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Federal Reserve
bank
OF DALLAS
WILLIAM H. WALLACE
FIRST VICE PRESID ENT
December 12, 1986
DALLAS, TEXAS 75222
Circular 86-112
TO:
The Daylight Overdraft Coordinator
or the Chief Executive Officer of
the depository institution addressed
SUBJECT
Request fo r public comment on fiv e sets of proposals relating to the
Federal Reserve Payment System Risk (Daylight Overdraft) Program
DETAILS
The Board of Governors of the Federal Reserve System has requested
public comment on five sets of proposals dealing with the Federal Reserve's
Payment System Risk (Daylight Overdraft) Program, and has amended the Payments
System Risk Policy Statement in one particular. A copy of the Board's press
release on these actions and the orders detailing them are attached.
The proposals on which comment is requested are listed below, with
docket numbers and due dates for comments:
Book-entry securities transfers, Docket No. R-0587,
comments to be received by February 9, 1987.
Cap levels, Docket No. R-0588, comments to be received by
February 9, 1987.
De Minimis caps, Docket No. R-0589, comments to be received
by February 9, 1987.
Limits on inter-affiliate Fedwire transfers, Docket No.
R-0590, comments to be received by February 9, 1987.
Automated clearing house (ACH) transactions, Docket No.
R-0591, comments to be received by March 16, 1987.
Pricing daylight overdrafts, Docket No. R-0592, comments to
be received by April 13, 1987.
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
The amendment, Docket No. R-0515, reduces the frequency for
self-assessments under the Program from once every six months to once a year.
Study papers on each of the above topics plus a separate overview
paper have been prepared and are available on request to the Public Affairs
Department of the Federal Reserve Bank of Dallas at (214) 651-6266.
Comments should be addressed to Mr. William W. Wiles, Secretary,
Board of Governors of the Federal Reserve System, Washington, D.C. 20551.
All such correspondence should refer to the appropriate docket numbers and
should be received by the appropriate deadlines.
ATTACHMENTS
The Board's press release and the related orders are attached.
M R INFORMATION
OE
For further information please contact Senior Vice President
George C. Cochran, III, at (214) 651-6257, Vice President James L. Stull at
(214) 698-4286, Vice President Robert D. Hankins at (214) 651-6120, or
Assistant Vice President Uzziah (Earl) Anderson at (214) 651-6275.
Sincerely yours,
FEDERA^ESERVI^Dres^elease
For immediate release
December 10, 1986
The Federal Reserve Board today issued for comment a series of
proposals to reduce and control the payments system risk faced by the Federal
Reserve and individual depository institutions participating in large-dollar
wire transfer networks, book-entry transfer systems, and automated clearing
houses (ACHs).
These proposals supplement the payment system risk policy
announced by the Board on May 17, 1985.
Large-dollar funds transfer networks are an integral part of the
payments and clearing mechanism, and total overdrafts by participants
making funds transfers on these networks frequently exceed more than $80
billion daily.
A daylight overdraft occurs when an institution sends funds
over Fedwire in excess of the balance in its reserve or clearing account,
or sends more funds over a private network than it has received.
Another $60 billion or more of overdrafts occur each day from
book-entry transfers of U.S. Government and agency securities; book-entry
overdrafts occur when a depository institution receives (and pays for)
more securities over Fedwire than it has sent (and been paid for).
The Board's basic policy is designed to reduce the potential for
Federal Reserve losses and systemic risk to the banking system associated
with settlement failure through a reduction, over time, in both the total
volume of daylight overdrafts and the number of institutions with a pattern
of substantial reliance on such credit.
-
2-
Changes proposed by the Board in its payment system risk policy,
with a 60-day comment period, would:
o
provide depository institutions incurring daylight overdrafts as
a result of book-entry government securities transactions with
two options.
First, depository institutions could include these
overdrafts with net debits that arise from transfers of funds over
Fedwire and private wire networks for purposes of determining
the total debits subject to the ceiling on the amount of intra-day
credit an institution can incur (net debit cap).
Alternatively,
depository institutions could collateralize their book-entry
related overdrafts with eligible book-entry securities that the
institutions receive over Fedwire and only the uncollateralized
portion would be added to the net debit subject to the cap.
Further, the Board is seeking specific comment on whether there
should be a book-entry transfer limit and whether that limit should
be $25 or $50 million.
The Board plans to make the new policy
effective on March 23, 1988.
o
reduce the levels for the net debit cap established in May 1985
by 25 percent effective June 18, 1987.
At the end of 1987 the
Board will consider whether to reduce the cap further,
establish a new de minimis cap category for institutions that do
not incur large or frequent daylight overdrafts.
This cap would
be the lesser of 10 percent of capital or $500,000 and would be
available to institutions that do not undergo the self-assessment
-3required for establishing a positive net debit cap under the
Board's policy.
The institution's board of directors would have
to approve the cap.
o
amend its policy statement on payment system risk to indicate
that efforts by holding companies to consolidate payment activities
at one subsidiary through affiliate transfers over Fedwire that
create a pattern of overdrafts at the sending institution would
either (a) be prohibited or (b) permitted only under certain
conditions consistent with safe and sound banking practices.
Comment on the above proposals should be received by February 9.
In addition, the Board proposed several changes affecting automated
clearing house (ACH) procedures.
These changes include: (1) for purposes
of calculating daylight overdraft levels only, posting all entries for ACH
debit payments and checks as of 1 p.m. Eastern time,
(2) granting finality
for ACH credit payments of $5,000 or less at 1 p.m. local time, and (3) treating
as provisional credit all ACH debit and those ACH credit items over $5,000
until the Reserve Banks have actually received the funds.
Comment for these
changes is requested by March 16.
In connection with its proposals on daylight overdrafts, the Board
is seeking comment on the concept of charging a fee for all daylight overdrafts
in accounts maintained with the Federal Reserve that are subject to the net
debit cap.
The objective of this fee would be to provide an additional
incentive for depository institutions and their customers to adopt policies
-4and procedures that would reduce daylight overdrafts.
Comment is requested
by April 13.
Orders detailing the above proposals are attached.
-
Attachment
0-
FEDERAL RESERVE SYSTEM
[Docket No. R-0587]
Request for Comments on Proposals Regarding
Payment System Risks
Book-Entry Securities Transfers
AGENCY:
Board of Governors of the Federal Reserve System,
ACTION:
Request for comment.
SUMMARY:
for
The Board is proposing for public comment a policy
reducing
the
risks
arising
from
daylight
overdrafts
associated with transfers of book-entry securities on Fedwire.
The proposed policy includes the following principal components;
1.
Depository institutions (and other entities, such
as U.S. branches and agencies of foreign banks) would
choose between
with
their
net
cross-system
including
debit
funds
all
book-entry overdrafts
positions
transfers
for
arising
from
determining
their
total overdrafts subject to their net debit caps, or
collateralizing
book-entry
overdrafts
with
the
eligible incoming book-entry securities and including
only the uncollateralized portion of their book-entry
overdrafts
with
the
cross-system
funds
overdrafts
subject to their caps.
2.
Each institutions choosing the collateralization
option would enter into a written security agreement
-
2-
with its Reserve Bank and warrant that a specified
minimum
percentage
of
book-entry
overdrafts
always be covered by collateral.
would
In monitoring an
institution's compliance with the warranty, a Reserve
Bank
would
apply
a margin
to
the
value
of
the
securities to account for interest rate and clearing
risk.
The
margin
for
clearing
risk
would
be
established for each institution choosing this option
based
on
a self-evaluation
conducted
according
to
Board established guidelines.
3.
Book-entry securities transfers on Fedwire
(with
the
exception
and
stripped
of
original
securities)
issue
would
be
transactions
subjected
to
a
transaction size limit of either $50 or $25 million,
with public comment solicited on the most appropriate
level.
DATE:
Board
Comments must be received by February 9, 1987.
expects
that
the
policy
will
become
effective
The
on
March 23, 1988.
ADDRESS:
Comments, which should refer to Docket No. R-0587,
should be addressed to the Board of Governors of the Federal
Reserve System,
20th and C Streets,
N.W.,
Washington,
D.C.
20551, Attention: Mr. William W. Wiles, Secretary; or delivered
to Room B-2223
between
8:45
a.m.
and
5:15
p.m.
Comments
-3-
received may be inspected in Room B-1122 between 8:45 a.m. and
5:15 p.m., except as provided in S 261.6(a)
Rules
Regarding
Availability
of
of the Board's
Information,
12
C.F.R.
S 261.6(a).
FOR
FURTHER
Director
INFORMATION CONTACT:
(202-452-3368),
or
Edward C.
Stephen
A.
Ettin,
Lumpkin,
Deputy
Economist
(202-452-2378), Division of Research and Statistics; Elliott C.
McEntee, Associate Director (202-452-2231), Division of Federal
Reserve Bank Operations; Oliver I. Ireland, Associate General
Counsel (202-452-3625), or Joseph R. Alexander, Senior Attorney
(202-452-2489),
Federal
Legal
Reserve
Division;
System,
hearing impaired only:
Board
Washington,
of Governors
D.C.
the
For
20551.
of
the
Telecommunications Device for the Deaf
(202-452-3544), Earnestine Hill or Dorothea Thompson.
SUPPLEMENTARY INFORMATION:
This is one of a series of proposals regarding payment
system
risk
today.
that
the Board
The others concern
is
issuing
for
the net debit
public
cap
(Docket Nos.
R-0588 and R-0589), pricing of daylight overdrafts
R-0592),
consolidation
monitoring purposes
of
(Docket
affiliated
No.
comment
(Docket No.
institutions
R-0590),
and
for
treatment
payments processed through automated clearing houses
No. R-0591).
cap
of
(Docket
The Board encourages all interested parties to
comment on each of these proposals.
The Board urges
proposals,
proposal,
commenters
that
prepare
in filing
separate
comments
letters
on
for
these
each
identifying the appropriate docket number on each.
-4-
This
procedure
will
facilitate
the Board's
processing
and
analysis of the comments on these complex proposals, and will
ensure that each comment is quickly brought to the attention of
those responsible for analysing the proposal,
BACKGROUND
In May, 1985, the Board announced its policy to reduce
the risks that
large-dollar payments systems present to the
Federal Reserve, to depository institutions and other entities
(such as U.S. branches and agencies of foreign banks and Edge
Act corporations) using such systems (hereafter referred to as
"institutions"), to the banking system, and to other sectors of
the
economy.
50
Fed.
Reg.
formulating this policy,
effect
that overdraft
21,120
(May
the Board was
22,
1985).
In
concerned about
restrictions could have on
the
the
U.S.
government securities market, the smooth functioning of which
is vital both to the conduct of monetary policy through Federal
Reserve open market operations and to the efficient funding of
the
federal
debt.
Consequently,
the
Board
exempted
from
quantitative overdraft controls, such as sender net debit caps,
Fedwire daylight overdrafts
book-entry securities.
resulting from the transfer
of
Rather, the Board sought comment on a
proposal to control the risks associated with such overdrafts
by requiring institutions incurring them to choose one of three
collateralization options.
51 Fed. Reg. 21,132 (May 22, 1985).
Comments on these proposals were largely negative, and
the Board's staff reevaluated the proposals.
this reconsideration,
As a result of
together with discussion with
industry
-5-
groups,
new
collateralization
supplemented
by
other
proposals
options
not
were
developed,
previously
considered.
