure equity’"
less goodwill.1* Tier I alone would be
10 "Primary" capital for commercial banka is
common stock, perpetual preferred stock, surplus,
undivided profits, contingency and other-capital
reserves, cumulative foreign currency transaction
adjustments, qualifying mandatory convertible
instruments, allowance for possible loans and lease
loses (exclusive of any allocated transfer risk
reserves), and minority interest in equity accounts
of consolidated subsidiaries. Intangible assets are
subtracted from.this total to obtain "adjusted”
primary capital. (Equity capital of Edge corporation
subsidiaries is also subtracted from the parent's
capital if the parent permits the subsidiary to incur
its own overdrafts).
For savings and loan associations and federal
savings banks, “primary" capital is composed of
perpetual preferred stock, permanent reserves or
guaranty stock, contributed capital, qualifying
mutual capital certificates, net worth certificates,
income capital certificates, retained earnings, and
all general valuation allowances. From this total are
deducted deferred net lasses on loans and other
assets sold; goodwill, and other-intangible assets to
obtain "adjusted" primary capital. Mutual savings
banks’ capital measures are similar.
11 Common-Stock, surplus, undivided profits,
capital reserves, cumulative foreign currency
translation-adjustments, and the minority Interest in
consolidated subsidiaries. While goodwill is
deducted, in general, mortgage servicing rights and.
other identifiable intangible assets are no t

smaller than adjusted primary capital
for all depository institutions. Tier II
(which cannot exceed Tier I) is
composed of certain forms of hybrid
capital, preferred stock, subordinated
debt (up to 50 percent of Tier I capital),
and loan loss reserves (up to 1.25
percent of risk-weighted assets).12 For
most banks, the sum of the two tiers
exceeds their adjusted primary capital,
as the inclusion of subordinated debt
and hybrid capital in Tier II exceeds the
reduction due to the limited inclusion of
loan reserves now fully included in
primary capital. The ratio of estimated
risk-based capital to adjusted primary
capital at the 286 U.S. chartered banks
that, in the February 1988 test period,
had overdrafts of sufficient size to
require filing for a cap suggests, on
average, that risk-based capital for U.S.
banks incurring overdrafts subject to
cap would be about 15 to 25 percent
higher than adjusted primary capital,
increasing maximum permissible
overdrafts by that am ount
The Administration's proposal to
address the thrift problem and to modify
the regulatory structure of the thrift
industry would apply bank capital
standards to thrift institutions, other
than credit unions, by 1991. In the test
period, only 13 thrifts (excluding credit
unions) incurred overdrafts above the
exemption leveL As might be expected,
some of these entities would face larger
increases in capital requirements than
banks. About half of them, however,
would have no increase in capital for
overdraft purposes because most of the
regulatory accounting adjustments are
already eliminated from adjusted
primary capital for thrifts.13 In the
aggregate, the 60 thrifts (including credit
unions) with Fedwire overdrafts in
excess of the exemption level incurred
only about $300 million of overdrafts in
the February 1988 test period, about 0.2
percent o f total Fedwire overdrafts.
** More specifically, hybrid capital is the sum of
net equity contract notes and equity commitment
notes: preferred stock must be noncumulative
perpetual preferred, subordinated debt is the sum-of
limited life preferred and subordinated notes and
debentures, and loan loss reserves must-be general
provisions and not for specific assets.
1 Deferred net lasses on loans and assets sold
3
and goodwill are deducted from both current and
proposed capital; risk-based capital would generally
permit the inclusion of mortgage servicing rights and
other intangibles (existing goodwill is grandfathered
through 1892. and then excluded), while all forms of
intangibles are now excluded from adjusted primary
capital; net worth and income capital certificates
are included in adjusted primary capital but woulcf
be excluded from the new capital standard; FSUC
and FDIC notes could serve to raise capital under
both standards.

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
Impact o f Proposal on Cap Utilization
According to the data collected during
the February 1988 survey, under the
current posting procedure, excluding
book-entry overdrafts and with no
exemptions or exclusions, 3,414
depository institutions with $92.7 billion
of intraday peak overdrafts subject to
cap would be covered by the current
daylight overdraft policy. If book-entry
overdrafts were added to the amount
subject to cap assuming the current
overdraft measurement methodology
and no exemptions of small overdrafters
or exclusions of CHIPS net debits, the
number of overdrafters would have
risen by only 100 or so depository
institutions, but the amount of
overdrafts subject to cap could have
increased by over $40 billion to $133.8
billion. The proposed modification of
posting procedures would have raised
the total number of depository
institutions with overdrafts by almost
1,600 depository institutions to 5,097,14
and would have raised the aggregate
level of overdrafts an additional $17
billion to $150.8 billion. This latter
increase in overdrafts and overdrafters
reflects the shift of non-wire net credits
from opening-of-day to close-of-day
posting for about 2,700 depository
institutions that had such credits in the
test period. It is this shift in posting that
accounts for the large increase in the
number of overdrafters. However, the
inclusion of book-entry overdrafts
accounts for two-thirds of the dollar
increase in overdrafts.
If CHIPS net debits were removed
from overdraft calculations and then
smaller overdrafters were excused from
filing for the Fedwire cap, the number of
depository institutions that would have
had to file for either a de minimis or
other cap in the test period would fall to
less than 450. However, the total
Fedwire overdrafts at depository
institutions subject to caps would have
fallen only from $120.2 billion to $118.4
billion. Thus, with the small overdrafter
exemption and the CHIPS exclusion,
most depository institutions would not
be directly affected by the change in the
posting rules, and the amount of
Fedwire overdrafts subject to the policy
would be reduced by only a small
amount
One hundred forty-three depository
institutions would have exceeded their
1* During the test period, about 2,100 depository
institutions incurred overdrafts under the posting
proposal that would not have done so under the
current policy, but over 400 would have ceased
overdrafting under the proposal because their
current opening-of-day ACH debits and/or late
afternoon non-wire net debits would not be posted
until after the close of Fedwire.

