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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10724
July 27, 1994
PRIVATELY OPERATED LARGE-DOLLAR
MULTILATERAL NETTING SYSTEMS
Comment Requested on Proposed Policy Statement
by October 17, 1994
To All Depository Institutions, and Others
Concerned, in the Second Federal Reserve District:
F o llo w in g is the text o f a statem ent issu ed by the Board o f G overn ors o f the Federal R eserv e
S ystem :
The Federal Reserve Board has requested public comment on a proposal to update its policies on
“Privately Operated Large-Dollar Funds Transfer Networks” and “Offshore Dollar-Clearing and Netting
Systems” and integrate those policies into a single policy statement on “Privately Operated Large-Dollar
Multilateral Netting Systems.”
Comment is requested by October 17, 1994.
In general, the policy statement would apply to such arrangements as domestic, privately operated,
large-dollar multilateral payment netting systems; offshore large-dollar multilateral payment netting
systems; multilateral foreign exchange clearinghouses involving settlements in U.S. dollars; and
multicurrency payment netting systems involving settlements in U.S. dollars.
The Board is proposing to incorporate into the new policy statement minimum standards for the
design and operation of privately operated large-dollar multilateral netting systems. These minimum
standards are based on those set out in the Report o f the Committee on Interbank Netting Schemes o f the
Central Banks o f the Group o f Ten Countries (“Lamfalussy Report”), which was published in November
1990 by the Bank for International Settlements.
The Board is also requesting comment on the need for, and possible specifications of, a higher
standard with respect to assuring settlement that might be applied to large-dollar multilateral netting
systems that present a high degree of systemic risk.
Printed on the fo llo w in g p ages is the B oard’s o fficia l n o tice on the p rop osed statem ent; it also
appears in the July 18 ed ition o f the
Federal Register.
C om m ents should b e su b m itted b y O ctober
17, 199 4 and m ay be sent to the B oard, as indicated in the n o tice, or to our P aym ents S y ste m Studies
Staff.
Q u estio n s on th is m atter m ay be d irected , at this B ank, to M aryS u e Fisher, C o u n sel and V ice
P resident (Tel. N o. 2 1 2 -7 2 0 -5 9 3 0 ) or C hristopher J. M cCurdy, S en ior V ic e P resid en t (Tel. No.
2 1 2 -7 2 0 -5 4 4 6 ).
W il l ia m J. M c D o n o u g h ,
President.
"1
/0 9 M
f
FEDERAL RESERVE SYSTEM
[Docket No. R-0842]
Proposed Policy Statement on Privately Operated
Large-Dollar Multilateral Netting Systems
AGENCY:
B oard
ACTION:
R eq u est
of
G overnors
fo r
of
th e
F ederal
R eserv e
S y ste m .
c o m m e n t.
SUMMARY:
T he B o a r d o f G o v e r n o r s i s r e q u e s t i n g com m en t o n a
p r o p o s a l t o u p d a te i t s p o l i c i e s on " P r iv a t e ly O p e r a te d L a r g e D o l l a r F u n d s T r a n s f e r N e tw o r k s" an d " O ffs h o r e D o l l a r - C l e a r i n g an d
N e t t in g S y ste m s" and i n t e g r a t e t h o s e p o l i c i e s i n t o a s i n g l e
p o l i c y s ta te m e n t on " P r iv a t e ly O p e r a te d L a r g e - D o lla r M u l t i l a t e r a l
N e t t i n g S y s te m s ."
I n g e n e r a l , t h e p o l i c y s t a t e m e n t w o u ld a p p ly
t o su c h a r r a n g e m e n ts a s d o m e s tic , p r i v a t e l y o p e r a te d , la r g e d o lla r m u lt ila t e r a l paym ent n e t t in g sy s te m s ; o f f s h o r e la r g e d o lla r m u lt ila t e r a l paym ent n e t t in g sy s te m s ; m u lt ila t e r a l f o r e ig n
e x c h a n g e c le a r in g h o u s e s i n v o l v i n g s e t t l e m e n t s i n U .S . d o l l a r s ;
and m u ltic u r r e n c y paym ent n e t t in g sy ste m s in v o lv in g s e t t le m e n t s
in U .S . d o l l a r s .
The B o a rd i s p r o p o s in g t o in c o r p o r a t e i n t o th e
n e w p o l i c y s t a t e m e n t m in im u m s t a n d a r d s f o r t h e d e s i g n a n d
o p e r a tio n o f p r iv a t e ly o p e r a te d la r g e - d o lla r m u lt ila t e r a l n e t t in g
sy ste m s.
T h e s e m in im u m s t a n d a r d s a r e b a s e d o n t h o s e s e t o u t i n
t h e R e p o r t o f t h e C o m m itte e o n I n t e r b a n k N e t t i n g S c h e m e s o f t h e
C e n t r a l B a n k s o f t h e G rou p o f T en C o u n t r ie s (" L a m fa lu s s y
R e p o r t " ) , w h ic h w as p u b l i s h e d i n N o v em b er 1 9 9 0 b y t h e B ank f o r
I n t e r n a t io n a l S e ttle m e n ts .
T he B o a rd i s a l s o r e q u e s t i n g com m en t
on th e n e e d f o r , and p o s s ib le s p e c i f i c a t i o n s o f , a h ig h e r
s t a n d a r d w it h r e s p e c t t o a s s u r i n g s e t t l e m e n t t h a t m ig h t b e
a p p lie d to la r g e - d o lla r m u lt ila t e r a l n e t t in g sy ste m s th a t p r e s e n t
a h ig h d e g r e e o f s y s t e m ic r i s k .
DATES:
C o m m e n ts m u s t
be
r e c e iv e d
ADDRESSES:
on
or
b e fo r e
O c to b e r
17,
1994.
C o m m e n ts s h o u l d r e f e r t o D o c k e t N o . R - 0 8 4 2 , a n d m a y
b e m a i l e d t o M r. W i l l i a m W. W i l e s , S e c r e t a r y , B o a r d o f G o v e r n o r s
o f th e F e d e r a l R e se r v e S y ste m , 2 0 th S t r e e t an d C o n s t it u t io n
A v e n u e , N . W . , W a s h i n g t o n , D .C . 2 0 5 5 1 .
C o m m e n ts m a y b e d e l i v e r e d
t o R oom B - 2 2 2 2 o f t h e E c c l e s B u i l d i n g b e t w e e n 8 : 4 5 a . m . a n d 5 : 1 5
p .m . w e e k d a y s o r t o t h e s e c u r i t y c o n t r o l ro o m a n y t i m e .
B o t h R oom
B -2 2 2 2 a n d t h e s e c u r i t y c o n t r o l room a r e a c c e s s i b l e fr o m t h e
c o u r ty a r d e n tr a n c e on 2 0 th S t r e e t b e tw e e n C o n s t it u t io n A ven u e and
C S t r e e t , N .W .
C o m m e n ts m a y b e i n s p e c t e d i n R oom M P - 5 0 0 o f t h e
M a r t in B u i l d i n g b e t w e e n 9 : 0 0 a .m . a n d 5 : 0 0 p .m . w e e k d a y s , e x c e p t
a s p r o v i d e d i n 1 2 CFR 2 6 1 . 8 o f t h e B o a r d ' s r u l e s r e g a r d i n g
a v a i l a b i l i t y o f in fo r m a tio n .
7
/° 7 &
V
FOR FURTHER INFORMATION CONTACT:
J e f f r e y C. M a r q u a r d t, A s s i s t a n t
D ir e c t o r (2 0 2 /4 5 2 -2 3 6 0 ) , P a u l B e t t g e , M anager (2 0 2 /4 5 2 -3 1 7 4 ) ,
K e lly Shaw , P r o j e c t L ea d er ( 2 0 2 /4 5 2 - 3 0 5 4 ) , D iv is io n o f R e se r v e
B ank O p e r a tio n s and P aym ent S y s te m s ; o r O liv e r I r e la n d , A s s o c ia t e
G e n e r a l C o u n se l (2 0 2 /4 5 2 - 3 6 2 5 ) , S t e p h a n ie M a r tin , S e n io r A t t o r n e y
(2 0 2 /4 5 2 -3 1 9 8 ), L e g a l D iv is io n , B oard o f G o v ern o rs o f th e F e d e r a l
R e s e r v e S y ste m ; f o r th e h e a r in g im p a ir e d o n l y .