These staff recommendations formed the basis for the proposals
on which the Board is now seeking comment.
staff's recommendations,
Full details on the
including a detailed comment summary,
an analysis of the markets in Treasury and agency securities,
an evaluation of policy options, and likely market responses,
may be found in the staff study, Book-Entry Daylight Overdrafts
(Nov. 1986).
Copies of this study are available free of charge
from the Secretary of the Board at the address noted above, or
from the Daylight Overdraft Liason Officer
Reserve Bank.
of each Federal
The Board encourages all parties interested in
commenting to obtain a copy of the staff study, as it contains
background information that may enable them more readily to
understand the rationale for the Board's proposals.
Because the
have been
subjected
issues
to
associated with
comment
parties are familiar with
them,
previously
these proposals
and
interested
the Board believes
60-day comment period is sufficient.
Further,
that a
in order
to
provide the public with time to prepare for implementation, the
Board plans to implement this new policy on March 23, 1988,
unless
the
difficulties
public
with
comments
the
reveal
Board's
significantly different policy.
substantial,
proposal
that
unforeseen
require
a
-6-
PROPOSAL
Introduction
The Board's May, 1985, proposals would have required
institutions incurring book-entry overdrafts to select one of
three
collateralization
options:
(1)
Treat
book-entry
overdrafts the same as other daylight overdrafts,
subjecting
both to the sender net.debit cap; (2) establish a stable pool
of collateral to secure book-entry overdrafts; or (3) establish
a pledge
account
containing
securities,
including
customer
securities, that could be pledged to collateralize book-entry
overdrafts.
Under the third option,
institutions would have
been required to shift securities out of the pledge account
when they no longer became eligible to pledge, say, as a result
of a payment for the securities by an institution's customer.
The proposal on which the Board
is now requesting
comment would continue to permit institutions to choose the
first
option;
dropped.
the
other
two
options,
however,
have
been
In place of the two collateralization options, the
Board is proposing a modified pledge account option that will
allow an institution
to collateralize book-entry overdrafts
with the incoming book-entry securities
(other than paid for
securities
to pledge)
include
sender
and
with
securities
cross-system
net debit
not
eligible
funds
overdrafts
cap only that portion
of
subject
purposes,
each
institution
to
to
the
the book-entry
daylight overdraft that is not so collateralized.
monitoring
and
choosing
For ex post
the
-7-
collateralization option would warrant to its Federal Reserve
Bank
that a specific minimum percentage of
its book-entry
overdrafts would be collateralized by securities in the pledge
account.
A margin would be applied
securities offered as collateral
Reserve Banks of (1) declines
deficiencies
in the pledgor
controls over
The
Board's
the value
to represent
of
risks
the
to the
in collateral values and
institution's
(2)
internal operating
its securities transfer and clearing business.
policy
supplementary
to
is
rounded
out
self-assessment
of
by
(1)
each
the
use
of
institution's
a
own
book-entry operations and controls as a factor in determining
margin
amounts,
and
(2)
a maximum
limitation
on
Fedwire
book-entry transactions of either $25 or $50 million.
Details of the Board's proposal follow:
1.
Collateralization
A.
Pledge Agreement
A depository institution or other entity choosing to
collateralize its book-entry overdrafts would take two steps.
First it would enter into a written agreement with its Reserve
Bank granting the Reserve Bank a security interest in all those
securities
policy.—^
that
are
eligible
collateral
under
the Board's
A Reserve Bank's actual collateral position at any
time during the day would be determined by the total market
T/
See Section
collateral.
B^
below,
for
a
discussion
of
eligible
-8-
value of the book-entry securities eligible to be pledged under
the Board's
policy.
Given
accounting
lags,
market
price
changes, and possible conflicting interests in the securities,
a Reserve Bank would know the actual value of the securities in
which it could successfully assert a security interest only
after the fact.
Second, recognizing the impossibility of tracking the
exact collateral amount that secures a book-entry overdraft at
any point in time, the institution would warrant to its Reserve
Bank that the adjusted v a l u e d
of its pledgeable securities
would be no less than a stated warranty ratio.2/
This ratio
would be used to determine collateralized and uncollateralized
book-entry
overdraft
monitoring
purposes.
amounts
As
for
described
day-to-day
in
ex post
cap
below,
the
detail
relationship of the warranty to actual collateral values would
be checked on a periodic basis.
B.
Eligible Collateral
The
Board
believes
that
institutions
should
be
permitted to pledge only securities that were received through
book-entry transfers to secure book-entry related overdrafts.
A healthy
institution
should
not
be
permitted
to
pledge
portfolio assets or securities released each day from pledge as
collateral for dealer loans and maturing hold-in-custody and
2/
See Section C, on adjustments to collateral values, below.
3/
See Section D, on the warranty, below.
-9-
three-party
repurchase
agreements
(RPs).
Accordingly,
the
Board proposes to permit institutions to count as collateral
for
book-entry
related
overdrafts
only
those
book-entry
securities that the institution is authorized to pledge and
that are transferred to the pledging.institution over Fedwire
on the particular day they are pledged.
The Board realizes that excluding collateral released
from maturing RPs and loans may require an increase in costs to
depository
institutions
to
track
throughout
the day
those
securities in a dealer's position that do not come in during
the day on the book-entry wire.
requesting
comment
on
what
the
Therefore,
increase
the Board
in
institutions such tracking is likely to be.
costs
is
for
Specifically, the
Board is interested in knowing the cost to clearing banks of
excluding from their own customers' collateral used to secure
credit extensions those securities that were not transferred
over the book-entry wire that day— and hence did not give rise
to a book-entry overdraft.
C.
In
exposures
Value Adjustments
order
and
to
to protect
increase
Reserve
incentives
Banks
for
against
credit
institutions
to
improve prudential controls over (and reduce the size of) their
book-entry overdrafts,
the Board proposes two adjustments to
the value of eligible-to-pledge collateral.
First,
for purposes
of book-entry collateralization
only, a market risk adjustment would be subtracted to protect
the Reserve
Banks
against
interest
rate
changes
over
the
-10-
interval between the time the collateral is taken and the time
the Reserve
Bank's
claim
is
extinguished.
The
Board
is
proposing to adopt a market risk "haircut" of between three and
five per cent to be applied to book-entry securities collateral
on a daily basis.
Reserve Banks would be given the flexibility
to choose haircut factors within this range for purposes of
applying the standard to particular institutions.
the
individual
institution
market-risk
haircut
The size of
could
be
reviewed as often as the Reserve Bank wishes, but on any day it
would be fixed within the three to five per cent range.
Given
recent price history, a daily haircut for market risk in this
range should be sufficient
to account
for most
fluctuations
in prices of government securities.
specifically
requests
comment on whether
day-to-day
The Board
this procedure
is
desirable, whether a fixed haircut should be applied to all
institutions, or whether the criteria for application of the
haircut to institutions should be further refined.
A supplementary haircut in addition to the market risk
margin,
which
would be specific
to each
institution's
own
operations, would be based on the results of each institution's
self-assessment of these risks.
subject to supervisory review,
This haircut, which would be
is
initially expected
to be
between 0 and 10 per cent for institutions with excellent to
satisfactory assessments.
The
self-assessment
of
an
individual
institution's
controls and procedures in its book-entry operations would be
an extension of the self-assessment approach of the earlier
-11-
Policy
Statement,
internal
controls,
which
addressed
and monitoring
policies,
procedures,
capabilities.
Under
the
proposed policy on book-entry risks, four basic areas would be
addressed in detail as they relate to book-entry clearing and
settlement activities:
°
Credit policy and controls;
°
Collateral monitoring and control;
°
Operational risk; and
°
Funding capacity.
The
would look
self-assessment
in detail
of
credit policy
at the adequacy
of
an
and
controls
institution's
policies and procedures for establishing credit limits for a
customer or a group of related customers and monitoring the
intra-day exposures within these limits.
Although the focus of
the monitoring would be heavily on the book-entry activity, the
institution's overall exposure to the customer would also be
taken into account.
The assessment of an institution's ability to monitor
the position of a customer's collateral would focus on this
critical element of the institution's exposure in book-entry
activity.
both
A sound credit judgment would be impossible without
a good
available
to
measure
secure
of
a
control
over
customer's
what
collateral
is
position
in
overdraft
book-entry securities.
The
assessment
of
an
institution's
operational
environment would have to identify risks posed by such factors
as
capacity
constraints,
internal
bottlenecks,
and
other
-12-
operating conditions that (1) could affect internal information
flows needed to make otherwise sound policies and procedures
work properly, or (2) could affect the overall operation of the
book-entry
securities
market
and
the
exposures
of
the
institution itself and other institutions in the market.
reliability of automated systems,
The
the availability of back-up
processing capability, and the ability to reconcile and resolve
fails and suspense items would be key factors in this area.
Finally, the assessment of funding capacity would look
at the ability of the institution to tap the funds market to
support not only its normal level of funding needs, but also
its ability to fund large book-entry securities positions of
its own or its customers
in situations
involving temporary
operational disruptions or external market strains.
regard,
market perception
of the
normal funding patterns,
institution,
In this
existing
demonstrated funding capacity,
and
and
identified contingency funding plans are key factors.
Each of the four factors
collateral
monitoring
funding capacity)
and
(credit policy and controls,
control,
operational
risk,
would be rated on a four level
and
scale of
Excellent, Very Good, Satisfactory, and Unsatisfactory, with an
overall summary rating.
Any institution rated unsatisfactory
on any of the four factors would not be eligible to participate
in
the
related
option
permitting
collateralization
to book-entry activity,
and all of
of
overdrafts
its book-entry
overdrafts would be included with cross-system funds overdrafts
-13-
for
purposes
of
the
consolidated
net
debit
cap.—'
Institutions with an overall rating of excellent would require
no additional haircut on their pool
after
the adjustment
satisfactory on all
for
market
four
haircut of 10 per cent.
of eligible
risk.
factors
collateral
Institutions
would take
rated
an additional
Those with a very good rating would
take an additional haircut of 5 per cent.
Further details on this self-assessment procedure may
be found in the staff study referred to earlier.
The Board requests comments on whether the additional
haircut
to cover
these
risks
self-assessment guidelines
is
that
needed,
the Board
and whether
the
is proposing
are
appropriate.
D. Warranty
As
part
of
the
collateralization
agreement,
the
pledging institution would warrant to its Reserve Bank that a
specific percentage of its book-entry related overdrafts would
always be covered by eligible collateral as adjusted.
This
warranty ratio would be used for cap monitoring purposes only,
i.e.
for determining the uncollateralized daylight overdraft
that would be subject to the cap.
banks providing
have
clearing services
The Board estimates that
for broker-dealers
adjusted-collateral-value-to-book-entry-overdraft
should
ratios
of 85 to 95 per cent, and thus would be able to use warranty
ratios of at least that amount.
47 See Section E, below, on the consolidated sender net debit
cap.