cap during the test period under the
proposed rules. Most of the overdrafts
above cap are at a small number of
depository institutions that exceed their
caps because of book-entry overdrafts.
In fact the four major book-entry
clearers accounted for virtually all of the
overdrafts in excess of cap. As
discussed in Docket No. R-0669, the
Board is proposing that such depository
institutions be permitted to exceed their
cap, provided they post collateral. Thus,
the cap per se is not a constraint for
these depository institutions.
Most of the remaining overdrafts at
depository institutions that would have
exceeded their cap in the test period
where at six large banks that would
have exceeded their caps due to the
proposed posting change. About onehalf of the overdrafts at these six banks,
and an even larger amount at other
depository institutions (including some
of the major book-entry clearers) was
related to the settlement for maturing
commercial paper.1* The Depository
Trust Company ("DTC") is expanding its
existing same-day settlement system to
include book-entry processing for
commercial paper. Both the proposed
posting procedures and pricing for
overdrafts should accelerate this effort
The DTC book-entry system will
virtually eliminate Fedwire overdrafts
associated with commercial paper
issuance, transfers, and redemption,
removing a substantial part of the
overdrafts above cap associated with
the posting proposal.
During the test period, a significant
part of the remaining overdrafts above
cap, as well as those at a small number
of other depository institutions with high
cap utilization rates, were at
correspondent banks that had only
modest overdrafts under the current
posting procedure. These depository
institutions now benefit from openingof-day posting of net credits for checks
they collect on their own behalf and for
respondents through the Federal
Reserve and/or through local
clearinghouses that settle on the books
of the Reserve Banks. These credits
would be recognized at the end of the
day under the proposal.
*• Maturing commercial paper is presented to
paying agent depository institutions by custodian or
collecting depository institutions. New York
Clearing House members settle such paper, n e t as
part of the New York Clearing House net settlement
on the books of the Federal Reserve Bank of New
York. Those.depository institutions in a net credit
position on the net settlement now receive that
credit at the opening of the day. Under the proposal
this credit would be received after the close of
business. In addition, issuing agent depository
institutions often provide the issuers with proceeds
of new issues before investors have transferred
funds to the issuing agent depository institution.

26103

Eighty-seven depository institutions
incurred a modest level of overdrafts
that exceeded their proposed 20percent-of-capital de minimis caps
because of the new posting rules. Some
of these depository institutions could file
for non-cfe minimis caps and operate
with the new posting procedures.
Bankers’ banks cannot avoid the
impact of the posting proposal by filing
for a cap. Bankers’ banks are exempt
from reserve requirements and, hence,
do not have access to the discount
window. Depository institutions without
such access may not incur Fedwire
overdrafts because they may, in some
circumstances, have no other way to
cover a daylight overdraft at the end of
the day. Some bankers’ banks may
choose to become member banks in
order to gain access to the discount
window and thus avoid a restriction on
the size of deposit a member bank may
place with the bankers’ bank.1*
However, Congress intended that
discount window access be available
only to a depository institution that is
subject to reserves.17 A bankers’ bank
eligible to become a member may have
access to the discount window upon
approval provided it agrees to maintain
reserves. Nine bankers’ banks have
done so. Because the Board has ruled
that credit unions may not become
member banks, this access to the
discounty window is not available to
corporate credit unions.1* Thus,
bankers’ banks organized as credit
unions may not incur daylight overdrafts
on Fedwire so long aa they qualify as
bankers’ banks. They would have
access, and would be subject to reserve
requirements, if they fail to qualify as
bankers' banks. For example, it may be
possible for credit unions organized as
bankers' banks to amend their charter
so as to become depository institutions
eligible for Federal Reseve credit. The
Board requests comment on the effect of
the risk proposals on bankers’ banks
and possible solutions to any problems.
During the test period, 43 bankers'
banks, virtually all of which were
corporate credit unions, incurred
overdrafts under the proposal, mainly as
the result of the loss of opening-of-day
net credits for non-wire transactions.
'• Section 19(e) of the Federal Reserve Act
provides that nomember bank shall keep on deposit
with any depository institution without access to
the discount window under section 10(b) of that Act
a sum in excess of 10 percent of the member bank's
capital and surplus.
17 Colloguy of Congressmen S t Germain and
Wirth, 128 Cong. Rec. H2291 (March 27.1980).
*• See letter from Secretary of the Board to
Federal Reserve Bank of Minneapolis, S-540, August
6,1942.

26104

Federal Register / Vol. 54, No. 118. / W ednesday, June 21, 1989 / Notices

While none incurred an overdraft as
high as $50 million, the total overdrafts
of such depository institutions were $200
million. Only three of the depository
institutions could have met the
exemption proposal if they were eligible:
for i t Relative to capital, their
overdrafts under the proposed
measuring procedure would in virtually
all cases not permit them to operate
within any cap constraint, if they were
permitted to have a cap. Bankers’ banks
would thus, under the proposal, have to
hold larger balances, reduce their
federal funds sales, or take similar
actions to reduce their wire payments
relative to their wire inflows and
balances.
In view of the proposal’s impact on
the overdraft level of various types of
institutions, die Board requests comment
on alternative approaches to the
treatment of Fedwire overdrafts over
cap. For example, should some level of
overdrafts in excess of cap continue to
be permitted in extraoridinary cases at
the discretion o f the Fedeal Reserve
Bank? Further; some overdrafts are
readily secured and generally self
liquidating. For example, under the
terms of Section 4-208 of the Uniform
Commercial Code, depository
institutions handling a check for
collection may have a security interest
in the check until payment is received.
Overdrafts in excess of cap incurred in
anticipation of check credits would be
paid routinely when the credit is posted.
Should such readily secured, selfliquidating overdrafts, ox other sectored
overdrafts, in excess of cap be
permitted? Who should bear the cost of
maintaining collateral if collateralized
overdrafts in excess of cap were
permitted? Would permitting
collateralized ovedrafts in excess of capincrease risks to other creditors of
overdrafting depository institutions?
Federal Reserve Operational
Modificati ons for Pricing
Federal Reserve operating outages
could affect intraday liquidily in the
banking system and thereby contribute
to measured overdrafts atindividual
depository institutions. Therefore
Fedwire’s operating reliability is critical
to the success o f the payments system
risk reduction program. To assure
greater Fedwire reliability, the Federal
Reserve Banks are improving overall
Fedwire processing performance and
developing and implementing disaster
recovery capabilites for Fedwire
operations.
Fedwire's reliability is high and has
been improving steadily. The time
Fedwire was unavailable (hiring
business hours, decreased sharply in