T e le c o m m u n ic a t io n s D e v ic e f o r t h e D e a f , D o r o t h e a T h om p son
(2 0 2 /4 5 2 -3 5 4 4 ).
SUPPLEMENTARY INFORMATION:
T he B o a r d 's c u r r e n t P o l i c y S ta te m e n t on P a y m e n ts S y ste m
R is k i n c o r p o r a t e s tw o p o l i c i e s d i r e c t e d s p e c i f i c a l l y a t l a r g e d o ll a r fu n d s t r a n s f e r s y s te m s : " P r iv a te L a r g e - D o lla r F unds
T r a n s f e r N e tw o r k s" an d " O ffs h o r e D o l l a r - C le a r i n g a n d N e t t i n g
S y s te m s ."
N e it h e r o f t h e s e p o l i c i e s a d d r e s s e s m u ltic u r r e n c y
c l e a r i n g an d s e t t le m e n t a r r a n g e m e n ts in v o lv in g s e t t le m e n t s in
U .S . d o l l a r s , s u c h a s t h e m u l t i l a t e r a l f o r e i g n e x c h a n g e
c l e a r i n g h o u s e s t h a t a r e u n d e r d e v e lo p m e n t i n N o r th A m e r ic a a n d
E urope.
F u r th e r , th e B oard in te n d e d i t s e x i s t i n g p o li c y
s t a t e m e n t on " O ffs h o r e D o lla r - C le a r in g an d N e t t in g S y ste m s" t o b e
an in te r im m easu re u n t il an in t e r n a t io n a l c o n s e n s u s w as r e a c h e d
a m o n g c e n t r a l b a n k s o n t h e m in im u m s t a n d a r d s f o r t h e d e v e l o p m e n t
and o p e r a tio n o f m u lt ila t e r a l c r o s s -b o r d e r n e t t in g s y s te m s .
T h at c o n s e n s u s w as r e a c h e d w ith th e 1990 p u b lic a t io n o f
t h e R e p o r t o f t h e C o m m itte e o n I n t e r b a n k N e t t i n g S c h e m e s o f t h e
C e n t r a l B a n k s o f t h e G rou p o f T en C o u n t r ie s (" L a m fa lu s s y
R e p o r t" ).
T he L a m fa lu s s y R e p o r t r e c o g n iz e d t h a t m u l t i l a t e r a l
n e t t in g a r r a n g e m e n ts f o r in te r b a n k p aym en t o r d e r s and fo r w a r d v a l u e c o n t r a c t u a l c o m m itm e n ts , s u c h a s f o r e i g n e x c h a n g e
c o n t r a c t s , h a v e t h e p o t e n t i a l t o im p r o v e t h e e f f i c i e n c y a n d t h e
s t a b i l i t y o f in te r b a n k s e t t le m e n t s th r o u g h th e r e d u c t io n o f
s e t t le m e n t c o s t s , a lo n g w ith c r e d it and l i q u i d i t y r i s k s , p r o v id e d
t h a t c e r t a i n c o n d it io n s a r e m e t.
In t h i s r e g a r d , th e r e p o r t
d e v e l o p e d a n d d i s c u s s e d , i n s o m e d e t a i l , " M in im u m S t a n d a r d s f o r
N e t t in g S ch em es"
( " L a m f a l u s s y M in im u m S t a n d a r d s " ) a n d " P r i n c i p l e s
f o r C o - o p e r a t iv e C e n tr a l B ank O v e r s ig h t" o f s u c h a r r a n g e m e n ts .
C e n t r a l b a n k s h a v e now h a d a p e r i o d o f t im e t o a n a l y z e
t h e p r a c t i c a l i m p l i c a t i o n s o f t h e L a m f a l u s s y M in im u m S t a n d a r d s ,
a n d t h e B o a r d b e l i e v e s t h a t i t w o u ld b e a p p r o p r i a t e t o r e v i s e i t s
" P o l i c y S t a t e m e n t o n P a y m e n ts S y s te m R is k " t o i n c o r p o r a t e t h e
L a m f a l u s s y M in im u m S t a n d a r d s a n d t o a d d r e s s e x p l i c i t l y p r i v a t e l y
o p e r a te d , la r g e - d o lla r m u ltic u r r e n c y n e t t in g a r r a n g e m e n ts
i n v o l v i n g s e t t l e m e n t s in U .S . d o l l a r s . 1 T he B o a rd i s p r o p o s in g
t o i n t e g r a t e i t s p o l i c i e s on " P r iv a te L a r g e - D o lla r F unds T r a n s fe r
xT h e L a m f a l u s s y M in im u m S t a n d a r d s h a v e b e e n e n d o r s e d b y t h e
E u r o p e a n U n i o n c e n t r a l b a n k s a s m in im u m s t a n d a r d s f o r d o m e s t i c
l a r g e - v a l u e n e t t i n g s y s t e m s w i t h i n t h e E u r o p e a n U n io n .
3
N e tw o r k s" an d " O ffs h o r e D o l l a r - C le a r i n g an d N e t t i n g S y s te m s " i n t o
a s i n g l e c o m p r e h e n s iv e p o l i c y on " P r i v a t e l y O p e r a te d L a r g e - D o lla r
M u l t i l a t e r a l N e t t i n g S y s te m s " t h a t w o u ld i n c l u d e t h e L a m f a lu s s y
M in im u m S t a n d a r d s .
L a r g e -d o lla r m u lt ila t e r a l, m u ltic u r r e n c y
n e t t i n g s y s t e m s w o u ld b e c o v e r e d b y t h e sam e p o l i c y .
S co p e and A p p lic a t io n o f th e P o l i c y .
S p e c if ic a lly , th e
B o a r d ' s p r o p o s e d p o l i c y s t a t e m e n t w o u ld a p p l y t o s u c h
a r r a n g e m e n ts a s d o m e s tic , p r i v a t e l y o p e r a te d , l a r g e - d o l l a r
m u lt ila t e r a l paym ent n e t t in g sy s te m s ; o f f s h o r e la r g e - d o lla r
m u lt ila t e r a l paym ent n e t t in g sy s te m s ; m u lt ila t e r a l f o r e ig n
e x c h a n g e c le a r in g h o u s e s i n v o l v i n g s e t t l e m e n t s in U .S . d o l l a r s ;
and m u ltic u r r e n c y paym en t n e t t in g s y ste m s in v o lv in g s e t t le m e n t s
in U .S . d o l l a r s .
The i n c l u s i o n o f m u l t i l a t e r a l f o r e ig n e x c h a n g e
c le a r in g h o u s e s and m u ltic u r r e n c y paym en t n e t t in g s y ste m s
i n v o l v i n g a s e t t l e m e n t in U .S . d o l l a r s r e p r e s e n t s a n e x p a n s io n o f
e x i s t i n g p o li c y , a s n e it h e r o f t h e s e a r r a n g e m e n ts a r e c o v e r e d
e x p l i c i t l y b y th e B o a r d 's c u r r e n t p o l i c y s ta te m e n t on p aym en t
sy ste m r is k .
T he B oard i s p r o p o s in g t o a p p ly th e p o l i c y
sta te m e n t to su ch sy ste m s i f th e y m eet c e r t a in s i z e c r i t e r i a , in
o r d e r t o c o v e r m ore c o m p le t e ly th e r a n g e o f m u l t i l a t e r a l n e t t i n g
s y s t e m s i n v o l v i n g s e t t l e m e n t s in U .S . d o l l a r s t h a t h a v e t h e
p o t e n t ia l to in c r e a s e s y s te m ic r is k in th e f in a n c ia l m a r k e ts.