-14-
The warranty ratio selected by each institution would
be based on the historical evidence of the adjusted values of
eligible-to-pledge
overdrafts.
securities
relative
to
its
book-entry
Each institution would have to present evidence to
its Reserve Bank to support or modify its warranty ratio; the
Reserve Bank would be able to change that ratio if the Reserve
Bank's independent review called for it.
take several forms.
example,
Reserve
This review could
The normal periodic examination would, for
test the warranty and review the margin for other
Bank
guidelines.
risks
associated
with
the
self-evaluation
Moreover, on a random basis— say twice a month for
clearing banks— the Reserve Bank would ask the institution at
the end of the day to demonstrate ex post that the adjusted
value of its eligible collateral in its accounting record at a
specific time that day was equal to or larger than the warranty
percentage of its book-entry overdrafts.
Reserve Bank
might
lower
the warranty
evidence from the institution.
If it was not, the
ratio,
pending
new
Thus, spot checks, as well as
periodic certification coupled with normal examination, would
provide checks on the adequacy of the warranty.
With
purposes and
the warranty
ratio
the real collateral
used
only
for
position coming
monitoring
from
the
repledging of eligible incoming securities, there would be no
need to require institutions to reposition collateral between
accounts at Reserve Banks, as under the pledge account option
published for comment in 1985.
-15-
Under the proposal, each institution would be given
the choice— but not be permitted to switch back and forth—
of
/
either
(1) using the warranty percentage throughout each day,
or (2) adjusting the intra-day warranty amount the next day by
providing its Reserve Bank with the .measured adjusted dollar
amount of pledgeable collateral the institution held each 15
minutes
during
the
day.
Institutions
choosing
the
second
option could have the benefit of eligible collateral in excess
of their own warranty when they could demonstrate it.
They
would also bear the cost— higher uncollateralized overdrafts
subject to cap— when the collateral data available the next day
indicated a level below their warranty ratio.
This approach
would
to
provide
collateral
an
incentive
tracking programs
for
institutions
in order
develop
to be able
to
show
collateral positions above their minimum warranty ratio and
thus
lower
their
overdraft
subject
to
cap.
At
each
institution, the collateral tracking data would only have to be
recaptured ex post.
Under either approach, Reserve Banks would
have to compare from time-to-time warranty ratios (or amounts)
with the ex post adjusted value of pledgeable securities for
which a security interest has been taken.
The actual pledged
securities would be the same under both approaches.
E.
Consolidated Net Debit Cap
The voluntary sender net debit cap— now applicable to
cross-system
policy,
funds
become
a
overdrafts--would,
cross-system
under
consolidated
the
net
proposed
debit
cap
-16-
applicable
to
the
uncollateralized
sum
of
book-entry
cross-system
overdrafts.
funds
and
institutions
would
continue to establish their own caps through a self-evaluation
based
on current
Board
guidelines;
those
institutions
not
adhering to the guidelines and the policy would, as under the
present policy,
be prohibited from incurring funds
overdrafts on Fedwire.
transfer
Under the new policy, they would also
not be able to incur book-entry overdrafts.
The Board would
also consider it an inappropriate use of Fedwire to substitute
purposefully book-entry transfers (which can be collateralized)
for funds
transfers
(which
cannot)
in order
to avoid
the
constraints of the consolidated sender net debit cap.
The current
Reserve
Bank
to
daylight
take
full
overdraft policy authorizes
collateral
for
Fedwire
a
funds
overdrafts whenever it believes it is necessary to protect its
own
position
with
an
individual
institution.
The
Board
proposes that this policy be extended for book-entry overdrafts
at problem institutions as well, permitting Reserve Banks to
take other
collateral
for book-entry overdrafts,
if deemed
necessary.
Full collateralization is required by the Board's
current policy for all the Fedwire funds overdrafts of Edge
corporations,
bankers'
banks,
adjusted primary capital,
Fedwire funds
overdrafts
and
institutions
for
of U.S.
with
negative
the amount by which
branches
and
agencies
the
of
foreign banks exceeds their cap based on their "U.S. capital
equivalency."
The
Board
proposes
that
the
required
-17-
collateralization for Fedwire funds transfers for these special
entities be extended to book-entry overdrafts as well.
2.
Transfer Limits
The Board is also proposing to adopt a mandatory size
limit on book-entry securities transfers of either $25 or $50
million.
The Board believes that this limit would not change
market trade size, but would likely alter delivery practices so
that
transactions would be split,
and partial
orders could begin earlier in the day.
delivery
of
The Board estimates
that this size limit would increase transactions by less than
10 per
cent
of
all
transactions,
but
would
affect
about
one-third of the dollar value of book-entry transfers.
objective of
the transfer
limit
position-building by dealers,
evenly
over
overdrafts.
original
the day,
and
is to constrain
The
intra-day
spread book-entry volume more
limit
the
level
of
book-entry
Maximum transfer limits would not apply to either
issue
transactions
or
to
transfers
of
stripped
securities.
These limitations would only be effective if sellers
and purchasers of securities are willing to accept and pay for
multiple transactions, know what their rights are in the case
of a failure to deliver one or more transactions involved in a
single trade, and do not simply continue to build positions
thereby increasing the size and duration
of overdrafts and
contributing to end-of-day volume bottlenecks.
Thus, to ensure
that transfer size limits are effective, the staff of the Board
-18-
and the Federal Reserve Bank of New York will work with the
various committees of the Public Securities Association,
well
as
other
industry
representatives,
to
as
encourage
development of conforming delivery practices and compensation
rules.
The Board is requesting public comment on whether the
proposed
maximum
million.
With
minimized,
but
transaction
a
lower
such
a
limit
limit,
limit
should
position
may
be
$25
building
unduly
or
$50
may
be
increase
the
transactions costs of large trades and have negative market
effects.
If the Board finally adopts this policy of a size
limit of either amount, it will modify its current policy on
proper uses of Fedwire.
On March 29, 1984, the Board issued a
policy statement stating that "use of Fedwire for the avoidance
of Federal Reserve or private sector risk reduction measures is
not appropriate."
With the May, 1985, policy statement, the
Board reaffirmed this policy.
If the Board adopts a maximum
transfer limit as a risk reduction measure,
the Board will
similarly consider it an unacceptable use of Fedwire to avoid
the
intent
deliveries
of
at
the
transfer
the same
time
limit,
for
such
as
the account
by
of
multiple
the
same
customer, unless the securities were already in position at the
time of the order.
Reserve Banks would monitor the book-entry
wire and take appropriate action
Board's policy.
to end violations
of
the
-19-
As with levels for sender net debit caps, the Board is
intentionally setting the transfer limit at a high level, and
plans to reduce the level over
gained.
time as more experience
is
The Board is interested in the public's view as to
whether the initial limit should be set lower,
such as $25
million.
3.
Netting Arrangements
The Federal Reserve System will continue to monitor
private sector
initiatives to develop a non-Federal Reserve
facility for netting of securities trades made prior to a given
date.
The Board
understands
that
participants
facility would be mainly dealers and brokers.
of
such
a
The facility
would net positions multilaterally and then settle the nets
through
the
Federal
Reserve's
book-entry
wire.
Such
an
approach, by reducing daylight exposure and intra-day credit
risks,
especially
significantly
Board
believes
at
the
large
clearing
reduce
Federal
Reserve
this
private
sector
monitored closely, however,
market
banks,
could
exposure.
initiative
should
The
be
to ensure that these reduce both
Federal Reserve and systemic risks in a fashion that provides
adequate safeguards and limitations within the netting system.
The Board proposes that any private network desiring
to obtain Federal Reserve net settlement services
for
the
clearing of U.S. Treasury or agency securities would have to
provide intra-day data on each participant's net positions and
adjusted collateral values.
Net debits on such networks that
-20-
are collateralized in ways acceptable to the Board would be
exempt from the consolidated cap (whether or not the network
uses Federal Reserve net settlement services),
4.
Monitoring
The
Board's
current
policy
on
funds
daylight
overdrafts calls for ex post monitoring and counseling of those
institutions whose overdrafts exceed their caps.
Moreover, the
Fedwire funds
are
monitored as
transfers
of problem institutions
they occur
(i.e.,
in
"real-time"),
to be
and
those
transfers exposing the Reserve Bank to excessive risk, after
available
collateral
is
considered,
are
to be held
sufficient funds are available or rejected outright.
until
By March,
1987, all Reserve Banks are to have the capability to do such
monitoring on an automated basis, and those that cannot do so
prior to that time are to be able to limit funds transfers of
problem institutions by manual intervention.
Book-entry
securities
transfers,
however,
are
initiated by the seller of securities (sending institution) who
gives
up
securities
and
(receiving institution).
receives
funds
from
the
buyer
The receiving institution does not
directly control either the timing or the exact amount of the
charge
to
transfer.
its
account
Moreover,
that
occurs
with
the
securities
unlike a rejection of a funds transfer
which is known only to— and is controllable by— the sending
institution,
both the sender
and receiver would know
if a
-21-
securities transfer were to be rejected because of insufficient
funds at a troubled receiving institution.
a
real-time
monitoring
process
cannot
It seems clear that
simply
reject
a
securities transfer to a troubed institution, as might be done
in funds
transfer
monitoring.
Rather,
securities
transfers
being received by troubled institutions should be made only on
a fully collateralized basis.
The Board assumes that prior to real-time monitoring,
the warranty ratio of a financially troubled institution would
have
been
gradually
reduced
by
the
Reserve
Bank.
Thus,
increasing amounts of the institution's book-entry exposures
would be included in, and controlled by, its consolidated cap.
The Board also assumes that the institution would be monitored
in real-time against
its cap,
and
that excessive exposures
would have to be secured by a stable, nontransferable pool of
collateral held by the Reserve Bank.
decides
to
implement
full
real-time
When the Reserve Bank
controlled
monitoring for a troubled institution,
it will,
book-entry
in effect,
reduce the institutions warranty ratio to zero and require the
institution to supplement its collateral
to cover both
its
expected funds and securities overdrafts.
With a real-time book-entry monitor
the value of an
incoming book-entry transfer would be compared in real-time to
available funds balances and the value of the collateral pool.
If these amounts were sufficient to cover the transfer,
incoming
securities
would
be
released
to
the
the
receiving
-22-
institution.
(it should be noted
that
securities
receipts
delivered against funds balances and collateral could severely
restrict the institution's ability to make funds transfers.)
If funds balances and collateral values were insufficient to
cover the book-entry transfer,
it would be held until
were available to cover the purchase.
funds
(The sending institution
would receive payment and be unaware that the securities were
being held by the receiving institution's Reserve Bank.)
The
securities being held could become available to the receiving
institution either through incoming funds transfers,
other
securities,
or
transfers
institution against payment.
of
securities
to
sales of
another
Thus, a continual check of funds
balances as well as the cash position arising out of securities
transfers would be necessary to determine when the book-entry
transfer could be processed.
Board
of Governors
of the Federal Reserve
December 10, 1986.
William W. Wiles
Secretary of the Board
System,
FEDERAL RESERVE SYSTEM
[Docket No. R-0588]
Request for Comments on Proposals Regarding
Payment System Risks
Cap Levels
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for comment.
SUMMARY:
The
Board
is
proposing
for
public
comment
an
amendment to its policy regarding risks on large-dollar payment
systems.
The proposal would reduce the levels for the sender
net debit cap in the present policy by 25 per cent.
has also announced
that
it plans
to
consider
The Board
further
cap
reductions at the end of 1987.