second quarter of 1990. As indicated in
1988. Funds transfer downtime
Docket No. R-0670, the effective date for
decreased by almost 50 percent and
securities transfer downtime decreased
requiring collateral of all Fedwire
overdrafts of foreign banks with
by approximately 40 percent from the
1987 levels. In. 1988, the funds transfer
Fedwire overdrafts exceeding their cap
and securities transfer systems achieved >
based on U.S. capital equivalency would
99.59 percent and 99.41 percent
also be in the second quarter of 1990.
availability, respectively.
The Board proposes that the use of
Hardware and software systems that
risk-based capital to compute debit caps
will reduce the likelihood of Fedwire
as well as the. other cap and daylight
outages and facilitate more rapid
overdraft measurement proposals
recovery from operations problems are
become effective in late 1990 or early
being implemented to improve reliability 1991. CHIPS settlement finality is also
further, fa addition, the Federal Reserve
expected to occur within this time
is strengthening its disaster recovery
frame, and thus CHIPS net debits would
capabilities to minimize the likelihood of be excluded from the cross-system net
a prolonged service, disruption. The New debit cap in late 1990 or early 191)1.
York Reserve Bank has demonstrated in
Approximately three months altar
disaster recovery simulations at its
adoption of the overdraft measurement
dedicated contingency sitB , the ability to changes, Reserve Banks would begin
recover Fedwire operations, reconcile
sending mock bills to depository
funds and securities transfers, and
institutions as if pricing were being
resume processing of new transfers
applied. The Board proposes th a t by
within four hours of a disaster; The
mid-1991. Reserve Banks would, begin
Chicago and San Francisco Reserve
assessing the first 10 basis points of the
Banks also currently have, or are in the
25 basis point charge. The second 10
process of establishing, dedicated
basis points would be applied in midbackup: sites: for Fedwire processing.
1992 and the final 5 basis points in midThe remaining Reserve Banks share a
1993. The Board reserves the right to
disaster recovery site located in
accelerate or extend the phase-in period
Culpeper; Virginia.
depending on market responses. Tlie
Federal Reserve pricing for daylight
Board also reserves the right to
overdrafts will re quire that reliable
terminate the phase-in at a lower price
information be m ade available to
than 25 basis points or to continue the
depository institutions by their Reserve
phase-in to a higher price, depending on
Banks regarding the depositary
market responses.
institutions’ payment activity affecting
By order of the Board of Governors of the
their reserve or clearing accounts during
Federal Reserve System. June 15,1989.
the day. The Reserve Banks have
William W. WUes,
developed a n Account Balance
Secretary o f die Board.
Monitoring System t“ABM&”)i which
[FR Doc. 89-14636 Filed 6-20-89: 8:45 am]
will enable depository institutions to
obtain their current account balance
W tU N Q CODE w rra-O t-M
during the day. The ASMS will reflect
the depository institution’s opening
[D o c k et No. R-G665]
balance,, funds; and securities transfers
as they occur, and selected non-wire
RIN 7100-A A 76
transactions that would be posted to- the
monitor periodically during the day
Policy Statement on Private Deliveryconsistent with this proposal. While
Agatnst-Payment Systems
some institutions may rely on ABMS
exclusively, other institutions may use it AGCNCYr Board of Governors of the
Federal Reserve System.
in conjunction with their own internal
monitoring systems. ABMS will be
a c t i o n ; Policy statement.
available to depository institutions;
s u m m a r y : The Board is issuing a policy
before any pricing scheme in
statement establishing guiding principles
implemented.
for reducing risk on delivery-againstProposed Implementation Schedule
payment systems that settle on a net
same-day basis over the Federal
The Board proposes that the new
Reserve’s wire transfer system. The
payments system risk reduction policy
Board believes that adherence to the
be implemented in a series of staggered
policy statement will reduce systemic
effective dates. As indicated on Docket
No. R-0669, Fedwire debit caps would
risk for both die Federal Reserve and
be applied to total Fedwire overdrafts
system participants. This policy
(funds and book-entry), with collateral'
statement is issued in conjunction with
required for total Fedwire overdrafts
the Board’s requests for comments on
exceeding the Fedwire cap because of
proposals regarding its payments system
book-entry securities transfers, in the
risk reduction program and its policy

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
statements regarding offshore clearing
systems and rollovers and continuing
contracts, published elsewhere in
today’s Federal Register.
EFFECTIVE DATE: June 15,1989.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202452-3368); Oliver I. Ireland, Associate
General Counsel (202-452-3825) or
Stephanie Martin, Attorney (202-4523198), Legal Division; for the hearing
impaired only: Telecommunications
Device for the Deaf, Eamestine Hill or
Dorothea Thompson (202-452-3544).
SUPPLEMENTARY INFORMATION: The
Board is concerned about the systemic
risk associated with private large-dollar
payments and clearing systems. Hie
potential systemic risk caused by the
failure of a private system participant to
settle its obligations can be far broader
than the direct credit risk exposure to
the Federal Reserve if a depository
institution were unable to settle its net
debit position on the Federal Reserve’s
wire transfer system (“Fedwire"). The
receiver of a Fedwire payment is
insulated from any losses associated
with the failure of the sender because
the receiver of the transfer receives
good funds from the Federal Reserve
upon receipt of advice of the credit; the
Federal Reserve absorbs the direct
credit risk that otherwise would be
borne by counterparties to Fedwire
payments.1 Thus, the repercussions of
the failure of an overdrafting sender on
Fedwire to setde its obligations end
with the loss to the Federal Reserve; no
systemic losses are incurred by direct or
indirect creditors of the Federal Reserve.
In contrast, the creditor of participants
on private networks are subject to
systemic risk. This risk occurs because
the direct counterparties of a failing
participant may bear losses that in turn
may affect their ability to meet their
own settlement and other obligations.
Additional indirect credit relationships
may exist among participants in a
network or in interbank credit
relationships outside of payments
networks. These indirect credit
relationships and their attendant credit
risks increase systemic risks associated
with the failure of a participant to settle
on a private network.
1The private sector still feces credit losses
outside of the payments system associated with a
failing depositary Institution. Such indirect privatesector risks increase when the Reserve Banks
reduce their direct credit risk by taking collateral to
cover their daylight credit extensions. Faalare of a
sender would then cease no losses for Reserve
Banks even though the receiver obtains foil
payment: other creditors of the failed depository
institution, however, have fewer assets against
which to make a claim.