T h e s e a r r a n g e m e n t s h a v e t h e p o t e n t i a l t o g e n e r a t e t h e sa m e t y p e s
o f r is k s a s s in g le cu rren cy sy ste m s.
M o r e o v e r , t h e L a m fa lu s s y
M in im u m S t a n d a r d s w e r e d e v e l o p e d e x p l i c i t l y t o a d d r e s s , a m o n g
o th e r t h in g s , r is k s in m u lt ila t e r a l fo r e ig n ex ch a n g e n e t t in g
a r r a n g e m e n ts.
T he B o a r d 's p r o p o s e d p o l i c y s ta te m e n t c o n t a in s c r i t e r i a
th a t d e lim it th e sco p e and a p p lic a t io n o f th e p o lic y .
S p e c i f i c a l l y , th e p o l i c y w i l l a p p ly t o s y s te m s t h a t :
(1 ) h a v e
t h r e e o r m ore p a r t i c i p a n t s t h a t n e t p a y m e n ts o r f o r e i g n e x c h a n g e
c o n t r a c t s i n v o l v i n g t h e U .S . d o l l a r , w h e th e r o r n o t n e t t e d
a m o u n ts a r e l e g a l l y b i n d i n g ; a n d e i t h e r (2 ) h a v e , o r a r e l i k e l y
t o h a v e , on a n y d a y , s e t t le m e n t s w ith a s y s te m -w id e a g g r e g a te
v a lu e o f n e t s e t t le m e n t c r e d it s (o r d e b it s ) la r g e r th a n $500
m illio n
( in U .S . d o l l a r s an d a n y f o r e i g n c u r r e n c i e s c o m b in e d ); o r
(3 )
r o u t i n e l y p r o c e s s i n d i v i d u a l p a y m e n ts o r f o r e i g n e x c h a n g e
c o n t r a c t s , w ith a s t a t e d d o ll a r v a lu e la r g e r th a n $ 5 0 0 ,0 0 0 .
A
m u l t i l a t e r a l n e t t in g sy ste m th a t m e e ts th e a b o v e c r i t e r i a w i l l b e
s u b je c t to th e p o lic y i f
(1 ) i t i s a s t a t e - c h a r t e r e d m em b er o f
th e F e d e r a l R e se r v e S y ste m ,
(2 ) a n y o f i t s a g e n t ( s ) o r
p a r t i c i p a n t s a r e s t a t e - c h a r t e r e d m em b ers o f t h e F e d e r a l R e s e r v e
S y ste m ,
(3 ) i t s p a r t i c i p a n t s ' n e t p o s i t i o n s a r e s e t t l e d t h r o u g h a
F e d e r a l R e se rv e s e ttle m e n t a c c o u n t,
(4 ) i t s p a r t i c i p a n t s s e t t l e
t h e i r n e t p o s it io n s in th e m u lt ila t e r a l n e t t in g sy ste m th r o u g h
t h e ir in d iv id u a l F e d e r a l R eserv e a c c o u n ts o r th e F e d e r a l R e se rv e
a c c o u n t o f t h e s e t t l e m e n t a g e n t ( s ) , o r (5 ) o n e o r m o r e b a n k
h o ld i n g c o m p a n ie s h a v e an in v e s t m e n t in t h e m u l t i l a t e r a l n e t t i n g
sy ste m .
The B oard b e l i e v e s t h a t t h e s e r e l a t i v e l y s im p le c r i t e r i a
w i l l e n a b le th e o p e r a t o r s o f m u l t i l a t e r a l n e t t in g s y s te m s t o
4
/&
d e te r m in e
t h a t o n ly
w hen t h e y a r e
s y s t e m s w h ic h
su b ject
p resen t
to th e p o lic y
s y s te m ic r is k
/&
/
and w i l l p r o v id e
w ill be covered .
T h e B o a r d b e l i e v e s t h a t t h e L a m f a l u s s y M in im u m
S t a n d a r d s m ay a p p l y , f o r e x a m p le , t o a l l l a r g e - d o l l a r
m u lt ila t e r a l paym ent n e t t in g sy ste m s ir r e s p e c t iv e o f th e ty p e o f
f i n a n c i a l in s tr u m e n t o r c o n t r a c t u a l o b lig a t io n n e t t e d b y th e
sy ste m .
H ow ever, th e B oard r e c o g n iz e s th a t in th e c a s e o f
p r iv a t e ly o p e r a te d la r g e - d o lla r m u lt ila t e r a l n e t t in g sy ste m s fo r
th e b a tc h p r o c e s s in g o f p a p e r -b a se d a s w e ll a s e le c t r o n ic
p a y m e n ts , i n c l u d i n g p r i v a t e l y o p e r a t e d A u to m a te d C le a r in g H o u se
("A C H ") s y s t e m s , c e r t a i n e l e c t r o n i c c o n t r o l s t h a t w o u l d b e
r e q u i r e d t o i m p l e m e n t t h e L a m f a l u s s y M in im u m S t a n d a r d s m a y n o t b e
fe a s ib le .
F u r th e r , th e r ig h t s and r e s p o n s i b i l i t i e s o f p a r t ie s
w ith in su ch sy ste m s a s w e ll a s th e c h a r a c t e r is t ic s o f th e
in s tr u m e n ts t o b e c le a r e d o r n e t t e d r e q u ir e f u r t h e r a n a ly s i s .
C o n s e q u e n tly , th e B oard in t e n d s t o s tu d y f u r t h e r th e im p lic a t io n s
o f t h e L a m f a l u s s y M in im u m S t a n d a r d s , a n d t h e a r r a n g e m e n t s t o
i m p l e m e n t t h e L a m f a l u s s y M in im u m S t a n d a r d s , f o r p r i v a t e l y
o p e r a te d la r g e - d o lla r m u lt ila t e r a l n e tt in g sy ste m s fo r th e b a tc h
p r o c e s s in g o f p a p e r -b a s e d a s w e ll a s e l e c t r o n i c p a y m e n ts.
The
B o a r d e x p e c t s t h a t i t m ay i s s u e , i n d u e c o u r s e , a p r o p o s a l f o r
m in im u m s t a n d a r d s f o r t h e d e s i g n a n d o p e r a t i o n o f s u c h s y s t e m s .
I m p l e m e n t a t i o n o f t h e L a m f a l u s s y M in im u m S t a n d a r d s .
The B oard b e l i e v e s t h a t l a r g e - d o l l a r m u l t i l a t e r a l n e t t in g
s y s te m s , w h e th e r o n -s h o r e o r o f f - s h o r e , s h o u ld m eet in f u l l th e
L a m f a l u s s y M in im u m S t a n d a r d s , a s s e t f o r t h i n t h e p r o p o s e d p o l i c y
sta te m e n t.
The B oard h a s d e v e lo p e d f i v e r i s k m anagem en t m e a su r e s
t h a t a l a r g e - d o l l a r m u l t i l a t e r a l n e t t i n g s y s t e m w o u ld b e e x p e c t e d
t o i m p l e m e n t i n o r d e r t o s a t i s f y L a m f a l u s s y M in im u m S t a n d a r d s I I I
a n d IV , w h ic h d e a l w it h r i s k m a n a g em en t a n d s e t t l e m e n t
c o m p le t io n .
R is k m an agem en t d e v ic e s t h a t le a d t o a s u b s t a n t i a l l y
e q u iv a le n t d e g r e e o f r i s k m an agem en t an d c o n t r o l c o u ld a l s o b e
a d o p te d , a s a p p ro v ed by th e B oard on a c a s e - b y - c a s e b a s is .