DATE:
Comments must be received by February 9, 1987 .
The
Board is proposing that the cap reductions become effective on
June 18, 1987.
ADDRESS:
Comments,
which should refer
to Docket No.
0588,
should be addressed to the Board of Governors of the Federal
Reserve System,
20th and C Streets,
N.W.,
Washington,
D.C.
20551, Attention: Mr. William W. Wiles, Secretary, or delivered
to Room B-2223
between
8:45
a.m.
and
5:15
p.m.
Comments
received may be inspected in Room B-1122 between 8:45 a.m. and
5:15 p.m.,
Rules
except as provided
Regarding
S 261.6(a).
Availability
in § 261.6(a)
of
of the Board's
Information,
12
C.F.R.
-
FOR FURTHER
Director
2-
INFORMATION CONTACT:
(202-452-3368),
or
Edward
Matthew
D.
C.
Ettin,
Gelfand,
Deputy
Economist
(202-452-3634), Division of Research and Statistics? Elliott C.
McEntee, Associate Director (202-452-2231), Division of Federal
Reserve Bank Operations; Oliver I.
Ireland, Associate General
Counsel (202-452-3625), or Joseph R. Alexander, Senior Attorney
(202-452-2489),
Federal
Legal
Reserve
Division;
System,
Board
Washington,
of Governors
D.C.
the
For
20551.
of
the
hearing impaired only: Telecommunications Device for the Deaf
(202-452-3544) Earnestine Hill or Dorothea Thompson.
SUPPLEMENTARY
proposals
INFORMATION:
This
regarding payment
issuing for
public
comment
is
one
of
a
series
system risk
that the
today.
other
The
of
Board
concern
is
the
book-entry securities (Docket No. R-0587), pricing of daylight
overdrafts
(Docket No. R-0592),
consolidation
of affiliated
institutions for cap monitoring purposes
(Docket No. R-0590),
treatment
automated
of
payments
processed
through
clearing
houses (Docket No. R-0591), and a new cap category (Docket No.
R-0589).
The
Board
encourages
all
interested
parties
to
comment on each of these proposals.
The Board urges
proposals,
proposal,
This
commenters
that
prepare
in filing comments
separate
letters
on
for
these
each
identifying the appropriate docket number on each.
procedure
will
facilitate
the
Board’s processing
and
-3-
analysis of the comments on these complex proposals, and will
ensure that each comment is quickly brought to the attention of
those responsible for analysing the proposal.
BACKGROUND
In May, 1985, the Board announced its policy to reduce
the risks that large-dollar payment
systems present
to the
Federal Reserve, to the depository institutions using them, to
the banking system, and to other sectors of the economy.
Fed. Reg. 21,120
this
policy,
(May 22, 1985).
the
Board
50
As a principal component of
strongly
encouraged
depository
institutions and other entities (such as Edge corporations and;
U.S. branches and agencies of foreign banks) incurring daylight
overdrafts
on
Fedwire
or
large-dollar wire network
voluntarily
participating
(hereafter
a cross-system sender
levels,
the
self-evaluation
a
private
"institutions")
net
guidelines established by the Board.
to perform
on
debit
to adopt
cap following
To encourage institutions
necessary
for
setting
cap
the Board announced that institutions not complying
with the policy would not be permitted
to
incur
daylight
overdrafts on Fedwire.
Under
the
the Board's policy,
self-evaluation
creditworthiness;
procedures;
and
rates
itself
operational
credit
policies
an institution performing
in
three
controls,
and
categories:
policies,
procedures.
It
and
then
establishes an overall assessment of "High," "Above Average,"
Average,”
and
corresponding
"adjusted
"No
cap."—^
cap levels
primary
These
defined
capital."—'
translate
as a certain
The
into
multiple
cap multiples
for
of
each
self-assessment cap category are as follows:
Cap Class
High
Above Average
Average
No Cap
Dual Sender Net Debit Cap
Two-Week
Plus SingleAvg.
Day
2.0
3.0
1.5
2.5
1.0
1.5
0.0
0.0
Under the Board’s policy,
an institution is expected
to avoid incurring cross-system net debits that, on average
over a two-week period, exceed the two-week average cap, and,
on any one day, exceed the single-day cap.
Institutions that
have negative adjusted primary capital or have recently grown
1/ The overall rating is basically the lowest of the ratings
in any one category.
2/
"Primary
capital"
includes
common
stock,
perpetual-preferred
stock,
surplus,
undivided profits,
contingency and other capital reserves, qualifying mandatory
convertible instruments, allowances for possible loan and lease
losses (exclusive of any allocated transfer risk reserves), and
minority interests in equity accounts of consolidated
subsidiaries, but excludes limited-life preferred stock.
"Adjusted" primary capital is defined as the sum of these
primary capital components less all intangible assets and
deferred net losses on loans and other assets sold. Adjusted
primary capital for thrift institutions includes any capital
assistance provided by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance
Corporation in the form of net worth certificates pursuant to
12 U.S.C. SS 1729(f) or 1823(i). U.S. branches and agencies of
foreign banks have a cap based on a "U.S. capital equivalency;"
this "capital equivalency" follows the deposit requirements
applied to federal branches and agencies by S 4(g) of the
International Banking Act of 1978, 12 U.S.C. 5 3102(g).
-5-
to a small positive adjusted primary capital position may incur
overdrafts
on
Fedwire
as
large
as
50 per
cent
of
their
unadjusted primary capital if they perform the self-evaluation
and are judged otherwise satisfactory by their Reserve Banks.
The Board has announced that the special cap levels for these
3/
institutions will be eliminated on January 1, 1989.—
In its policy statement, the Board explained that its
initial policy was
purposely designed to minimize initial disruptions
and permits the Board to monitor the impact of its
policy on financial markets.
The Board fully
expects that it will, after review of the initial
impact of its policies, be adopting guidelines
designed to reduce further the volume and
incidence of daylight overdrafts and other uses of
intra-day credit.
Moreover, the policy statement continues,
[i]t should be noted that the Board has purposely
set the recommended caps to be associated with
each category at relatively high levels so that
institutions and their examiners can gain
experience with caps while maintaining a margin of
flexibility for most institutions. The Board will
evaluate these caps continuously, and expects to
have enough data on their impact to recommend new,
lower cap levels by March, 1987.
The Board is now proposing for comment lower cap
levels in accordance with its previously stated intention.
The Board's Division of Research and Statistics
has prepared a study, proposals for Daylight Overdraft Cap
Reductions,
De
Minimis
Caps,
and
Frequency
of
Self-Assessment Ratings (Nov. 1986), that forms the basis
3/
51 Fed. Reg. 23,829 (July 1, 1986).
-6-
of the proposal on which the Board is requesting comment.
This
study
present
contains
cap
levels
information
and
the
on
the experience
possible
effects
proposals to reduce cap levels could have.
with
various
Copies of this
study are available free of charge from the Secretary of
the Board at the address noted above, or from the Daylight
Overdraft Liasion Officer of each Federal Reserve Bank.
The Board encourages all parties interested in commenting
to obtain
a copy
of
the
staff
study
as
it contains
background information that may enable them more readily to
understand the Board's proposal.
PROPOSAL
The
Board proposes
to reduce
the
current
levels by 25 per cent, effective June 18, 1987.
cap
Under the
proposal, the dual sender net debit cap levels would be as
follows:
Cap Class
High
Above Average
Average
No Cap
Dual Sender Net Debit Cap
Two-Week
Plus
SingleAvg.
Day
1.5
2.25
1.125
1.875
0.75
1.125
0.0
0.0
Institutions with negative
adjusted primary capital
or that have recently
improved to a slight
positive adjusted primary
capital position
0.375*i/
0.375*i/
If the Board adopts the proposal effective June
18, 1987, it intends to review the impact of the cap
4/*Applied to unadjusted primary capital.
-7-
reductions at the end of 1987, and will consider further
cap reductions at that time.
Board of Governors of the Federal Reserve System,
December 10, 1986.
William W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
[Docket No. R-0589]
Request for Comment on Proposals Regarding
Risks on Large-Dollar Transfer Systems
"De Minimis" Caps
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for comment.
SUMMARY:
"Reducing
The Board is proposing to amend its policy statement
Risks
on
Large-Dollar
Electronic
Funds
Transfer
Systems" to provide for a "j3e minimis" cap category in addition
to the sender
net debit
policy.
cap
This
cap provided
would
be
for
available
in the original
only
for
those
institutions whose boards of directors approved the c e minimis
t
cap.
Institutions coming under the new cap category would not
have to undergo the periodic self-evaluation required to select
a sender net debit cap.
The < e minimis cap would be the lesser
3
of 10 per cent of the institution's adjusted primary capital or
$500/000.
As
under
the
present
policy,
an
institution's
Federal Reserve Bank could prohibit the use of Fedwire daylight
overdrafts,
and
its
primary
supervisor
continues
to
have
authority to restrict the use of daylight credit that is not
consistent with safe and sound banking.
The Board also seeks
comment on whether the de minimis cap should be available only
-2-
to
those
institutions
that
incur
overdrafts
up
to
the
de minimis level no more than twice per biweekly monitoring
period.
DATE:
Comments must be received by February 9, 1987,
ADDRESS:
Comments, which should refer
to Docket No. R-0589
should be addressed to the Board of Governors of the Federal
Reserve System,
20th and C Streets,
N.W.,
Washington,
D.C.
20551, Attention: Mr. William W. Wiles, Secretary; or delivered
to Room B-2223
between 8:45
a.m.
and
5:15
p.m.
Comments
received may be inspected in Room B-1122 between 8:45 a.m. and
5:15 p.m., except as provided in § 261.6(a)
Rules
Regarding
Availability
of
of the Board's
Information,
12
C.F.R.
S 261.6(a).
FOR FURTHER
Director
INFORMATION
(202-452-3368),
CONTACT:
Matthew
Edward C.
D.
Ettin,
Gelfand,
Deputy
Economist
(202-452-3634), Division of Research and Statistics; Elliott C.
McEntee, Associate Director (202-452-2231), Division of Federal
Reserve Bank Operations; Oliver I. Ireland, Associate General
Counsel (202-452-3625), or Joseph R. Alexander, Senior Attorney
(202-452-2489),
Federal Reserve
Legal Division;
System,
Board of Governors
Washington,
D.C.
20551.
of
For
the
the
hearing impaired only: Telecommunications Device for the Deaf
(202-452-3544), Earnestine Hill or Dorothea Thompson.
-3-
SUPPLEMENTARY INFORMATION:
This is one of a series of proposals regarding payment
system risk
today.
No.
that
the Board
is issuing
for public
comment
The others concern the book-entry securities
R-0587),
reducing
self-assessment
cap
ratings
levels
(Docket
for
No.
institutions
R-0588),
(Docket
filing
pricing
of
daylight overdrafts (Docket No. R-0592), monitoring of daylight
overdrafts of affiliated institutions on a consolidated basis
(Docket No.
R-0590),
and
treatment
through automated clearing houses
of
payments
(Docket No.
processed
R-0591).
The
Board encourages all interested parties to comment on each of;
these proposals.
The Board urges
proposals,
proposal,
commenters
that
in filing comments
prepare
separate
letters
on
for
these
each
identifying the appropriate docket number on each.