The Board is issuing a policy
statement to address intraday credit
risks arising out of the delivery of
securities against payment through
systems other than Fedwire. The Board
believes that private book-entry systems
have the potential to (1) Reduce
operating risk by supplanting separate
physical delivery and wire payment for
definitive instruments; (2) lower
operational costs by setting net
positions rather than each underlying
transaction, which also reduces the
volume of funds necessary for
settlement; and (3) reduce credit
exposures by reducing the volume of
intraday credit extensions. In addition,
such systems lend themselves to
techniques that permit participants to
establish credit discipline amoung
themselves. With the proper safeguards,
such as collateral, debit caps, bilateral
credit limits, pre-arranged lossallocation formulas, and legally binding
netting and close-out arrangements (e.g.,
novation), these systems can also be
risk-reducing. In addition, such riskreducing safeguards would serve to
focus the attention of system
participants on their own risk exposure.
The Board’s policy statement
establishes general guidelines to ensure
that settlement occurs in a timely
fashion and that participants do not face
excessive intraday risk. Guidelines are
established in four areas: (1) Liquidity
safeguards for ensuring settlement, (2)
provisions for reversals, (3) credit
safeguards, such as collateral and
netting features, and (4) cpen settlement
accounting. The rules and procedures of
those delivery-against-payment systems
that use the Federal Reserve's net
settlement services would be subject to
prior and ongoing review on a case-bycase basis by the Federal Reserve in
accordance with the Board’s policy
statem ent
Policy Statement On Private DeliveryAgainst-Payment Systems
Private delivery-against-payment
securities systems that settle on a net,
same-day basis entail credit and
liquidity risks for their participants and
for the payments system in general. This
policy statement provides guidance on
payment risk management for those
delivery-against-payment systems that
settle their end-of-day obligations
directly or indirecdy over Fedwire.
The policy specifically addresses
intraday credit risks arising out of the
delivery of securities against payment
through systems other than the Federal
Reserve's wire transfer system
(“Fedwire”). These systems meet the
criteria listed in the Board’s definition of

261G5

a large-dollar payments system, but
generally will not be subject to the
specific measures adopted as part of the
Board’s risk reduction program, such as
cros3-system debit caps, provided that
these systems conform to the
requirements of this policy statement.
The Board believes that these systems
should include risk-controlling features
if they are to rely on Fedwire for
ultimate settlement. The need for such
risk controls is becoming increasingly
important in view of these systems’
potential for growth and high volume
and the possible future course of the
Federal Reserve's payments system risk
reduction program, e.g., pricing intraday
Fedwire funds and bock-entry
overdrafts. The Board is, therefore,
establishing the following general policy
framework for the treatment of the
payment risk in private-sector deliveryagainst-payment systems under its risk
reduction program.
Delivery-against-payment securities
systems, as described below, are
expected to adopt appropriate liquidity
and credit safeguards in order to ensure
that setdement occurs in a timely
fashion and that the participants do not
face excessive intraday risks. In view of
the continuing evolution of these
systems, the Board has decided to
establish general guidelines rather than
to specify the exact form such
safeguards should take. Reversals or
“unwinds” of funds and securities
transfers, however, are not considered
appropriate liquidity control measures.
The policy addresses four issues: (1)
Liquidity safeguards for ensuring
setdement; (2) provisions for reversals;
(3) credit safeguards, such as collateral
and netting features; and (4) open
settlement accounting. These
components, and the scope and
regulatory implications of this policy,
are described below.
Scope of the Policy. This policy
statement is specifically targeted at
large-scale private delivery-againstpayment securities system s that 3ettie
their obligations on a net, same-day
basis over Fedwire, eith er directly or
indirectly. These systems setde
securities transactions for their
participants by tranfemng securities
and the accompanying payments
obligations on the books of a clearing
corporation or a depository institution
operating the system and arrange for
final settlement of the funds positions on
a net basis at the end of the processing
day. Settlement on a “net basis” means
that the funds obligations are netted
among all participants, so that a
participant can setde obligations to or
from many counterparties by making a

26106

Federal Register / Vol. 54, No. 118 / W ednesday. June 21, 1989 / Notices

single transfer to or from the system.
"Same day" settlement means that the
appropriate funds and securities
transfers are settled on the day that a
delivery-against-payment request is
entered into the system. “Large-scale”
systems are those systems that routinely
process a significant number of
individual transfers larger than $50,C O
O
or that would permit any one participant
to be exposed to a net debit position at
the time of settlement in excess of its
capital.
This policy applies to systems that
function primarily as a means of
transferring securities and funds
between participants. If a firm or bank
is providing clearing services to a
customer, and these services focus
primarily on the bilateral relation
between the clearer and the customer,
the firm or bank would not be viewed as
a system under this policy. Moreover, at
least initially, a system that is an
integral component of.a full service ban,
such that obligations that settle on an
item-by-item basis are the direct
obligations of the bank, will not be
subject to this policy because of the
existing supervisory oversight of a
bank’s liquidity and credit resources.
This policy applies to systems in the
United States that transfer debt and
equity securities, including those not
eligible for Fedwire. The policy does not
apply to systems dealing with other
financial instruments, such as futures
and options.
This policy is directed at limiting the
risks arising out of the intraday credit
generated in private delivery-againstpayment systems. The policy does not
address other potential sources of risk in
these systems, such as inadequate
management or facilities. The Board
expects that these systems will be
subject to regulatory oversight because
they are typically clearing agencies
subject to supervision by the Securities
and Exchange Commission, or because
they are limited purpose trust companies
subject to state or federal banking
supervision, or both. These supervisors
have broad responsibility for ensuring
the safety and integrity of these systems.
Liquidity Safeguards. Because they
give rise to intraday credit, private
delivery-against-payment systems rely
on payments by-participants with net
obligations to the system (“net debtor”
participants) in order to make settlement
payments to participants with net
obligations due from the system (“net
creditor" participants). In the absence of
appropriate safeguards, failure by a
single participant with a net debit
position may delay all settlement
transfers by the system. The result of a