The
p ro p o sed m easu res a re:
(1 ) a r e q u i r e m e n t t h a t e a c h p a r t i c i p a n t
e s t a b lis h b ila t e r a l n e t c r e d it lim it s v i s - a - v i s ea ch o th e r
p a r t ic ip a n t in th e sy ste m ;
(2 ) e s t a b l i s h a n d m o n it o r i n r e a l
tim e s y s t e m - s p e c i f i c n e t d e b it l i m i t s ;
(3 ) e s t a b l i s h a s y s t e m t o
r e j e c t o r h o ld a n y p aym en t o r f o r e ig n e x c h a n g e c o n t r a c t t h a t
w o u ld e x c e e d t h e r e l e v a n t b i l a t e r a l a n d n e t d e b i t l i m i t s ;
(4 )
e s t a b l i s h l i q u i d i t y r e s o u r c e s , s u c h a s c a s h , c o m m itte d l i n e s o f
c r e d i t s e c u r e d b y c o l l a t e r a l , o r a c o m b in a tio n t h e r e o f , a t l e a s t
e q u a l t o t h e l a r g e s t s i n g l e n e t d e b i t p o s i t i o n ; 2 a n d (5 )
e s t a b l i s h r u le s and p r o c e d u r e s f o r th e s h a r in g o f c r e d it l o s s e s
am ong t h e p a r t i c i p a n t s in a n e t t i n g s y s te m .
2T h e t e r m " l a r g e s t s i n g l e n e t d e b i t p o s i t i o n " m e a n s t h e
la r g e s t in tr a d a y n e t d e b it p o s it io n o f any in d iv id u a l p a r t ic ip a n t
a t a n y tim e d u r in g t h e d a i l y o p e r a t in g h o u r s o f t h e n e t t i n g
sy ste m .
5
f i f t y
T he f i r s t tw o m e a s u r e s a r e c o n t a i n e d i n t h e B o a r d 's
e x i s t i n g p o li c y s ta te m e n t on P r iv a t e L a r g e -D o lla r F unds T r a n s fe r
N e tw o r k s.
The t h ir d m ea su re i s a ls o c o n ta in e d in th e e x i s t i n g
p o li c y s ta te m e n t b u t i t a p p lie s o n ly t o b i l a t e r a l n e t c r e d it
lim its .
In th e p r o p o se d p o lic y s ta te m e n t, th e B oard h a s ex p a n d ed
th e t h i r d m e a su r e t o a p p ly a l s o t o s y s t e m - s p e c i f i c n e t d e b it
lim its .
R e q u ir e m e n t s (4 ) a n d (5 ) a r e n ew a n d w o u ld h e l p e n s u r e
t h a t th e fu n d s n ee d e d f o r s e t t le m e n t a r e a v a ila b le t o
m u l t i l a t e r a l c l e a r i n g o r g a n i z a t i o n s a t t h e p r o p e r m om en t a n d
c l a r i f y how a n y l o s s e s w i l l a f f e c t p a r t i c i p a n t s .
T i m e f r a m e f o r I m p l e m e n t a t i o n o f t h e L a m f a l u s s v M in im u m
S ta n d a r d s.
The B oard r e c o g n iz e s th a t n o t a l l e x i s t i n g la r g e d o l l a r m u l t i l a t e r a l n e t t i n g s y s t e m s m ay m e e t t h e L a m f a lu s s y
M in im u m S t a n d a r d s , a n d t h e a s s o c i a t e d r e q u i r e m e n t s f o r
im p le m e n ta tio n o f t h o s e s ta n d a r d s , c o n ta in e d in th e p r o p o s e d
p o lic y sta te m e n t.
The B oard a l s o r e c o g n iz e s t h a t e x i s t i n g l a r g e d o l l a r m u l t i l a t e r a l n e t t i n g s y s te m s w i l l n e e d a p e r io d o f tim e in
w h ic h t o m ake a n y n e e d e d c h a n g e s t o t h e i r o r g a n i z a t i o n o r
o p e r a tio n s .
C o n s e q u e n tly , th e B oard b e l i e v e s t h a t an e ig h t e e n m o n th t r a n s i t i o n p e r i o d w o u ld b e a p p r o p r i a t e f o r l a r g e - d o l l a r
m u l t i l a t e r a l n e t t in g s y ste m s th a t a r e o p e r a t in g on th e d a te o f
an y f i n a l a c t io n by th e B oard on th e p r o p o se d p o lic y .
Such
s y s t e m s w i l l b e e x p e c t e d t o c o m p ly f u l l y w i t h t h e p o l i c y
s ta te m e n t w it h in th e e ig h te e n -m o n th t r a n s i t i o n p e r io d .
L arged o lla r m u lt ila t e r a l n e t t in g sy ste m s e s t a b lis h e d su b se q u e n t to th e
d a te o f f i n a l a d o p tio n o f th e p o l i c y b y th e B oard w i l l b e
e x p e c t e d t o c o m p ly f u l l y w i t h t h e p o l i c y s t a t e m e n t , w i t h o u t
b e n e f it o f a t r a n s it io n p e r io d .
Specific Issues On Which The Board Seeks Comment.
T h e B o a r d s e e k s com m en t o n a l l a s p e c t s o f t h e p r o p o s e d
p o lic y sta te m e n t.
In a d d i t i o n , t h e B o a r d i s s e e k i n g com m en t o n
th e fo llo w in g s p e c if ic is s u e s :
1.
The p r o p o se d c r i t e r i a fo r i d e n t i f y i n g l a r g e - d o l l a r
m u lt ila t e r a l n e t t in g sy ste m s s u b je c t to th e p o lic y
sta te m e n t.
•
A re th e t h r e s h o ld s f o r s y s te m -w id e a g g r e g a te d a il y
n e t s e ttle m e n t d e b it s o r c r e d it s , a s w e ll a s fo r th e
s i z e o f in d iv id u a l t r a n s a c t io n s , s e t a t a p p r o p r ia t e
l e v e l s su c h t h a t th e p o l i c y w i l l a p p ly t o t h o s e s y s te m s
th a t p o se s y s te m ic r is k ?
• A re th e r e o th e r c r i t e r i a th e B oard s h o u ld c o n s id e r in
th e d e te r m in a tio n o f w h e th e r t o a p p ly th e p o l i c y t o a
p a r t i c u l a r sy ste m ?
2.
th e
T he f i v e r i s k m anagem ent m e a su r e s f o r im p le m e n ta tio n o f
L a m f a l u s s y M in im u m S t a n d a r d s .
•
Do t h e r e q u ir e m e n t s p r o v i d e o p e r a t o r s o f l a r g e d o lla r m u l t i l a t e r a l n e t t in g s y s te m s w ith a p p r o p r ia te .
6
/ o 7 &
y
a n d a d e q u a t e m e c h a n is m s t o c o n t r o l t h e c r e d i t ,
l i q u i d i t y , and s e t t le m e n t r is k s in h e r e n t in su c h
sy ste m s?
•
W hat a d d i t i o n a l r i s k m a n a g e m e n t m e a s u r e s w o u ld b e
u s e fu l?
•
W hat a l t e r n a t i v e m e c h a n is m s w o u ld p r o v i d e
s u b s t a n t i a l l y e q u iv a le n t d e g r e e s o f r i s k m anagem ent and
c o n tr o l?
3.
T he tim e fr a m e f o r im p le m e n ta t io n o f t h e L a m fa lu s s y
M in im u m S t a n d a r d s .
•
D o es th e p r o p o se d e ig h te e n -m o n th t r a n s i t i o n p e r io d
p r o v id e e x i s t i n g la r g e - d o lla r m u lt ila t e r a l n e t t in g
s y s t e m s w it h s u f f i c i e n t t im e t o m ake a n y o r g a n i z a t i o n a l
o r o p e r a t io n a l c h a n g e s n e e d e d t o m e et t h e L a m fa lu s s y
M in im u m S t a n d a r d s ?