This procedure
will
facilitate
the
Board's processing
and
analysis of the comments on these complex proposals, and will
ensure that each comment is quickly brought to the attention of
those responsible for analysing the proposal.
BACKGROUND
In May, 1985, the Board announced its policy to reduce
the risks that large-dollar payments systems present to the
Federal Reserve, to depository institutions using them, to the
banking system, and to other sectors of the economy.
Reg. 21,120
(May 22, 1985).
50 Fed.
As a principal element of that
-4-
policy, each depository institution or other entity (such as an
Edge
corporation
participating
or
U.S.
on private
branch
of
large-dollar
a
foreign
networks
bank)
or
incurring
daylight overdrafts on Fedwire (hereafter "institution") were
strongly encouraged
to adopt
a "sender
net
debit
cap"
(a
ceiling on the aggregate cross-system net debit position that
it
incurs
during a given
interval)
district Federal Reserve Bank.
and
file
it with
its
For most participants,
the
sender net debit caps are computed as a multiple of adjusted
primary
capital.—^
An
institution
selects
a
cap
after
undergoing a self-assessment, including review by its board o£
directors, following guidelines developed by the Board.
Under the Board's current policy, formal caps apply to
all institutions in the cap classification category, regardless
of the size of their relative or absolute daylight overdrafts.
This part of the policy has proved difficult to administer.
In
any two-week period, almost half of the 3,400 institutions
1/
"Primary
capital"
includes
common
stock,
perpetual-preferred
stock,
surplus,
undivided profits,
contingency and other capital reserves, qualifying mandatory
convertible instruments, allowances for possible loan and lease
losses (exclusive of any allocated transfer risk reserves), and
minority interests in equity accounts of consolidated
subsidiaries, but excludes limited-life preferred stock.
"Adjusted" primary capital is defined as the sum of these
primary capital components less all intangible assets and
deferred net losses on loans and other assets sold.
Adjusted
primary capital for thrift institutions includes any capital
assistance provided by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance
corporation in the form of net worth certificates pursuant to
12 U.S.C. S 1729(f) or 1823(i).
S
U.S. branches and agencies of
foreign banks have a cap based on a "U.S. capital equivalency;"
"capital equivalency" follows the deposit requirements applied
to federal branches and agencies by S 4(g) of the International
Banking Act of 1978, 12 U.S.C. S 3102(g).
-5-
incurring an overdraft have either not filed a cap or have
filed a cap of zero.
These 1,600 institutions are mainly small
and account for about 0.4 per cent of all funds overdrafts.
The
managements
of
these
institutions
find
either
the
self-evaluation or the absolute avoidance of overdrafts very
burdensome,
required
and many Reserve Banks have found the resources
to monitor
and
counsel
these
institutions
to be
unusually high relative to the risk exposure involved.
In order to alleviate the burdens and costs both to
the Federal Reserve and the institutions involved, the Board is
proposing
to establish
a "de minimis" cap
category.
This
proposal is based on a paper prepared by the Board's Division
of Research and Statistics, Proposals for Daylight Overdraft
Cap
Reductions,
De
Minimis
Caps,
Self-Assessment Ratings (Nov. 1986).
and
Frequency
of
Copies of this study are
available free of charge from the Secretary of the Board at the
address noted above,
or from the Daylight Overdraft Liaison
Officer of each Federal Reserve Bank.
The Board encourages all
parties interested in commenting to obtain a copy of the staff
study as it contains background information that may enable
them to understand the rationale for the Board's proposals more
readily.
PROPOSAL
The Board is proposing to create a d e minimis cap
*
category as follows:
-6-
1.
Any institution, regardless of size, could incur
total cross-system daylight overdrafts up to the de minimis
level.
That
level would be the
lesser
of
0.1
times
institution's adjusted primary capital or $500,000.
the
This cap
would be applied on a daily basis.
2.
Institutions
would
not
have
to
undergo
the
self-assessment required for selecting a sender net debit cap
under
the
existing
Board
policy.
Nevertheless,
for
an
institution to be in compliance with the Board's policy, its
board of directors would have to approve the use of daylight
credit up to the de minimis level.
director's
resolution approving
A copy of the board of
the use of daylight
credit
would have to be filed annually with the institution's Reserve
Bank.
3.
Federal
As under
Reserve
the present
Bank
could,
at
policy,
any
an
time,
institution's
prohibit
an
institution from incurring daylight overdrafts if the Reserve
Bank believes that the institution's use of daylight credit
exposes the Reserve Bank, other depository institutions, or the
payments system to excessive risk.
primary supervisor would continue
Further, an institution's
to have the authority
to
restrict or prohibit the use of daylight credit that is not
consistent with safe and sound banking.
4.
The
Board
also
seeks
comment
on whether
the
de minimis cap should be available only to institutions that
-7-
incur overdrafts up to the de minimis level no more than twice
per biweekly monitoring period.
5.
Any institution that incurred a daylight overdraft
for the first
time and that the Reserve Bank
judges to be
financially sound would be assigned a d£ minimis cap.
If,
after 90 days, the institution did not file with its Reserve
Bank a copy of its board's resolution adopting a de minimis cap
or
a
positive
sender
net
debit
cap
under
the
Board's
guidelines, the Reserve Bank would drop the institution's cap
to zero.
6.
Reserve Banks will vigorously counsel institutions
that chronically violate their de minimis or zero caps,
will
prohibit
violates
these
counseling.
Fedwire
overdrafts
caps and does not
to
any
respond
and
institution
that
to Reserve
Bank
Overdrafts may be denied either through real-time
monitoring or by taking the institution "off-line."
The Board intends that the de minimis cap policy take
effect on June 18,
1987,
unless
the public comments
raise
substantial issues.
Board
of Governors
of
the Federal Reserve
System,
December 10, 1986.
Williams W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
[Docket NO. R-0590]
Request for Comments on Proposals Regarding
Payment System Risks
Limits on Inter-Affiliate Fedwire Transfers
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for Comment.
SUMMARY:
"Reducting
Systems,"
The Board is proposing to amend its policy statement,
Risks
by
on Large-Dollar
limiting
originating depository
incur
daylight
Electronic
inter-affiliate
institutions
overdrafts.
The
Funds
Fedwire
and other
Board
Transfer
transfers
entities
requests
whether the policy should be amended to either
comment
(1)
at
that
on
permit
transfers of funds over Fedwire among affiliated institutions
that create a pattern of daylight overdrafts up to the sending
institution's net debit cap provided certain conditions
are
met, or (2) prohibits such transfers.
DATE:
Comments must be received by February 9, 1987.
The
Board proposes to make the new policy effective on June 18,
1987.
ADDRESS:
Comments, which should refer to Docket No. R-0590,
should be addressed to the Board of Governors of the Federal
Reserve System,
20th and C Streets,
N.W.,
Washington,
D.C.
20551, Attention: Mr. William W. Wiles, Secretary/ or delivered
to Room B-2223
between
8:45
a.m.
and
5:15
p.m.
Comments
-2-
received may be inspected in Room B-1122 between 8:45 a.m. and
5:15 p.m., except as provided in § 261.6(a)
Rules
Regarding
Availability
of
of the Board's
Information,
12
C.F.R.
§ 261.6(a).
FOR FURTHER
(202-452-3368),
Director
Elliott c .
of
INFORMATION
CONTACT:
Edward
C.
Ettin,
Deputy
Division of Research and Statistics;
McEntee, Associate Director ( 2 0 2 - 4 5 2 - 2 2 3 1 ) ,
Federal
Reserve
Bank
Operations;
Oliver
I.
Division
Ireland,
Associate
General
Counsel
(202-452-3625),
or
Alexander,
Senior
Attorney
(202-452-2489),
Legal
Joseph
R.
Division;
Board of Governors of the Federal Reserve System, Washington,;
D.C.
20551.
For the hearing impaired only: Telecommunications
Device for the Deaf ( 2 0 2 - 4 5 2 - 3 5 4 4 ) ,
Earnestine Hill or Dorothea
Thompson.
SUPPLEMENTARY
proposals
issuing
INFORMATION:
This
is
one
regarding payment system risk
for
public
comment
today.
The
of
a
series
that the
others
of
Board
is
concern
book-entry securities (Docket No. R-0587), pricing of daylight
overdrafts (Docket No. R-0592), cap levels (Docket No. R-0588),
"de minimis" caps
(Docket
No.
R-0589),
and
treatment
payments processed through automated clearing houses
No. R-0591).
of
(Docket
The Board encourages all interested parties to
comment on each of these proposals.
The Board urges
proposals,
proposal,
commenters
that
prepare
in filing comments
separate
letters
on
for
these
each
identifying the appropriate docket number on each.
-3-
This procedure
will
facilitate
the
Board's
processing
and
analysis of the comments on these complex proposals, and will
ensure that each comment is quickly brought to the attention of
those responsible for analysing the proposal.
BACKGROUND
The
Board's
Large-Dollar
policy
Electronic
intra-day net
statement
Funds
debit limits
"Reducing
Transfer
Systems"
for depository
Risks
on
establishes
institutions
and
other entities (such as Edge corporations and U.S. branches of
foreign
banks;
hereafter,
all
will
be
referred
"institutions") on an individual entity basis.
to
as
The 1985 staff
report to the Board, from which the policy statement was drawn,
recommended
that
System Advisory
the
Group
private-sector
study
the
Large-Dollar
possibility
of
Payments
allowing
institutions affiliated through holding company ownership to
treat all of the affiliates as a single entity for purposes of
the Board's daylight overdraft policy.
The Federal Reserve's
staff also studied the issue.
After
reviewing the consolidation issues,
the Board
has determined that the current prohibition on consolidation of
affiliates for daylight overdraft monitoring purposes should be
retained.
consolidate
Permitting
their
holding
funds
company
transfer
organizations
activity
for
to
daylight
overdraft monitoring purposes would result in an increase in
either Federal Reserve Bank credit risk or systemic risk to
depository
institutions.
Consolidation
could
also
-4-
significantly
increase
the
daylight overdrafts for
maximum
the lead
permissible
level
institution in a holding
company organization.
Without enforceable guarantees
Reserve
affiliates
Bank
from
the
of
of
the
lead
to the
institution
i
covering this additional overdraft level,
credit
exposure
would
increase.
If,
the Reserve Bank's
however,
enforceable
guarantees were provided, reliance by the Reserve Bank on them
in the event of a default could endanger other institutions in
the holding company organization.
One of the arguments advanced in favor of modifying
the policy statement to permit monitoring on a consolidated
basis
is that holding company organizations
can approximate
consolidation through daily Fedwire transfers, concentrating at
one lead institution funds equal to their subsidiaries'
caps.
For example, a holding company could arrange for all of its
depository institution subsidiaries
to transfer funds
up to
their individual sender net debit caps to the lead bank; each
of the sending affiliates would then have used all the daylight
credit available to them under the Board's policy to provide
the lead bank with a large net credit position against which
the lead bank's payments could be made.
The effect would be to
consolidate the caps of all institutions in the holding company
in the one subsidiary, giving that subsidiary a much higher cap
than would be available
Board's policy.
to it if it stood alone under the
-5-
The Board believes that such de facto consolidation
practices may be inconsistent with the principle of monitoring
daylight overdrafts on a separate-entity basis.