system's failure to settle in a timely
manner will be that participants do not
receive the transfers of funds and
securities that they expected and that
they may need to conclude transactions
outside the system. Because settlement
typically occurs at the end of the day,
the system and net creditor participants
will have relatively little time to react to
any failure that may occur.
This policy seeks to ensure that these
private systems settle in a timely
manner, so that participants can rely on
the funds or securities obtained as a
result of transfers through the system.
The importance of ensuring reliable
transfers is due in part to the fact that
these systems generally allow
participants to re-transfer funds credits
or securities acquired during the day. If,
for example, a participant sold securities
early in the day and later used his funds
credits to purchase other securities, then
a failure in the settlement of the earlier
transaction could result in a failure of
the settlement of the later transaction.
The Board believes that private
systems should protect timely settlement
by adopting safeguards that are
commensurate with the risk of
settlement failure. The Board recognizes
that a private system relying on intraday
credit will not be able to guarantee
timely settlement of funds and securities
transfers under all conceivable
circumstances and, therefore, that such
a system cannot make an absolute
guarantee of settlement finality. At a
minimum, however, a system must have
sufficient safeguards so that it will be
able to settle on time if any one of its
major participants defaults. In addition,
the Board strongly encourages systems
to adopt settlement safeguards beyond
this required minimum.
Liquidity arrangements that will
enable a system to make end-of-day
settlement payments are crucial
settlement safeguards. Liquidity
safeguards adopted by private deliveryagainst-payment systems should include
provisions that give the system access to
sources of readily available funding that
will support timely settlement in case a
participant is unable to settle its
obligation. Funding sources could, for
example, include prearranged lines of
credit or a pool of funds contributed by
the participants. The system should
limit, on an intraday basis, the size of
potential net debit positions to ensure
that these liquidity sources will be
adequate.
Because settlement risks and structure
may vary in different systems, the Board
does not consider it appropriate to
specify the exact structure of acceptable
safeguards. One example of an

appropriate liquidity safeguard may be a
cap on the net debit funds position that
may be incurred by an individual
participant, which is tied to the liquidity
resources available to the system and/
or to the participant. If such a cap is
used, it may be appropriate for it to be
administered in a flexible manner, with
due regard for liquidity and credit risks
and for the efficient operation of the
system.
Generally, net debits incurred by a
depository institution within the system
will not be applied to cross-system net
debit caps established under the risk
reduction program, which are applicable
to Fedwire or CHIPS, nor will net credits
on these systems be available as offsets.
Reversals. Currently, certain systems
permit reversals of transfers of funds
and securities to facilitate settlement if
a participant defaults. By reversing
transactions, the systems try to reduce
the obligations of the defaulting
participant. However, settlement with
reversals will not ease the liquidity
problems caused by a default; reversals
will simply transfer a liquidity shortfall
from the defaulter to another participant
and will do so at the end of the day,
when it may be difficult to arrange for
alternate sources of liquidity. The return
of securities, with the resulting reversal
of a funds credit, may cause the
participant receiving the returned
securities to default on its obligations.
Thus, settlement using reversals will not
achieve this policy’s objective, because
participants will not be able to rely on
transfers of funds and securities if
transfers may be reversed.
Because the Board does not view
reversals as a satisfactory liquidity
safeguard, the systems covered by this
policy should not use reversals as a
substitute for liquidity arrangements,
such as those discussed above, in order
to ensure timely settlement.
Credit Safeguards. As stated above,
these systems effectively allow
participants to use intraday credit when
receiving securities. All participants
may be affected by one participant’s
failure to repay this credit if the
system’s liquidity arrangements permit
settlement. The Board, therefore,
believes that these systems should
adopt clear loss-allocation rules and
should minimize credit risks incurred
through the system. Methods of reducing
credit risk may vary in different
systems. Appropriate methods include
requiring contributions by all
participants to a fund that may be used
in the event of a default or requiring the
pledging of a sufficient volume of
market-to-market collateral. The loss

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
allocation schedule should not increase
risks to the system. In particular, the
system should calculate the loss
resulting from a default on the basis of
the net obligations of the defaulter
rather than on the basis of the
underlying gross obligations between
the defaulter and its counterparties.
Thus, the Board would find a loss
allocation scheme to be unacceptable if
it reversed all transactions between the
defaulter and other participants.
It is worth noting that this policy
statement, including the restriction on
reversals, is not intended to prevent a
system from allocating credit losses to
the counterparty of a defaulter based on
the business dealings between the
counterparty and the defaulter. It may
be appropriate and prudent for a system
to have rules which would require
participants who have dealt with the
defaulter to be responsible, after
settlement, for the related loss. These
arrangements could well include
returning securities to the counterparty
to help absorb the loss.
Open Settlement Accounting. As the
systems described in this policy grow in
size and volume, the timely and orderly
completion of end-of-day settlements
take on an increased importance for the
settlement of other large-dollar
payments systems. As a general matter,
the Board believes that it will be easier
for market participants and supervisors
to monitor and protect against
settlement risks if current information is
readily available. Participants in a
delivery-against-payment system should
therefore have up-to-date information on
theim et position and on the settlement
progress of the system, and appropriate
market supervisors should have ready
access to current intraday information
on both the system’s settlement and
participants' positions. For those
systems wishing to use Fedwire
payments as a means of settlement, the
Board encourages the use of Federal
Reserve Bank net settlement services
rather than individual wire payments
that cannot be distinguished from all
other Fedwire payments. This policy is
in no way intended to broaden access to
Federal Reserve services; neither
Fedwire nor net settlement services will
be available, as a general matter, to
non-member nondepository institutions.
By order of the Board of Governors of the
Federal Reserve System, June 15,1989.
W illiam W . W iles,

Secretary o f the Board.
[FR Doc. 89-14638 Filed 6-20-89; 8:45 am]
BILLING COOC (210-01-M

[D o c k et N o. R -0667]
RIN 7100-A A 76

Policy Statement on Rollovers and
Continuing Contracts To Reduce
Daylight Overdrafts