T he B o a r d a l s o s e e k s com m ent o n w h e th e r l a r g e - d o l l a r
m u l t i l a t e r a l n e t t i n g s y s te m s t h a t p r e s e n t a h ig h d e g r e e o f
s y s t e m ic r i s k s h o u ld b e e x p e c te d t o m eet a s ta n d a r d f o r e n s u r in g
s e t t l e m e n t t h a t i s h i g h e r t h a n L a m f a l u s s y M in im u m S t a n d a r d I V .
S t a n d a r d IV r e q u i r e s t h a t a n e t t i n g s y s t e m b e c a p a b l e o f e n s u r i n g
th e c o m p le tio n o f d a il y s e t t le m e n t in th e e v e n t t h a t th e
p a r t i c i p a n t w ith th e l a r g e s t n e t d e b it p o s i t i o n i s u n a b le t o
s e t t l e i t s o b lig a t io n to th e sy ste m .
F o r e x a m p le , t h e B o a rd
c o u ld r e q u ir e t h a t c e r t a in la r g e - d o lla r m u lt ila t e r a l n e t t in g
s y s t e m s w o u ld b e e x p e c t e d t o e n s u r e t i m e l y c o m p le t io n o f d a i l y
s e t t le m e n t in th e e v e n t o f an i n a b i l i t y to s e t t l e b y
th e
p a r t ic ip a n t w ith th e la r g e s t n e t d e b it p o s it io n , a s w e ll a s th e
p a r t ic ip a n t s w ith th e se c o n d o r t h ir d l a r g e s t n e t d e b it
p o s itio n s .
In m u lt ila t e r a l n e t t in g sy ste m s th a t e x te n d c r e d it
am ong p a r t i c i p a n t s , t h e f a i l u r e o f a p a r t i c i p a n t c o u ld t r i g g e r a
c h a in o f d e f a u l t s a n d l i q u i d i t y p r o b le m s a t o t h e r p a r t i c i p a n t s o r
in t h e f i n a n c i a l m a r k e ts m ore g e n e r a l l y .
T h is c o n c e r n i s th e
b a s i s f o r L a m f a l u s s y M in im u m S t a n d a r d I V , w h i c h e n s u r e s t h a t a
d e f a u lt b y a s in g le n e t d e b to r , in c lu d in g th e la r g e s t , w i l l n o t,
b y i t s e l f , i n i t i a t e a c h a in o f d e f a u lt s w it h in th e n e t t in g
a r r a n g e m e n t.
A r e q u ir e m e n t t h a t a n e t t i n g s y s te m b e a b le t o
e n su r e d a ily s e ttle m e n t in th e e v e n t o f s e ttle m e n t d e f a u lt s by
p a r t i c i p a n t s i n a d d i t i o n t o t h e l a r g e s t n e t - d e b t o r w o u ld b e b a s e d
o n t h e r i s k o f a s im u lt a n e o u s d e f a u l t b y tw o o r m ore
p a r tic ip a n ts .
S u ch an e v e n t c o u ld b e p r e c ip i t a t e d b y f i n a n c i a l
m ark et d i f f i c u l t i e s in th e c o u n tr y o f o r ig in o f th e d e f a u lt in g
p a r t i c i p a n t s , o r som e o t h e r m a r k e t d i s t u r b a n c e t h a t c o u l d c a u s e
f i n a n c i a l i n s t i t u t i o n s w ith s im ila r o r in t e r lin k e d a s s e t s and
l i a b i l i t i e s s im u lt a n e o u s ly to e x p e r ie n c e l i q u i d i t y o r c r e d it
p r o b le m s .
S u c h s i m u l t a n e o u s d e f a u l t s , h o w e v e r , m ay b e m u ch l e s s
l i k e l y th a n a s i n g l e d e f a u lt , and th e in c r e m e n ta l e x p e c te d c o s t s
and b e n e f it s o f r e q u ir in g m u lt ila t e r a l n e t t in g sy ste m s to m eet a
h i g h e r s t a n d a r d t h a n L a m f a l u s s y M in im u m S t a n d a r d IV m u s t b e
7
/o fa /
c a r e fu lly
w e ig h e d .3
An a d d i t i o n a l c o n s i d e r a t i o n i s w h ic h m u l t i l a t e r a l
n e t t in g s y s te m s s h o u ld b e e x p e c te d t o m eet a h ig h e r s ta n d a r d .
T he B o a r d a n t i c i p a t e s t h a t a n y h ig h e r s t a n d a r d w o u ld b e a p p l i e d
o n ly t o m u l t i l a t e r a l n e t t in g s y s te m s t h a t p r e s e n t a h ig h d e g r e e
o f s y s te m ic r is k .
In d e te r m in in g t h i s d e g r e e o f s y s t e m ic r i s k ,
t h e B o a r d c o u ld , a s an e x a m p le , u t i l i z e a t h r e s h o l d a p p r o a c h i n
w h ic h s y s t e m s t h a t e x c e e d a p a r t i c u l a r m e a s u r e w o u ld b e e x p e c t e d
t o m eet th e h ig h e r s ta n d a r d .
S u c h m e a s u r e s m ig h t i n c l u d e :
(1 ) a
s p e c i f i c d o ll a r am ount o f th e a g g r e g a te s y s te m -w id e n e t d e b it
p o s itio n s ;
(2 ) t h e r a t i o o f t h e n e t d e b i t p o s i t i o n s o f s e l e c t e d
m em bers o f a p a r t i c u l a r m u l t i l a t e r a l n e t t i n g s y s te m r e l a t i v e t o
t h e i r c a p i t a l ; o r (3 ) t h e r a t i o o f a n a g g r e g a t e m e a s u r e o f n e t
d e b it p o s it io n s to th e c a p it a l o f a c e n t r a l c o u n te r p a r ty ( i f on e
is u se d ).
The
B oard
is
s e e k in g
s p e c ific
c o m m e n ts
on:
4.
A p p lic a t io n o f a h ig h e r s ta n d a r d f o r in d iv id u a l la r g e d o l l a r m u l t i l a t e r a l n e t t i n g s y s t e m s t h a t m ay p r e s e n t a h ig h
d e g r e e o f s y s te m ic r is k .
•
W hat f a c t o r s s h o u l d b e c o n s i d e r e d i n a n a l y z i n g t h e
in c r e m e n ta l e x p e c te d c o s t s and b e n e f i t s o f r e q u ir in g
m u l t i l a t e r a l n e t t in g s y s te m s t o m eet a h ig h e r s ta n d a r d
t h a n L a m f a l u s s y M in im u m S t a n d a r d IV ?
•
S h o u ld a q u a n t i t a t i v e t h r e s h o l d l e v e l b e
e s ta b lis h e d ?
W hat i n d i c a t o r o r i n d i c a t o r s s h o u l d b e
e m p lo y e d i n s e t t i n g a t h r e s h o l d ?
COMPETITIVE IMPACT ANALYSIS:
The B oard h a s e s t a b lis h e d p r o c e d u r e s f o r a s s e s s in g th e
c o m p e t i t i v e im p a c t o f r u l e o r p o l i c y c h a n g e s t h a t h a v e a
s u b s t a n t i a l im p a c t on p a y m e n ts s y s te m p a r t i c i p a n t s . 4 U n d er
t h e s e p r o c e d u r e s , t h e B o a r d w i l l a s s e s s w h e t h e r a c h a n g e w o u ld
h ave a d ir e c t and m a te r ia l a d v e r se e f f e c t on th e a b i l i t y o f o th e r
s e r v i c e p r o v id e r s t o c o m p e te e f f e c t i v e l y w it h t h e F e d e r a l R e s e r v e
3F o r e x a m p l e , c o s t s w o u l d p r e s u m a b l y i n c l u d e t h e o p p o r t u n i t y
c o s t o f p le d g in g c o l l a t e r a l to e n su r e s e t tle m e n t and o f ta k in g
a n y o t h e r s t e p s t o e n s u r e t h a t fu n d s w i l l b e a v a i l a b l e f o r
s e t t l e m e n t , w h i l e b e n e f i t s w o u ld i n c l u d e a v o i d a n c e o f p o t e n t i a l
c r e d it l o s s e s , l i q u i d i t y e f f e c t s , o r b o th , th r o u g h th e g r e a t e r
p r o t e c t io n a ff o r d e d b y a h ig h e r s ta n d a r d .