Accordingly,
the Board is requesting comments on two alternative amendments
to its policy statement: one would permit institutions within a
holding
company
inter-affiliate
system
funds
to
simulate
transfers
consolidation
that
result
in
through
daylight
overdrafts so long as certain conditions were met; the second
would prohibit such transfers.
Further background material regarding these proposals
may
be
found
Overdraft
in
the
Monitoring
(Nov. 1986).
staff
paper,
of Affiliated
Consolidated
Depository
Daylight
Institutions
Copies of this study ar« available free of charge
from the Secretary of the Board at the address noted above, or
from the Daylight Overdraft Liaison Officer of each Federal
Reserve Bank.
The Board encourages all parties interested in
commenting to obtain a copy of this staff paper as it contains
background information that may enable them to understand more
readily the rationale for the Board's proposal.
PROPOSAL
The Board requests public comments on the following
alternative proposals for dealing with inter-affiliate transfer
practices:
-6-
1.
Under the first alternative,
the Board's policy
would continue to permit depository institutions to transfer
funds to their affiliates, even if such transfers cause the
originating institutions to incur overdrafts up to their net
debit caps, provided that each institution's board of directors
specifically approves each year the extension of credit to
specified affiliates and sends a copy of its resolution to its
Reserve Bank.
Further,
the institution's primary supervisor,
during the examination process, will review the transfer in the
context of the institution's overall credit relations with the
affiliates
for
consistency
soundness,
and
confirm
with
that
standards
the
of
originating
safety
and
institution
continues to exercise independent credit judgment in deciding
each day whether or not to make the transfers and maintains
adequate
Banks,
internal
of course,
controls
to do so.
retain the right
The
Federal
unilateraly
Reserve
to require
collateral or to prohibit any Fedwire transfer that,
opinion of the Reserve Bank,
exposes
the Reserve
in the
Bank
to
excessive risk.
2.
modify
Under
its
policy
the second alternative,
statement
to
prohibit
the Board
would
inter-affiliate
transfers that create a pattern of daylight overdrafts at the
sending
institutions
in
order
to
enable
one
or
more
institutions of a holding company system to obtain the benefits
of a higher net debit cap than they would be entitled to in the
absence of such transfers.
To ensure that institutions do not
-7-
engage
in such practices,
funds
transfer
activities
among
affiliates will be monitored by Reserve Banks and through the
examination process.
Board
of Governors
of the Federal Reserve
System,
December 10, 1986.
William W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
[Docket No. R-0591]
Risks on Large-Dollar Transfer Systems
Automated Clearing House Transactions
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for comment.
SUMMARY:
The Board of Governors of the Federal Reserve System
("Board")
is proposing several changes related to automated
clearing house
additional
("ACH")
steps
transactions,
in implementing
adopted by the Board in May,
"Reducing
Risks
on
Systems," 50 Fed. Reg. 21120).
the risk
1985.
Large-Dollar
which are
intended
as
reduction policy
(See, policy statement,
Electronic
Funds
Transfer
The changes proposed include:
A.
B.
Amendment of the Reserve Banks' ACH Operating
Circular to modify the time of finality for ACH
credit and debit transactions, and to clarify the
Reserve Bank's rights with regard to ACH credit
transfers.
C.
Efforts to reduce return times and improve
procedures for handling large-dollar ACH return
items.
D.
DATE:
Modification of the e£ post monitor to post ACH
debit transactions and check transactions at 1:00
p.m., Eastern Time, on the settlement/presentment
date.
Procedures for handling ACH credit transfers when
the originating institution is closed during the
middle of the week or for a nonstandard holiday.
Comments must be received by March 16, 1987.
ADDRESS:
Comments, which should refer to Docket No. R-0591,
may be mailed to the Board of Governors of the Federal Reserve
2-
-
System, 20th Street and Constitution Avenue, N. W., Washington,
D. C.
20551,
to
the
attention
of
Mr.
William
W.
Wiles,
Secretary, or delivered to room B-2223 between 8:45 a.m. and
5:15 p.m.
Comments may be inspected in room B-1122 between
8:45 a.m. and 5:15 p.m., except as provided in § 261.6(a) of
the Board's Rules Regarding the Availability of Information, 12
C.F.R. § 261.6(a).
FOR FURTHER INFORMATION CONTACT:
Director
(202/452-2231),
Division of
Federal
Terrence
Belton,
M.
or
Elliott C. McEntee, Associate
Florence
M.
Young,
Reserve Bank Operations
Economist
Adviser,
(202/452-3955);
(202/452-2444),
Division
of
Research and Statistics; Oliver I. Ireland, Associate General
Counsel
(202/452-3625),
or
Elaine
M.
Boutilier,
Senior
Attorney, Legal Division (202/452-2418), Board of Governors of
the Federal Reserve System, Washington, D. C. 20551.
For the
hearing impaired only. Telecommunications Device for the Deaf
("TDD"), Earnestine Hill or Dorothea Thompson (202/452-3544).
SUPPLEMENTARY
proposals
INFORMATION:
This
is
regarding payment system
issuing for public comment today.
one
of
a
series
risk that the
Board
of
is
The others concern the net
debit cap (Docket Nos. R-0588 and R-0589), pricing of daylight
overdrafts
(Docket No.
R-0592),
consolidation of affiliated
institutions for cap monitoring purposes
and book-entry securities transfers
(Docket No. R-0590),
(Docket No. R-0587).
The
Board encourages all interested parties to comment on each of
-3-
these proposals.
The Board urges that in filing comments on
these proposals, commenters prepare separate letters for each
proposal,
This
identifying the appropriate docket number on each.
procedure
will
facilitate
the
Board's
processing
and
analysis of the comments on these complex proposals, and will
ensure that each comment is quickly brought to the attention of
those responsible for analyzing the proposal.
Background
On
statement,
May 22,
the
Board
published
"Reducing Risks on Large-Dollar
Transfer Systems"
not,
1985,
however,
transactions.
(50 Fed. Reg.
21120).
its
Electronic Funds
That statement did
resolve the issues of risks arising from ACH
In
a related
document,
the
Board
requested
comment on issues relating to risk in ACH transfers.
Reg. 21130)
policy
(50 Fed.
Based upon the comments received and further study
of the issues, the Board is proposing certain changes related
to ACH transactions.
The Board anticipates
proposed changes set forth
implementing the
in this document by the fourth
quarter of 1987, after consideration of the comments received.
For a complete and detailed discussion of the ACH risk
issues considered by the Board, please refer to the Board staff
memorandum dated November,
1986,
entitled,
"Risk Associated
with the Automated Clearing House Mechanism."
Copies of this
memorandum are available from the Daylight Overdraft Officer at
each Federal Reserve Bank.
(The memorandum also includes a
detailed summary of the comments received regarding the May
1985 proposal on these issues.)
-4-
While the risks relating to the ACH are small compared
with
large-dollar
concerned
that
funds
the
transfer
ACH
systems,
mechanism
the
exposes
Board
is
individual
participants and the Federal Reserve to significant risk
certain cases.
One source of this concern
exposure associated with ACH transactions.
in
is the temporal
Because the ACH is
a value-dated mechanism, depository institutions are typically
exposed to overnight as well as intra-day credit risk when
using the ACH.
In the case of ACH credit transactions —
as payrolls or corporate trade payments —
such
temporal risk begins
one or two days prior to settlement day when the originating
depository
institution
processor.
At
that
deposits
time,
the
the
payments
depository
with
the
institution
is
committed to making the payment for its customer even though
the customer may not fund its account until close of business
on
settlement
day.
About
one-half
of
all
ACH
credit
transactions are processed two days in advance of settlement
day.
or
These transactions entail credit risk comparable to a two
three
day
loan
granted
by
the originating
institution to its corporate customer.
longer than the temporal
payments —
depository
This is significantly
risk associated with wire transfer
where payments are processed and settled on the
same day.
ACH debit transactions also entail temporal risk.
this case,
however,
the risk exists on
the days
settlement day when the ACH debit transactions —
In
following
like checks
-5-
—
may be returned after the collecting corporate customer has
already made use of the funds.
Five to six days typically
elapse before collecting institutions receive ACH return items
from payor institutions, so the collecting institutions may be
exposed to substantial temporal exposure.
significantly exceeds
the temporal
Again, this exposure
exposure associated with
wire transfer payments.
In addition to concerns about temporal risk, the Board
is concerned that its recently adopted guidelines on daylight
overdrafts may create incentives to use the ACH for some types
of large-dollar payments that are currently made over wire
transfer systems.
Accordingly, the Board is proposing changes
in the treatment of ACH transactions
categories:
amendments
that
fall
(1) modification of the ex post
to
the
Reserve
Banks'
ACH
monitor;
Operating
concerning the finality of ACH transactions;
into
four
(2)
Circular
(3) efforts to
reduce return times for large-dollar ACH return items; and (4)
treatment of ACH credit transactions originated by institutions
observing a midweek closing or nonstandard holidays.
Ex Post Monitoring System
The current ex post monitoring system is designed to
monitor depository institutions'
compliance with the Board's
payment system risk reduction program.—^
The Board's
1/ The time at which transactions are posted to the ex post
monitor does not affect the time at which funds become
available or final.
-6-
analysis suggests that existing procedures for monitoring ACH
debit
transactions
shortcomings.
treated
and
First,
differently
checks
have
ACH debit
even
a
number
and check
though
the
of
serious
transactions
intra-day
credit
associated with the two payment forms is similar.
are
risk
Currently,
the net of ACH debit transactions is posted at the opening of
business for ex post monitoring purposes.
net
of
check
transactions
plus
all
By contrast, if the
other
"off-line"— /
transactions is a credit, it is posted in the e c post monitor
j
at the opening of business? yet if it is a debit, it is posted
at the close of business.
It is desirable to treat checks and
ACH debit items as similarly as possible in the e£ post monitor
to avoid artificial
incentives
to use one over
the other.
Second, posting ACH debit transactions to receivers' accounts
at the opening
of business
institutions do not incur
is
inappropriate
because
these
intra-day credit risk and do not
impose any risk on the Federal Reserve until after the return
deadline.
A final problem with the current
procedures
is
that
they
create
ex
incentives
post monitoring
for
depository
institutions to originate ACH debit transactions in order to
circumvent
the
Board's
reduction program.
large
dollar
payments
system
risk
There are several factors that contribute
2/ Off-line transactions include all transactions other than
ACH, funds transfer, and book-entry security transfers.
-7-
to
these
incentives.
First,
ACH
transactions
entail
significantly lower costs than wire transfer payments.
Second,
ACH payments provide depository institutions greater control
over the timing of payments.
This is because a collecting
institution that receives payments by wire transfer must rely
on the payor institution to send funds on a timely basis.
contrast,
By
institutions that collect funds by originating ACH
debit transactions currently have these funds posted to their
reserve accounts at opening of business on settlement date.
This earlier crediting of ACH transactions creates an incentive
for collecting institutions near their cap to substitute ACH
debit originations for wire transfer payments.
By making such
a substitution, the collecting institution is able to receive
the credit from the transaction at the opening of business in
the ex_ post monitor, and thereby able to use that credit to
fund anticipated daylight overdrafts.