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

The Board is issuing a policy
statement encouraging the prudential
use of rollovers and continuing contracts
to reduce daylight overdrafts on
Fedwire. The Board believes that the
use of such arrangements is consistent
with its overall payments system risk
reduction program. This policy
statement is being issued in conjunction
with the Board’s requests for comments
on proposals regarding its payments
system risk reduction program and its
policy statements regarding private
delivery-against-payment systems and
offshore clearing systems, published
elsewhere in today's Federal Register.
EFFECTIVE DATE: June IS, .1989.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368) or Oliver L Ireland, Associate
General Counsel, Legal Division (202/
452-3625); for the hearing impaired only.
Telecommunications Device for the
Deaf, Eamestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: The
Board of Governors of the Federal
Reserve System has issued the following
policy statement concerning rollovers
and continuing contracts to reduce
daylight overdrafts. This policy
statement is being issued in conjunction
with the Board's requests for comments
on proposals regarding its payments
system risk reduction program and its
policy statements regarding private
delivery-against-payment systems and
offshore clearing systems, published
elsewhere in today’s Federal Register.
Policy Statement on Rollovers and
Continuing Contracts To Reduce
Daylight Overdrafts
The Board of Governors of the Federal
Reserve System believes that the use of
market innovations, such as federal
funds or Eurodollar rollovers or
continuing contracts, to reduce daylight
overdrafts on the Federal Reserve’s wire
transfer system (“Fedwire”) and the
New York Clearing House's Clearing
House Interbank Payments System
(“CHIPS”) is consistent with the Board's
policy concerning daylight overdrafts.
The Board urges market participants to
consider using such innovations for

26107

these and other financial instruments
where feasible. In doing so, participants
should be mindful that implementing
changes of this type may involve
incremental costs, at least transitionally,
and modified risk positions.
Accordingly, participants should
evaluate these factors and take them
into account when selecting and
negotiating with counterparties.
Many overnight interbank federal
funds and other similar purchases and
sales are negotiated in the morning with
the funds being sent over Fedwire in the
afternoon. Typically the previous day’s
overnight borrowings are returned to the
seller in the early morning, thus leaving
a midday time gap of three or more
hours between the morning repayment
and the receipt of that same day’s new
borrowing. Often these transactions are
between the same two banks for the
same amount. This funding time gap can
contribute to daylight overdrafts of the
borrowing institution and create risk to
Reserve Banks.
Rollovers are interbank overnight
transactions where the principal does
not change and is not returned the next
day to the seller but, instead, is rolled
over for the next overnight period. The
overnight interest rate is negotiated
daily between buyer and seller. The
maturity is one business day, or no
maturity is specified, and the
arangement may be cancelled at any
time by either fcarty. The Board
understands that national bank lending
limits would not apply to federal funds
transactions that have a maturity of one
business day or no stated maturity and
require no advance notice for
termination. Because the rollover
procedure eliminates the daily
movement of principal on Fedwire and
the corresponding time gap that could
otherwise exist between repayment of
the previous day’s borrowings and
receipt of new reborrowing, daylight
overdrafts are reduced.
Continuing contracts are similar to
rollovers. With a rollover, the size of
each day’s sale is the same. With a
continuing contract, the size of each
day’s sale can vary, and only the
difference in principal from the previous
day’s borrowing is moved over Fedwire
or CHIPS. Such arrangements reduce the
size of the daily movement of principal
on Fedwire and CHIPS and also
eliminate the time gap that could
otherwise exist between repayment of
the previous day’s borrowings and
receipt of new reborrowing, thereby
reducing Fedwire daylight overdrafts or
net debits on CHIPS. When the same
maturity conditions apply to a
continuing contract as apply to a

26108

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices

rollover (one business day or
unspecified maturity and cancellation at
any time by either party) national bank
lending limits do not apply.
An industry task force that evaluated
alternatives for reducing the level of
daylight overdrafts absorbed by the
federal funds and Eurodollar markets
sought to devise improved settlement
practices, e.g., rollovers and continuing
contracts, that sustain the present rate
negotiation mechanism. Each participant
should satisfy itself that it has the
flexibility to negotiate amounts, rates,
and maturity options before using these
practices for federal funds, Eurodollars,
or other financial instruments. E ther of
these practices, rollovers or continuing
contracts, can reduce daylight
overdrafts or intraday net debits, and
their prudential use by the banking
industry is consistent with the Federal
Reserve's policy of reducing intraday
exposures on Fedwire and CHIPS. When
borrowing banks reduce their daylight
overdrafts by use of these practices,
some extra operational costs and risks
may be incurred by either party
compared to current arrangements in the
overnight m arket For example, sellers
of federal funds and other instruments
may have to develop alternative audit
trail procedures and may accept some
addition risk of repayment since funds
would not be returned each day before
they would be relent In additiorvbuyers
of federal funds and other instruments
may experience some extra initial
operating costs to set up rollover
arrangements between themselves and
lending banks and may have to pay a
higher rate to induce lenders to commit
their funds for a longer time. However,
these costs and risks, if any, should be
reflected in the rate or rate spread
received and p aid On balance,
however, it is unclear whether rates on
interbank funds transferred daily over
Fedwire and CHIPS will fall relative to
rates paid for rollovers, continuing
contracts, or term funds, or whether the
reverse will occur. The Board believes
that it is important that the negotiation
of terms relative to the use of these
arrangements be left to the free
operation of the private m arket
The Board also supports efforts to
encourage timely return of overnight
federal funds and other borrowings and
encourages operational improvements
that would consistently allow timely
receipt of funds purchased soon after a
seller negotiates a sale. Similar
arrangements and industry standards
were suggested for federal funds by the
American Bankers Association in July
1986.

By order of the Board of Governors of the
Federal Reserve System, June 15,1989.
William W. Wiles,

Secretary o f the Board.
[FR Doc. 89-14639 Filed 6-20-89; 8:45 am)
BILL] NO COOC 62 10-0 1-M

[D o c k e t N o. R -0670]
RIN 7 1 0 0 -AA76

Proposals To Modify the Payments
System Risk Reduction Program; U.S.
Agencies and Branches of Foreign
Banks
AGENCY: Board

of Governors of the
Federal Reserve System.
ACTION: Request for comment.
SUMMARY: The