The e x p e c t e d b e n e f i t s ,
i n p a r t i c u l a r , m ay b e d i f f i c u l t t o q u a n t i f y .
In a d d it io n , t h e r e
m ay w e l l b e o t h e r m e a s u r e s o f c o s t s a n d b e n e f i t s t h a t w o u ld b e
a p p r o p r ia t e t o a p p ly in th e a n a ly s i s o f a h ig h e r s ta n d a r d .
4T h e s e p r o c e d u r e s a r e d e s c r i b e d i n t h e B o a r d ' s p o l i c y
s t a t e m e n t "The F e d e r a l R e s e r v e i n t h e P a y m e n ts S y s t e m ," a s
r e v i s e d i n M arch 1 9 9 0 .
( 5 5 FR 1 1 6 4 8 , M a r c h 2 9 , 1 9 9 0 ) .
8
/a
?
#
/
in p r o v id in g s im ila r s e r v ic e s due to d if f e r in g le g a l p o w ers o r
c o n s t r a i n t s , o r d u e t o a d o m in a n t m a r k e t p o s i t i o n o f t h e F e d e r a l
R e s e r v e d e r i v i n g fr o m s u c h d i f f e r e n c e s .
I f no r e a s o n a b le
m o d i f i c a t i o n s w o u ld m i t i g a t e t h e a d v e r s e c o m p e t i t i v e e f f e c t s , t h e
B o a rd w i l l d e te r m in e w h e th e r th e a n t i c i p a t e d b e n e f i t s a r e
s i g n i f i c a n t en o u g h t o p r o c e e d w ith th e ch a n g e d e s p it e th e a d v e r s e
e ffe c ts.
T h e B o a r d d o e s n o t b e l i e v e t h a t t h e L a m f a l u s s y M in im u m
S ta n d a r d s w i l l h a v e a d i r e c t a n d m a t e r i a l im p a c t o n t h e a b i l i t y
o f o t h e r s e r v i c e p r o v id e r s t o c o m p e te e f f e c t i v e l y w it h t h e
R e s e r v e B a n k s' p a y m e n ts s e r v i c e s .
The B oard n o t e s t h a t in
s e v e r a l c a s e s th e paym ent s e r v ic e s p o t e n t i a l l y c o v e r e d b y th e
p o lic y sta te m e n t a r e n o t o ff e r e d by th e F e d e r a l R e se r v e B an k s.
F o r e x a m p le , t h e F e d e r a l R e s e r v e B an k s d o n o t o f f e r s e r v i c e s
r e l a t i n g t o t h e e l e c t r o n i c c l e a r i n g an d s e t t le m e n t o f p a y m e n ts o r
c o n tr a c ts in fo r e ig n c u r r e n c ie s .
In th e c a s e o f d o m e s tic l a r g e - d o l l a r m u l t i l a t e r a l
n e t t i n g s y s t e m s , a num ber o f th e r i s k c o n t r o l m e a s u r e s p r o p o s e d
t o m e e t t h e L a m f a l u s s y M in im u m S t a n d a r d s a s w e l l a s c e r t a i n o f
th e s ta n d a r d s th e m s e lv e s h a v e grow n o u t o f th e e x p e r ie n c e o f th e
p r iv a t e s e c t o r in d e v e lo p in g r o b u s t n e t t in g a r r a n g e m e n ts and a r e
c u r r e n t l y e m p lo y e d i n m u l t i l a t e r a l n e t t i n g s y s t e m s .
To th e
e x t e n t a n i n c r e m e n t a l b u r d e n m ig h t b e im p o s e d o n l a r g e - d o l l a r
s y s te m s , th e n eed to re d u ce and c o n tr o l th e la r g e p o t e n t ia l
s y s t e m i c r i s k s o f s u c h s y s t e m s w o u ld j u s t i f y t h e a d o p t i o n o f
p ru d en t sta n d a r d s and m ea su res to c o n tr o l r is k .
The B oard d o e s
n o t e x p e c t a t t h i s tim e , h o w e v e r , t h a t th e a d o p tio n o f th e
L a m f a l u s s y M in im u m S t a n d a r d s w o u l d h a v e a d i r e c t a n d m a t e r i a l
im p a c t o n t h e a b i l i t y o f o t h e r s e r v i c e p r o v i d e r s t o c o m p e te w it h
th e F e d e r a l R e se r v e B an k s.
Federal Reserve System Policy Statement on Payments System Risk
T he B o a r d p r o p o s e s t o am end i t s " F e d e r a l R e s e r v e S y s te m
P o l i c y S t a t e m e n t o n P a y m e n ts S y s t e m R is k " u n d e r t h e h e a d i n g " I I .
P o l i c i e s f o r P r i v a t e - S e c t o r N e tw o r k s" b y r e p l a c i n g i n t h e h e a d in g
t h e w o r d " N e t w o r k s " w i t h t h e w o r d " S y s t e m s ; " d e l e t i n g "A . P r i v a t e
L a r g e - D o lla r F u n d s T r a n s f e r N e tw o r k s" i n i t s e n t i r e t y an d
r e p l a c i n g t h a t p a r t w i t h "A . P r i v a t e l y O p e r a t e d L a r g e - D o l l a r
M u l t i l a t e r a l N e t t i n g S y s t e m s ; " a n d d e l e t i n g "C . O f f s h o r e D o l l a r
C l e a r i n g a n d S e t t l e m e n t S y s t e m s " a n d r e d e s i g n a t i n g "D . P r i v a t e
S m a l l - D o l l a r C l e a r i n g a n d S e t t l e m e n t S y s t e m s " a s "C . P r i v a t e
S m a l l - D o l l a r C le a r in g an d S e t t le m e n t S y s te m s ."
II.
A.
P O L IC IE S
FOR PR IV A T E -SE C T O R SYSTEMS
P r iv a te ly
O p e r a te d
L a r g e -D o lla r
M u ltila te r a l
N e ttin g
L a r g e -d o lla r m u lt ila t e r a l n e t t in g sy ste m s
s ig n if ic a n t d e g r e e o f c r e d it and liq u id it y r is k fo r
9
S y ste m s
can c r e a te
th e ir
a
/
o
1 M
p a r t i c i p a n t s a n d a l s o e x p o s e t h e U .S . p a y m e n ts s y s t e m a n d
f i n a n c i a l m a r k e ts to s y s te m ic r i s k .
In th e c o n te x t o f la r g e d o lla r m u lt ila t e r a l n e t t in g sy ste m s, s y s te m ic r is k i s th e r is k
th a t th e i n a b i l i t y o f one in s t it u t io n w ith in su ch a sy ste m ,
in c lu d in g a c e n tr a l c o u n te r p a r ty i f one e x i s t s , to m eet i t s
o b l i g a t i o n s w hen d u e w i l l le a d t o t h e i l l i q u i d i t y o r f a i l u r e o f
o th e r i n s t i t u t i o n s , e it h e r w ith in th e p a r t ic u la r sy ste m o r in th e
f i n a n c i a l m a r k e ts a s a w h o le .
L a r g e - d o l l a r m u l t i l a t e r a l n e t t i n g s y s t e m s m ay p r o d u c e
e f f i c i e n c i e s in th e c le a r a n c e an d s e t t le m e n t o f p a y m e n ts an d
fin a n c ia l c o n tr a c ts.