Payor institutions not
near their caps, moreover, may be willing to accomodate this
substitution because of the lower costs associated with ACH
transactions
and
their
ability
to
reverse
the
transaction
without risk if the originating institution does not cover its
debit
with
the
receiving
institution
by
the
end
of
the
settlement day.
After evaluating a number of alternatives,
the Board
proposes that ACH debit and check transactions be posted to the
accounts
of
institutions,
collecting
for
(originating)
e c post
j
monitoring
and
payor
purposes,
(receiving)
on
the
-8-
settlement (presentment) date at 1:00 p.m. Eastern Time.
This
posting time would apply to items processed by the Federal
Reserve as well as items processed by private clearers that use
the Federal
Reserve's net
settlement
service.
Accordingly,
these private ACH clearers will be required to segregate their
ACH debit transactions from their credit
proposal
would
reduce
the
inequitable
transactions.
impact
of
The
current
procedures on receivers of ACH debit transactions by providing
them some additional time to obtain funds to cover
payments.
incoming
At the same time, the proposal reduces incentives to
use the ACH and check collection mechanisms to create intra-day
credit
in
program.
order
to
Finally,
circumvent
the
Board's
risk-reduction
the proposal acknowledges that the risks
associated with ACH debit and check transactions are comparable.
Under existing ex post monitoring procedures,
are
approximately
daylight
400
overdrafts
transactions.
The
depository
solely
from
Reserve
institutions from conducting
Board's review of ACH risk.
institutions
the
Banks
receipt
have
there
that
incur
of ACH
debit
excused
a self-evaluation,
these
pending
the
If the 1:00 posting time for ACH
debits is adopted as proposed, there could be approximately 70
depository institutions
that might have daylight overdrafts
only as a result of ACH debit transactions or checks that will
exceed the de minimis cap proposed in a related Board action.
(See "Request for Comment on Proposals Regarding
Caps",
Docket
No.
R-0589).
Because
the majority
'De Minimis'
of
these
-9-
institutions should have little difficulty in remaining below
their net debit caps under 1:00 p.m. posting, the Reserve Banks
will no longer grant exemptions from the risk reduction program
to institutions incurring daylight overdrafts solely from ACH
transactions or checks.
With respect to ACH credit transactions, the current
procedure for posting these transactions to the ex post monitor
treats them like funds transfers originated at the opening of
business on the settlement day.
This procedure is reasonable
because the originating depository institutions commit to make
the payments when they deposit them with a Reserve Bank.
result,
risk.
this procedure
Furthermore,
accurately measures
the current procedures
As a
intra-day credit
for posting
ACH
credit transactions to the ex post monitoring system do not
create
incentives to use the ACH as a substitute for wire
transfers because originators1 accounts
opening of business on the settlement
are debited at
day.
Therefore,
the
ACH
credit transactions will continue to be posted to the accounts
of both originating and receiving institutions in the ex post
monitor at the opening of business on the settlement day.
In summary,
system is to:
the proposal for the e c post monitoring
j
(1) post ACH debit and check transactions to the
accounts of collecting and payor
Eastern Time;
institutions
(2) discontinue the exemptions
at 1:00 p.m.
from the
risk
reduction policy for institutions incurring daylight overdrafts
solely from ACH transactions or checks;
and
(3) continue to
-10-
post ACH credit transactions, for ex_ post monitoring purposes,
at the opening of business on the settlement date.
ACH Operating Circular Changes
Most depository institutions treat credit received for
ACH credit items as final as of the opening of business on the
settlement
circular
day.
states
However,
only
the Reserve Banks'
that
credit
given
ACH
for
operating
ACH
credit
transactions is available for use on the settlement day.— /
Further,
the Reserve
Banks
reserve
the
right
to
reverse
transactions if either the originator or receiver is suspended
or closed before or during
the settlement day.
While
the
Reserve Banks would make a reasonable effort to provide timely
notice
to
receiving
institutions
when
they
reverse
transactions, reversing entries can be functioned without prior
notice.
Because the dollar value of the majority of ACH credit
transactions
depository
is
low,
the
institutions
risk
of
is also
loss
low.
to most
receiving
In addition,
because
receiving institutions for credit transactions originated by a
single institution are a highly diverse group, the reversal of
ACH credit transactions on the settlement day should not result
in systemic
risk.
Nevertheless,
the
Board
believes
that
receiving institutions would benefit if there were greater
3/ Copies of the ACH Uniform Operating Circular are available
at each Reserve Bank office.
-11-
certainty regarding the time that
transactions
become
final.
At
"small-dollar" ACH credit
the
same
time,
the
Board
believes that the ACH should not be used as a substitute for
large-dollar
payments
that
are
large-dollar payments network
currently
made
via
(Fedwire or CHIPS).
the
The Board,
therefore, proposes that the Reserve Banks modify their ACH
operating circular to provide (1) finality at 1:00 p.m. local
time
on
the
settlement
date
to
receivers
of
ACH
credit
transactions amounting to $5,000 or less, and (2) finality for
ACH credit transactions over $5,000 when the Reserve Banks have
received
actually
"small-dollar” ACH
and
finally
credit
Reserve Banks would use
collected
transactions
their best
funds.
If
are
reversed,
the
efforts
to notify
the
receiving depository institution before the 1:00 p.m. deadline
for finality.
In the case of
”large-dollar" payments,
the
Reserve Banks would use their best efforts to notify receiving
depository institutions as soon as possible that payments are
being reversed.
If ACH credit
transactions
of $5,000 or
less
are
treated as final to receivers at 1:00 p.m. local time on the
settlement day, the finality accorded these transactions would
be closer to the treatment the Board believes that the majority
of ACH users believe
transactions.
is currently accorded
to ACH credit
Treating ACH credit transactions in amounts over
$5,000 as provisional until the Reserve Banks have received
actually
and
finally
collected
funds
would
clearly
-12-
differentiate the ACH mechanism from Fedwire.
create
the
inducement
particularly
cautious
for
receiving
about
making
It would also
institutions
funds
to
received
be
via
"large-dollar” ACH transactions available to their customers on
the settlement date.
Under the Reserve Banks* ACH operating circular, ACH
debit transactions may not be reversed by a Reserve Bank acting
on its own initiative after the opening of business on the
banking
day
following
the
settlement
date.
Transactions
reversed as a result of the receiver exercising his right of
return, however, need not be dispatched by the receiver until
midnight
of
the
(presentment) day.
banking
day
following
the
settlement
With regard to check services, the Reserve
Banks reserve the right indefinitely to charge back the amount
of an item for which credit was given subject to receipt of
payment in actually and finally collected funds.
S 210.13)
(12 C.F.R.
While the treatment accorded ACH debit transactions
and checks
should be comparable,
the language
in
the ACH
operating circular may be misleading to users of ACH services.
The Board, therefore, proposes that the Reserve Banks modify
their ACH operating circular to indicate that credit given for
an ACH debit item, like that for checks, is not final until the
Reserve Bank
has received payment
in actually
and
finally
collected funds.
To protect the Reserve Banks from risk associated with
handling
ACH
transactions
for
institutions
experiencing
-13-
financial problems, another modification to the Reserve Banks'
ACH
operating
experiencing
established
circular
financial
to
monitor
is
proposed.
difficulties,
at
For
institutions
procedures
individual
will
institutions
be
the
cumulative balance of all ACH credit transactions originated by
4/
settlement date.—
The operating circular would be modified
to explicitly permit Reserve Banks,
(1)
to require advance
funding or collateral for ACH credit transactions originated by
problem institutions, and (2) to reject credit transactions if
there is a question about the originating institution's ability
to cover the payments.
ACH Return Items
Currently, five to six days, on average, elapse before
return
items
reach
debit transactions.
depository
institutions
A number of factors
originating ACH
contribute to the
delays, including the fact that a large proportion of return
items
are
submitted
to
the Reserve
Banks
in paper
form,
necessitating the use of ground transportation for delivery.
In addition, dispatch by the returning depository institution
by the midnight deadline does not coincide with processing
cycles at Reserve Banks and contributes to delays
in items
being returned to depository institutions.
The Board believes that meaningful reductions in ACH
4/
A task force will be established to develop specific
procedures for monitoring ACH debit and credit transactions.
-14-
risk could be realized by reducing return times and improving
procedures for providing advices of large-dollar returns.
The
Board, therefore, requests comment on the following questions:
°
Should the ACH return deadline for debit
transactions amounting to $2,500 and above be
changed from dispatching return items by midnight
of the banking day following the settlement date or
the day of receipt, whichever is later, to
depositing them for processing at the nighttime
deposit deadline on the banking day following the
settlement date or day of receipt, whichever is
later?
0
If the ACH return deadline for debit transactions
amounting to $2,500 and above were changed, the
deadline for paper returns would be changed to a
range of 5:00 p.m. to 8:00 p.m. Eastern Time so
that paper returns could be processed during the
nighttime operating cycle.
To facilitate a change
in the paper return deadline, it is envisioned that
the Reserve Banks would offer a telephone return
service to institutions that are unable to present
paper return items by the paper return deadline.
It is anticipated that thfe fee for the proposed
telephone return service would be about $6.00 per
return item, which is comparable to the fee the
Reserve Banks charge for off-line funds transfer
requests.
°
If the return deadline for ACH debit transactions
were changed, should all institutions returning ACH
debit transactions amounting to $100,000 or more be
required to send to the originator of the
transaction a notice that the item is being
returned by 3:00 p.m. Eastern Time the banking day
following the settlement date or the day of
receipt, whichever is later?
Would a higher or
lower dollar cut-off for required advices be
preferable?
If such a requirement is adopted, the
Reserve Banks would assess fees for this
notification service that would be comparable to
the fees assessed for the check notification
service, that is, $2.25 for an on-line notice and
$4.25 for an off-line notice.
°
The Reserve Banks could segregate ACH return items
and transmit them to originators at the opening of
-15business on the day following processing, rather
than intermingling them with original transactions
as is currently the practice.
Would institutions
originating ACH debit transactions be interested in
using such a service?
Midweek and Nonstandard Holiday Closings
In November 1985, the Board requested public comment
on a proposal to modify the procedures used by the Reserve
Banks to recover the cost of ACH float caused by depository
institutions that close" during the middle of the business week
and on nonstandard holidays.
this year,
(50 Fed. Reg. 47752)
In May of
the Board approved procedures for recovering the
cost of such float generated by ACH debit transactions,
deferred
action
on
procedures
associated
with
ACH
transactions until the ACH risk study was completed.
but
credit
(51 Fed.
Reg. 21421, June 12, 19861
In November 1985, the Board proposed that float caused
by the closing of depository institutions during the middle of
the business week or on nonstandard holidays be recovered by
debiting the institutions on the preceding business day and
compensating them for the early debit by means of an as-of
adjustment.
The Board now proposes to modify that proposal so
that originating depository institutions would be charged,
as
though they were open, for ACH credit transactions that settle
on days that they are closed.
voluntary
and
mandatory
This policy would apply to both
holidays
because
the
depository
institutions are aware of their obligation in advance.
The Reserve Banks have adopted a standard
holiday
-16-
schedule that, with one exception —
the observance of Mardi
Gras Day at the New Orleans Branch —
eliminates the observance
of nonstandard holidays.