Board is requesting
comment on a proposed risk reduction
policy that would require
collateralization of all Fedwire
overdrafts (funds and book-entry) of
foreign banks operating through U.S.
agencies and branches if such
overdrafts exceed the banks’ Fedwire
cap. This policy is proposed in
conjunction with the other requests for
comment and policy statements
regarding the Board's payments system
risk reduction program, published
elsewhere in today’s Federal Register.
DATES: Comments must be submitted on
or before November 17,1989.
a d d r e s s e s : Comments, which should
refer to Docket No. R-0670, may be
mailed to the Board of Governors of the
Federal Reserve System. 20th and C
Streets, N W , Washington, DC 20551,
Attention: Mr. William W. Wiles.
Secretary; or may be delivered to Room
B-2223 between 8:45 a.m. and 5:00 pjn.
All comments received at the above
address will be included in the public
file and may be inspected at Room B1122 between 8:45 a.m. and 5:15 p.m.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin. Deputy Director.
Division of Research and Statistics [202/
452-3368), Jeffrey C. Marquardt, Senior
Economist Division of International
Finance (202/452-3697); for the hearing
impaired only. Telecommunications
Device for the Deaf, Eamestine Hill or
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: This is
one of three proposals regarding
payments system risk reduction that the
Board is issuing for public comment
today. H ie others concern pricing of
overdrafts on the Federal Reserve’s wire
transfer system (“Fedwire") and related
overdraft measurement and caps
proposals (Docket No. R-0668), as well
as the inclusion of book-entry securities
transfers in the measurement of Fedwire

overdrafts (Docket No. R-0669). The
Board encourages all interested parties
to comment on each of these proposals.
The Board urges that in filing comments
on these proposals, commenters prepare
separate letters for each proposal,
identifying the appropriate docket
number on each. This procedure will
facilitate the Board’s processing and
analysis of the comments on these
proposals by ensuring that each
comment is quickly brought to the
attention of those responsible for
analyzing each specific proposal. In
addition, the Board encourages entities
that plan to submit identical comments,
such as affiliated institutions within a
holding company, to consolidate their
efforts; the Board will give equal
consideration to one letter signed by a
number of commenters as it would to
numerous identical letters submitted by
those commenters. Comments are due
November 17,1989, and the Board does
not intend to extend the comment period
beyond that date.
In addition to its requests for
comment, the Board is also issuing
today three risk-related policy
statements regarding private deliveryagainst-payment systems (Docket No.
R-0665), offshore clearing and netting
systems (Docket No. R-0666), and
rollovers and continuing contracts
(Docket No. R-0667).
In April 1985, the Board of Governors
adopted a policy to reduce risk on largedollar payments systems. This policy,
which was implemented in March 1986,
established a maximum amount of
intraday funds overdrafts that
depository institutions are permitted to
incur over both Fedwire and private
large-dollar payments systems. The
maximum, or cap, is a multiple of a
depository institution's adjusted primary
capital and is based on a self-evaluation
of a depository institution’s
creditworthiness, credit policies, and
operational controls. In July 1987, the
Board adopted a number of
modifications to the daylight overdraft
policy, including a two-step, 25 percent
reduction in the cross-system net debit
caps, thus reducing the maximum
daylight overdrafts permitted to
individual depository institutions.1
The Board has applied its daylight
overdraft policy to foreign banks as well
as domestic institutions in a manner
consistent with the policy of “national
treatment," i.e., applying similar rules to
foreign entities operating within the
United States as are applied to domestic
institutions. In this regard, U.S.
1 These reductions became effective in January
and May 1988. See 52 FR 29255 (August 8,1987).

Federal Register / Vol. 54, No. 118 / W ednesday, June 21, 1989 / Notices
subsidiary banks owned by foreign
banks are treated identically to all other
U.S. banks under the program. The
policy for branches and agencies of
foreign banks, however, of necessity,
takes into account certain differences
between these entities and
domestically-chartered institutions,
including the following: (1) Most of a
foreign bank’s assets and liabilities are
located and controlled outside of the
United States and only the operations of
the U.S. branches and agencies are
subject to supervisory review by U.S.
authorities, and (2) for many foreign
banks, the volume of dollar payments
that would flow through their U.S.
branch network is substantial relative to
the level of their assets in the United
States and their local dollar funding
capacity. As such, there may be
practical limits on the ability of
branches and agencies of foreign banks
to raise funds in the market, either
through unsecured borrowings or by
providing collateral in an acceptable
form, to meet liquidity needs in the
event of credit or operational problems.
In this initial policy, the Board based
the cross-system cap (for Fedwire and
CHIPS * combined) for branches of
foreign banks on their world-wide
capital, but based the Fedwire cap (for
Fedwire funds overdrafts) on a
surrogate for capital in the U.S. ("U.S.
capital equivalency” s), which is
significantly smaller than world-wide
capital. Foreign banks with U.S.
branches and agencies are permitted to
incur Fedwire overdrafts above their
Fedwire caps (up to the cross-system
cap) by posting collateral for the amount
of such overdrafts in excess of their
Fedwire caps.
A few foreign banks operating through
U.S. branches and agencies have
indicated that Fedwire caps are too
binding for their dollar payments
business, that their Fedwire caps do not
recognize their world-wide strength, and
that their U.S. operations do not involve
the kind of assets to permit the posting
of collateral for larger Fedwire
overdrafts. In the summer of 1987, the
Board reconsidered its policy in light of
> “CHIPS" is the Clearing House Interbank
Payments System, operated by the New York
Clearing House.
* U:S. capital equivalency is defined as the
greater of (1) the sum of the amount of capital (but
not surplus) that would be required of a national
bank being organized at each branch or agency
location or (2) the sum of 5 percent 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.

these concerns and determined that the
policy should not be changed. This
decision was based in part on the fact
that U.S. branches and agencies of
foreign banks were generally operating
well within their Fedwire caps and
seemed to be able to obtain large
volumes of private intraday credit on
CHIPS.
Foreign bank representatives have
noted that the Basle Accord capital
standards should meet or alleviate the
Board’s concerns about the capital
positions and supervision of foreign
banks with U.S. branches and agencies.
In early 1989, the Institute of
International Bankers renewed its
request that the Board permit world­
wide capital to be used as the base for
determining Fedwire caps for foreign
banks operating in the U.S. through
branches and agencies.
There continues to be little evidence,
however, that foreign banks are
seriously constrained in their access to
U.S. payments systems, despite rapid
growth in their overdrafts. Since the
Board's policy was initiated, both
Fedwire funds and CHIPS daily average
peak overdrafts of U.S. branches and
agencies of foreign banks have risen
more rapidly than have those of U.S.chartered entities. In the fourth quarter
of 1988,64 branches or agencies of
foreign banks incurred $6.4 billion of
Fedwire funds overdrafts, and 96
incurred $31.0 billion of CHIPS net
debits. Very few of these entities use
their Fedwire cap intensively, however
the few who do exceed their Fedwire
cap under the proposed policy would
have to collateralize the total amount of
their Fedwire overdraft
The Board does not believe that the
current daylight overdraft policy is
causing a hardship for foreign banks.
Moreover, given the lack of U.S. asset
base and potential limits on dollar
funding capacity that would apply to
some foreign banks, the current policy
appears to be sound. Including bookentry overdrafts under the cap policy
(see Docket No. R-0669) would have
virtually no impact on the Fedwire cap
utilization of foreign banks operating
through U.S. branches and agencies.
However, the proposed collateral policy
for book-entry overdrafters requires that
collateral be posted by U.S.-chartered
depository institutions for all Fedwire
overdrafts if the Fedwire cap is
exceeded because of book-entry
overdrafts. A parallel policy for those
U.S. branches and agencies of foreign
banks that exceed their Fedwire cap
based on U.S. capital equivalency would