A t t h e sa m e t i m e , m u l t i l a t e r a l n e t t i n g m ay
o b s c u r e , c o n c e n tr a te , and r e d is t r ib u t e th e c r e d it and l i q u i d i t y
r i s k s a s s o c ia t e d w ith c le a r a n c e and s e t t le m e n t .
As th e s iz e o f
n e t t e d p o s i t i o n s i n c r e a s e s , f o r e x a m p le , s o d o t h e p o t e n t i a l
l i q u i d i t y e f f e c t s on su ch sy ste m s and t h e ir p a r t ic ip a n t s , a s w e ll
a s t h ir d p a r t i e s , in th e e v e n t o f a s e t t le m e n t f a i l u r e .
In
a d d i t i o n , i f t h e h ig h v o lu m e s o f i n t e r r e l a t e d l a r g e - v a l u e
f i n a n c i a l c o n t r a c t s a n d p a y m e n ts , w h ic h r e f l e c t m o n ey a n d c a p i t a l
m ark et a c t i v i t y , a r e n o t s e t t l e d in a t im e ly m anner, th e r e i s a
s i g n i f i c a n t p o t e n t i a l f o r w id e s p r e a d f i n a n c i a l m a r k e t d is r u p t i o n .
C e r t a i n t y p e s o f n e t t i n g s y s t e m r u l e s m ay a l s o c r e a t e
s i z a b l e s y s t e m i c l i q u i d i t y r i s k s , i f e m p lo y e d b y s y s t e m s t h a t
p r o c e s s l a r g e - v a l u e p a y m e n ts t h a t a r e c e n t r a l t o t h e o p e r a t io n o f
f in a n c ia l m a r k e ts.
F o r e x a m p le , p r i v a t e l y o p e r a t e d p a y m en t
s y s t e m s t h a t p e r m it a s y s t e m o p e r a t o r t o u n w in d , r e c a s t , o r
o t h e r w i s e r e v e r s e s a m e -d a y fu n d s t r a n s f e r s m ade b y s y s t e m
p a r t ic ip a n t s , w h e th e r f o r r e a s o n s o f g e n e r a l f in a n c ia l m ark et
s t r e s s o r b e c a u se o f th e i n a b i l i t y o f a sy ste m p a r t ic ip a n t to
s e t t l e i t s o b li g a t io n s on tim e , ca n o b s c u r e and g r e a t l y in c r e a s e
th e l e v e l o f s y s te m ic l i q u i d i t y r is k a s s o c ia t e d w ith th e s y s te m .
A s a g e n e r a l m a tte r , th e B oard d o e s n o t v ie w a sa m e -d a y r e c a s t ,
u n w in d , o r r e v e r s a l o f p a y m e n ts a s a s a t i s f a c t o r y m e c h a n is m f o r
m a n a g in g l i q u i d i t y a n d s e t t l e m e n t r i s k s i n l a r g e - d o l l a r
m u lt ila t e r a l n e t t in g a r r a n g e m e n ts.
T he B o a rd a l s o r e c o g n iz e s t h a t t h e d e v e lo p m e n t o f
o f f s h o r e m u l t i l a t e r a l n e t t in g s y s te m s f o r l a r g e - d o l l a r p a y m e n ts
a n d f o r e i g n e x c h a n g e c o n t r a c t s m ay r a i s e c o n c e r n s a b o u t s y s t e m i c
r is k th a t e x te n d b eyon d th e p o t e n t ia l fo r d is tu r b a n c e s to p aym ent
an d s e t t le m e n t s y s te m s , o r f i n a n c i a l m a r k e ts, in th e U n ite d
S ta te s.
F o r e x a m p le , t h e o f f s h o r e c l e a r i n g o f U . S . d o l l a r
p a y m e n t s , f o r s u b s e q u e n t n e t s e t t l e m e n t i n t h e U n i t e d S t a t e s , m ay
c r e a t e t r a n s a c t io n a l and o th e r e f f i c i e n c i e s fo r p a r t ic ip a n t s in
su ch o ffs h o r e sy ste m s.
A t t h e sam e t i m e , t h e s e a r r a n g e m e n t s h a v e
th e p o t e n t ia l to c o n c e n tr a te s e ttle m e n t r is k s a t c le a r in g
o r g a n iz a t io n s and t h e ir a s s o c ia t e d s e t tle m e n t a g e n ts e it h e r in
th e U n ite d S t a t e s o r a b r o a d .
I f th e a llo c a t io n o f c r e d it and
l i q u i d i t y r i s k s a s s o c ia t e d w ith th e n e t t in g i s n o t c l e a r l y
d e f in e d , u n d e r s to o d , and m anaged, o f f s h o r e d o ll a r - c l e a r in g
a r r a n g e m e n t s m ay a l s o o b s c u r e , o r e v e n i n c r e a s e , t h e l e v e l o f
10
M
a
y
systemic risk in U.S. and offshore large-dollar payments systems,
as well as in the international dollar settlement process.
Poorly designed and managed systems may, therefore, increase
risks to the international banking and financial system.
In
addition, offshore arrangements have the potential to operate
without sufficient official oversight.
As the Federal Reserve implements fees for daylight
overdrafts, along with other risk management measures, it also is
important that risks not simply be shifted from the Federal
Reserve's payment services to private, inadequately structured
multilateral netting arrangements, either domestically or in
other countries. For example, the Board has been concerned that
the steps being taken to reduce systemic risk in U.S. largedollar payments systems may themselves induce the further
development of "offshore" large-dollar multilateral netting
systems. These offshore systems can settle directly through
payments on Fedwire or indirectly through a private large-dollar
clearing system, which in turn settles on a net basis using
Fedwire.
In response to potential systemic risks and the
possibility that efforts to avoid risk controls will lead to
inadequately structured and managed systems, the Board is
adopting minimum standards within which privately operated largedollar multilateral netting systems should operate. The minimum
standards apply whether or not these systems operate domestically
or in other countries. These minimum standards are identical to
those set out in the Report of the Committee on Interbank Netting
Schemes of the Central Banks of the Group of Ten Countries
(Lamfalussy Report).5
The Board recognizes that from time to
time, in specific cases, questions of interpretation of these
standards, as they apply to large-dollar multilateral netting
systems, may have to be resolved by the Board.
5In November 1990, the Committee on Interbank Netting
Schemes of the Central Banks of the Group of Ten Countries
produced a report on multilateral netting schemes. The Committee
was chaired by Mr. Alexandre Lamfalussy, General Manager of the
Bank for International Settlements. That report recognized that
netting arrangements for interbank payment orders and forwardvalue contractual commitments, such as foreign exchange
contracts, have the potential to improve the efficiency and the
stability of interbank settlements through the reduction of costs
along with credit and liquidity risks, provided certain
conditions are met. In this regard, the Lamfalussy Report
developed and discussed, in some detail, both "Minimum Standards
for Netting Schemes" and "Principles for Co-operative Central
Bank Oversight" of such arrangements.
11
/o7&i
It is important to note that the Board's adoption of
the Lamfalussy Minimum Standards in no way diminishes the primary
responsibilities of participants in, and operators of, largedollar netting systems for ensuring that these systems have
adequate credit, liquidity, and operational safeguards.
It is
the Board's intent to heighten awareness of the risks associated
with multilateral netting arrangements and of the need for their
prudent management. The Board also seeks to provide the
financial system with a set of minimum criteria, which have been
discussed by the G-10 central banks, against which structural and
risk management features of large-dollar multilateral netting
systems can be evaluated.
Scope and Application of the Policy. This policy
statement is directed toward any privately operated, multilateral
netting system that settles, or seeks to settle, U.S. dollar
obligations through payments affecting one or more accounts at
Federal Reserve Banks, either directly or indirectly
("multilateral netting systems"). Multilateral netting systems
include clearing house organizations, with or without a central
counterparty, for netting payments or foreign exchange contracts
among financial institutions.