For depository institutions located
in the New Orleans zone and originating credit transactions for
settlement on Mardi Gras Day,
it is proposed that they be
charged at the close of business on the preceding business day
and
be compensated
for
the
early debit
through
an
as-of
adjustment.
Board of Governors of
the Federal Reserve
System,
December 10, 1986.
Williams W. Wiles
Secretary
FEDERAL RESERVE SYSTEM
[Docket No. R-0515]
Policy Regarding Risks on Large-Dollar Wire Transfer Systems
Amendment
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Policy statement; amendment.
SUMMARY:
This document amends the Board's policy statement,
"Reducing
Risks
Systems,"
to provide
entities
on
Large-Dollar
Electronic
that depository
Funds
institutions
Transfer
and other
(such as foreign banks) that undergo a self-assessment
to establish levels for their sender net debit caps need do so
only once each year, rather than every six months as provided
for in the original policy statement.
The original
policy
statement was published in the Federal Register on May 22, 1985
(50 Fed. Reg. 21,120).
EFFECTIVE DATE:
December 10, 1986.
FOR FURTHER INFORMATION CONTACT:
Director
(202-452-3368),
or
Edward
Matthew
D.
C.
Ettin,
Gelfand,
Deputy
Economist
(202-452-3634), Division of Research and Statistics; Elliott C.
McEntee, Associate Director
(202-452-2231), Division of Federal
Reserve Bank Operations; Oliver
I. Ireland, Associate General
Counsel (202-452-3625), or Joseph R. Alexander, Senior Attorney
(202-452-2489),
Federal
Reserve
Legal
Division;
System,
Board
Washington,
of
D.C.
Governors
50551.
of
the
For
the
hearing impaired only: Telecommunications Device for the Deaf
(202-452-3544), Earnestine Hill or Dorothea Thompson.
-
SUPPLEMENTARY
INFORMATION:
2-
The
Board's
policy on
reducing
risks on large-dollar wire transfer systems strongly urges each
depository
institution
or
other
entity
(such
as
an
Edge
corporation or U.S. branch or agency of a foreign bank)
participates
on
a
private
daylight overdrafts
large-dollar
on Fedwire
adopt a sender net debit cap.
institution's
according
board
to
of
Board
network
(hereafter
or
that
incurs
"institution")
to
The cap is to be adopted by the
directors
guidelines
after
of
a
the
self-evaluation
institution's
creditworthiness, credit policies, and operational controls and
procedures.
The Board's policy currently provides that this
self-evaluation
should
take place
at least once
every
six
months, or more frequently if conditions warrant.
In order
to reduce
the burden on
institutions
of
complying with the risk reduction policy, the Board is amending
the policy statement to provide that institutions need update
their self-assessment ratings and cap level selections only
once during each
chooses
to adopt
twelve month period.
a new
self-assessment
Any
institution that
rating
at
shorter
intervals in order to revise the existing cap may do so.
In
any event, any institution that experiences a material adverse
change in its condition should conduct a new self-assessment
and establish a new cap as soon as practical after discovery of
the change.
All institutions should submit renewals of board
of director certifications of self-assessments at the time of
their new filings.
-3-
The following change
is made
in Docket No,
R-0515,
appearing on page 21,120 in the issue of May 22, 1985, and in
the Board's release of May 17, 1985:
On page 21,122,
third column
(the first
in the first full paragraph of the
full paragraph
of page
11 of
the
Board's release), the last sentence is amended to read:
process of self-evaluation,
with
board of director
"The
review,
should be conducted at least once in each 12 month period,"
Board of Governors
of the Federal
Reserve
System,
December 10, 1986,
William W. Wiles
Secretary of the Board
FEDERAL RESERVE SYSTEM
[Docket No. R-0592]
Risks on Large-Dollar Transfer Systems
Request for Comments on Proposal
Regarding Pricing Daylight Overdrafts
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Request for comments.
SUMMARY:
The Board is exploring the concept of instituting a
charge or fee on daylight overdrafts in lieu of,
or as
a
complement to, lowering the cap levels on daylight overdrafts.
The Board is therefore requesting comment on the concept of
pricing daylight overdrafts.
DATE:
Comments must be received by April 13, 1987.
ADDRESS:
Comments, which should refer to Docket No. R-0592.
may be mailed to the Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, N. W., Washington,
D. C.
20551,
to
the
attention
of
Mr.
William W.
Wiles,
Secretary, or delivered to room B-2223 between 8:45 a.m. and
5:15 p.m.
Comments may be inspected in room B-1122 between
8:45 a.m. and 5:15 p.m., except as provided in S 261.6(a) of
the Board's Rules Regarding the Availability of Information, 12
C.F.R. § 261.6(a).
FOR FURTHER
INFORMATION CONTACT:
Edward
C.
Director, Division of Research and Statistics
Elliott C. McEntee, Associate Director,
Ettin,
Deputy
(202/452-3368);
Division
of
Federal
-
Reserve
Bank
Operations
2-
(202/452-2231);
or Oliver
Ireland,
Associate General Counsel, Legal Division (202/452-3625), Board
of Governors of the Federal Reserve System, Washington, D. C.
20551.
Device
For
for
the
the
hearing
Deaf
impaired
("TDD")
only, Telecommunications
Earnestine
Hill
or
Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY
proposals
INFORMATION:
regarding
payment
This
is
system
issuing for public comment today.
one
of
a
series
risk that the
of
Board
is
The others concern the net
debit cap (Docket Nos. R-0588 and R-0589), book-entry security
transfers
(Docket
No.
R-0587),
consolidation
institutions for cap monitoring purposes
of
affiliated
(Docket No. R-0590),
and treatment of payments processed through automated clearing
houses (Docket No. R-0591). 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.
Board's
processing
and
This procedure will
analysis
of
the
facilitate
comments
on
the
these
complex proposals, and will ensure that each comment is quickly
brought to the attention of those responsible for analyzing the
proposal.
On May 22, 1985, the Board of Governors of the Federal
Reserve System published its policy statement, "Reducing Risks
on Large-Dollar Electronic Funds Transfer Systems."
Reg.
21120)
In
that
statement,
the
Board
(50 Fed.
announced
its
-3-
intention to adopt additional guidelines
in the future
"to
reduce further the volume and incidence of daylight overdrafts
and other uses of intraday credit."
not explicitly priced.
However,
At present, overdrafts are
the Board is exploring the
concept of levying a charge or fee for daylight overdrafts that
occur in accounts maintained with the Federal Reserve in lieu
of, or as a complement to, lowering the level of net debit caps.
The system of net debit caps now in place likely would
continue
to be
the
Federal
Reserve
System's
primary
risk
reduction policy tool, but pricing daylight overdrafts could be
used as a supplement to net debit caps.
provide additional
Such pricing would
incentives for users to reduce overdrafts
below the caps and would charge those depository institutions
who continue
to use daylight
system risks.
In addition,
credit
and
generate
payments
it would compensate the Federal
Reserve for assuming credit risk and providing finality of all
Fedwire payments.
Caps have reduced the level of overdrafts from what
they otherwise would be.
While the growth of payments' value
over large dollar networks continues to be greater than 15
percent
remained
a year,
the
relatively
level
flat
of
since
cross-system overdrafts
caps
have
been
in
has
place.
Pricing Fedwire daylight overdrafts would continue this trend
by encouraging
banks
to
reduce overdrafts
below
the
caps.
Pricing daylight overdrafts is expected to provide incentives
for payments network participants to use and develop further a
-4-
number of institutional changes for reducing overdrafts.
Such
changes could result in both a reduction in the daily value of
payments
sent
over external wire transfer
elimination of the current
networks
gap in processing
totally or partially offsetting payments.
time
and
an
between
Some examples
of
changes in payments practices that could reduce overdrafts are:
(1)
Rollovers where the same amount of maturing
overnight
(or longer) funds borrowing is
renegotiated with the same seller.
No funds move
over the wire networks except the initial
borrowing and the final repayment.
Importantly,
there is no time gap between daily repayment of
borrowed funds and receipt of borrowings for the
next time period.
As a result, the value of
payments over wire networks is reduced, the time
gap is eliminated, and associated daylight
overdrafts fall;
(2)
Continuing contracts where differing amounts of
daily funds borrowings are renegotiated with the
same sellers but only the net change in the
position (including interest) is sent over the
wire.
The value of the single net transfer is
less than either the early in the day full
repayment of the gross funds borrowed or the
later in the day full reborrowing of an altered
gross amount for the next period.
The value of
payments made is thus reduced and the time gap
between the two gross flows eliminated, so
overdrafts fall;
(3)
Term funds where longer term borrowings are
substituted for overnight funding.
Overdrafts
fall due to the lower average daily value of
funds sent and returned over the wire network, as
well as the now more infrequent daily time gap
between return of borrowed funds and subsequent
reborrowing;
(4)
Intraday funding where excess funds are sold and
sent to other payments participants for portions
of the day to fund, for a price, what otherwise
would be daylight overdrafts at the purchasing
institution; and,
-5(5)
Netting by novation where gross bilateral payment
obligations between depository institutions are
legally netted using contracts among the parties
prior to the value or settlement date.
Legal
exposure from payment obligations is reduced from
gross to net positions so that payments
satisfying these obligations over the wire are
reduced. Even though a time gap may remain, both
measured overdrafts and risk decrease.
Although there are a number of advantages to pricing
of
daylight
significant
overdrafts,
modification
such
of
pricing
current
would
policy.
represent
a
Accordingly,
public comment is invited on the general concept of pricing
daylight overdrafts.
In addition, comment is requested on the
following specific questions:
1.
If daylight overdrafts that occur
maintained with the Federal Reserve are priced,
in
accounts
(a)
How should the price be determined?
(b)
Should the overdraft value assessed be the
maximum overdraft incurred during the day or
some average value?
(c)
Should the price vary according to the
duration of the overdraft?
If so, how much
should the price be adjusted for overdraft
duration?
(d)
Should daylight overdrafts lasting less
than, say, one hour be excluded in order
to
allow for computer outages and other
operational difficulties? Similarly, should
some portion of the measured overdraft, be
exempt from pricing for the same reason?
(e)
What operational improvements or changes in
institutional practices would depository
institutions contemplate in response to
pricing?
(Examples of such improvements and
changes include better control over third
party payments that are not time-critical,
rollovers of overnight funding, shifting
-6from overnight to term federal funds, and
payment netting by novation arrangements.)
(f)
Would depository institutions attempt to
pass overdraft charges through to customers
in order to encourage them better to control
payments that do not have to be made
immediately?
Are there other means of
improving an institution's control over the
timing of payments made?
(g)
Should the proceeds of the overdraft charges
be placed in a special reserve fund for
possible Federal Reserve losses from
providing payment finality?
Should it be
used to make improvements in Fedwire?
(h)
Would pricing induce a private sector market
for intraday funds?
(i)
What operational problems are anticipated
with pricing? How might they be alleviated?
2.
Would pricing be a suitable substitute for
further cap reductions from their current levels?
3.
What are the anticipated problems with pricing
compared with a policy of lowering caps without
pricing?
Suggestions
of
any
other
alternatives
for
pricing
the Federal Reserve
System,
daylight overdrafts are welcome.
Board of Governors
of
December 10, 1986.
Williams W. Wiles
Secretary
@FedFRASER