26109

provide that collateral be posted equal
to the total Fedwire overdrafts, not just
the amount in excess of the cap. The
current policy that permits U.S.
branches and agencies of foreign banks
to incur uncollateralized Fedwire
overdrafts up to their Fedwire cap based
on U.S. capital equivalency would not
be changed Under the proposal, foreign
banks could have Fedwire overdrafts up
to the amount of their cap multiplied by
their world-wide capital if all of those
overdrafts were collateralized.
At the current time, such a policy
change would have virtually no impact
on foreign banks, which use CHIPS
much more than Fedwire and have
relatively low Fedwire cap utilization
rates. Such a change would also serve
as better protection for Reserve Banks if
large exposures do occur.
Accordingly, the Board is soliciting
public comment on a proposal that
would extend the collateral
requirements to all Fedwire overdrafts
(funds and book-entry) of foreign banks
operating through U.S. branches and
agencies if such overdrafts exceed their
Fedwire cap. The Board also requests
comment on the proposed general
overdraft policy (see Docket No. R-0668)
as it applies to these entities.4
Specifically, the Board is requesting
comment on the relative burdens and
benefits of the proposed collateral
policy versus maintaining the current
policy (but including book-entry
overdrafts in the total Fedwire
overdrafts subject to cap).
The Board is also requesting comment
on alternative definitions of U.S. capital
equivalency, particularly in light of the
recent international accord on the
definition of bank capital. Commenters
are asked to suggest alternative
definitions that would provide a
reasonable balance between the
practical U.S. asset and dollar liquidity
limits of foriegn banks and the interests
of foreign banks in more flexible access
to Fedwire.
By order of the Board of Governors of the
Federal Reserve System, June 15,1989.
W illiam W . W iles,

Secretary o f the Board.
[FR Doc. 89-14641 Filed 8-20-89; 8:45 am]
BILUNG COOE 6210-01-M

* Edge corporations would continue, as now, to bo
required to post collateral for all their Fedwire
overdrafts. No change in policy is being proposed
for these entities.

Highlights
of
Proposals for Modifying the Payment System Risk Reduction Policy
for
Small and Intermediate Size Depository Institutions
Defining Fedwire Overdrafts
•

Includes both funds and book-entry overdrafts for caps and pricing.

•

Measurement modified through change in sequence of posting of non-wire transactions.
(See table on reverse side.)

Net Debit Caps
•

A depository institution (DI) is exempt from filing if its daily peak Fedwire overdrafts are less
than $10 million and 20 percent of risk-based capital (Tier I and Her II). Virtually all small and
intermediate size DIs are expected to be exempt from filing.

•

Annual self-evaluation and board-of-directors’ resolution are required for all other cap categories

•

If filing for caps is required, the caps apply to intraday peak values with dual caps for single
days and two week averages of peak values.

•

Caps based on sum of Tier I and Her n risk-based capital

•

Regardless of cap standing, file board-of-directors’ resolution if either of the following occurs:
•another entity is authorized to make Fedwire transfers from your account or receive
book-entry transfers for your account
•a DI makes transfers to an affiliated DI to fund the affiliate’s reserve account intraday

Erising
•

Daily amount of Fedwire overdrafts subject to pricing:
•Average daily intraday total funds and book-entry Fedwire overdrafts
•In excess of 10 percent of risk-based capital (the “deductible”)
•P h ased -in over three years

•

Price is 25 basis points (annual rate) or 0.685 cents per day per $1,000 of average
overdrafts in excess of deductible

•

Virtually all small and intermediate DIs are expected to be exempt from pricing because their
average overdrafts will be less than their deductible

Federal Funds and RP Lending
•

The Board supports modification of federal funds and RP lending arrangements so as to eliminate
or reduce repayment each morning followed by re-lending to the same borrower each afternoon
(causing daylight overdrafts for borrower)

•

However, lenders should be aware of the resultant slightly reduced liquidity and should satisfy
themselves that the terms and conditions of such arrangements maintain their flexibility.

NOTE: Comments are due on these proposals on November 17,1989. All the proposals, if implemented,
would be phased in from mid-1990 to mid-1993. Federal funds and RP lending policy effective at once.

Posting Rules for Measuring Fedwire Daylight Overdrafts
PrepQsed

Current

Opening Balance (- Previous day’s
closing balance)
Plus

Opening balance (- Previous day’s
closing balance)
Plus or Minus

Posted at opening: U.S. Treasury and
government agency book-entry interest
credits
Plus

Posted ex post at opening: Net of ACH
Credit and Debit Transactions

Posted at opening: U.S. Treasury and
government agency book-entry
redemption (maturity credits)

Posted ex post at opening: Net credits (if
any) from "all other" (non-wire)
transactions that day
Equals

Plus
Posted at opening: U.S. Treasury ACH
credits
Minus

Plus

Adjusted opening balance

Plus or Minus

Posted at opening: U.S. Treasury
book-entry new issue debits

Fedwire funds and book-entry transfers
as they occur

Equsls
Adjusted opening balance

Minus
Posted ex post at close of Fedwire: Net
debits (if any) from “all other” (non-wire)
transactions that day
Equals

Plus or Minus
Fedwire funds and book-entry transfers
as they occur

Plus
Posted at 2:00 p.m. (local time):
Treasury direct (and special direct)
investments
Equals
Fedwire closing balance
Plus or Minus
Posted after close of Fedwire:
Commercial ACH and “all other”
transactions (non-wire debits and credits)

Equals
Closing balance

Closing balance

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