The scope of the policy statement is limited to
multilateral netting systems that involve large-dollar
settlements or payments.
In particular, such systems that: (1)
have three or more participants that net payments or foreign
exchange contracts involving the U.S. dollar, whether or not
netted amounts are legally binding; and either (2) have, or are
likely to have, on any day, settlements with a system-wide
aggregate value of net settlement credits (or debits) larger than
$500 million (in U.S. dollars and any foreign currencies
combined); or (3) routinely process individual payments or
foreign exchange contracts, with a stated dollar value larger
than $500,000.
A multilateral netting system that meets the above
criteria is subject to the policy if (1) it is a state-chartered
member of the Federal Reserve System, (2) any of its agent(s) or
participants are state-chartered members of the Federal Reserve
System, (3) its participants' net positions are settled through a
Federal Reserve settlement account, (4) its participants settle
their net positions in the multilateral netting system through
their individual Federal Reserve accounts or the Federal Reserve
account of the settlement agent(s), or (5) one or more bank
holding companies have an investment in the multilateral netting
system. The Board also reserves the right to apply the elements
of this policy to any non-dollar system based, or operated, in
the United States that engages in the multilateral clearing or
netting of non-dollar payments among financial institutions and
that would otherwise be subject to this policy. This policy does
not apply to systems dealing with exchange-traded futures and
12
options. Systems in the United States that undertake only the
clearance and settlement of debt and equity securities are
subject to the Board's policy statement on "Private DeliveryAgainst-Payment Securities Systems."
In applying the policy, the Board seeks to distinguish
between routine banking relationships and arrangements that
create a multilateral "system" for clearing and settling U.S.
dollar payment and other obligations. This policy statement is
not intended to apply to routine bilateral relationships between
financial institutions, such as those involved in correspondent
banking.
In certain borderline cases, for example involving
netting systems operated by a single financial institution and
that combine elements of bilateral and multilateral netting, a
case-by-case determination that an arrangement is a large-dollar
multilateral netting system may be necessary for the purpose of
applying this policy statement.
In general, the participation in, and operation of, a
multilateral netting system is governed by rules and procedures
designed to facilitate multilateral clearance and settlement.
Settlement risks are typically shared by the participants in some
fashion, either implicitly or through employment of explicit
loss-sharing and liquidity arrangements.
In contrast,
correspondent banking relationships generally focus on bilateral
relationships and risks; the risk of a settlement failure
typically falls, at least initially and sometimes primarily, on
the service provider's or settlement agent's liquidity and
capital.
The Board believes that the Lamfalussy Minimum
Standards may apply, for example, to all large-dollar
multilateral payment netting systems irrespective of the type of
financial instrument or contractual obligation netted by the
system. However, the Board recognizes that in the case of
privately operated large-dollar multilateral netting systems for
the batch processing of paper-based as well as electronic
payments, including privately operated Automated Clearing House
(ACH) systems, certain electronic controls that would be required
to implement the Lamfalussy Minimum Standards may not be
feasible. Further, the rights and responsibilities of parties
within such systems may require further analysis. Consequently,
the Board intends to study further the implications of the
Lamfalussy Minimum Standards, and the arrangements to implement
the Lamfalussy Minimum Standards, for privately operated largedollar multilateral netting systems for the batch processing of
paper-based as well as electronic payments. As such, the Board
does not intend to apply the Lamfalussy Minimum Standards to
these systems at this time.
13
Lamfalussv Minimum Standards for the Design and
Operation of Privately Operated Larcre-Dollar Multilateral Netting
Systems. The Federal Reserve's policy on privately operated
large-dollar multilateral netting systems is designed to strike
an appropriate balance between the requirements of market
efficiency and payments system stability. A direct means of
achieving this balance is to ensure that large-dollar
multilateral netting systems are designed and operated so that
the participants and service providers have both the incentives
and the ability to manage the associated credit and liquidity
risks. The Board's approach to privately operated large-dollar
multilateral netting systems will be guided by the following
minimum standards for such systems:6
1. Netting systems should have a well-founded legal basis
under all relevant jurisdictions.
2. Netting system participants should have a clear
understanding of the impact of the particular system on each
of the financial risks affected by the netting process.
3. Multilateral netting systems should have clearly-defined
procedures for the management of credit risks and liquidity
risks which specify the respective responsibilities of the
netting provider and the participants. These procedures
should also ensure that all parties have both the incentives
and the capabilities to manage and contain each of the risks
they bear and that limits are placed on the maximum level of
credit exposure that can be produced by each participant.
4. Multilateral netting systems should, at a minimum, be
capable of ensuring the timely completion of daily
settlements in the event of an inability to settle by the
participant with the largest single net debit position.
5. Multilateral netting systems should have objective and
publicly-disclosed criteria for admission which permit fair
and open access.
6. All netting systems should ensure the operational
reliability of technical systems and the availability of
backup facilities capable of completing daily processing
requirements.
6These standards are identical to the minimum standards for
netting systems in the Lamfalussy Report, with the exception that
the words "netting system" have been substituted for "netting
scheme" in minimum standards one, two, and six, and the words
"particular system" have been substituted for "particular scheme"
in standard two.
14
/ovziy
The Federal Reserve reserves the right to prohibit the
use of Federal Reserve payment services to support funds
transfers that are used to settle, directly or indirectly,
obligations on large-dollar multilateral netting systems that do
not meet the Lamfalussy Minimum Standards. The Federal Reserve
will also take appropriate supervisory steps, or refer matters to
the appropriate supervisory or regulatory authority, in cases of
systems not in compliance with the aforementioned Lamfalussy
Minimum Standards, or their equivalent. Moreover, in order for
Federal Reserve Banks to monitor properly the use of intraday
credit, no future or existing privately operated large-dollar
multilateral netting system will be permitted to settle on the
books of a Federal Reserve Bank unless its participants authorize
the system to provide position data to the Reserve Bank on
request.
Implementation of the Lamfalussy Minimum Standards.
The Board believes that large-dollar multilateral netting
systems, whether onshore or offshore, should meet in full the
Lamfalussy Minimum Standards, as set forth in this policy
statement.
In order to satisfy the Lamfalussy Minimum Standards,
the Board expects that individual large-dollar multilateral
netting systems will meet the following risk management
standards, or their equivalent:
(1) a requirement that each
participant establish bilateral net credit limits vis-a-vis each
other participant in the system;
(2) establish and monitor in
real-time system-specific net debit limits for each participant;
(3) establish real-time controls to reject or hold any payment or
foreign exchange contract that would exceed the relevant
bilateral and net debit limits; (4) establish liquidity
resources, such as cash, committed lines of credit secured by
collateral, or a combination thereof, at least equal to the
largest single net debit position;7 and (5) establish rules and
procedures for the sharing of credit losses among the
participants in the netting system. The Board will consider, on
a case-by-case basis, alternative risk management measures that
provide for risk management systems and controls that are
equivalent to the five measures listed above. The Board notes
that the Lamfalussy Minimum Standards and the arrangements to
implement the Lamfalussy Minimum Standards, as discussed above,
in no way diminish the responsibilities of the participants in,
and the operator of, a large-dollar multilateral netting system
to determine if additional safeguards would be appropriate.
7The term "largest single net debit position" means the
largest intraday net debit position of any individual participant
at any time during the daily operating hours of the netting
system.
15
Timeframe for Implementation of the Lamfalussv Minimum
Standards. The Board recognizes that not all existing largedollar multilateral netting systems may meet the Lamfalussy
Minimum Standards, and the associated requirements for
implementation of those standards, set forth in this policy
statement. The Board also recognizes that existing large-dollar
multilateral netting systems will need a period of time in which
to make any needed changes to their organization and operations.
Consequently, the Board believes that an eighteen-month
transition period would be appropriate for large-dollar
multilateral netting systems that are operating on [insert date
of final adoption by the Board]. Such systems will be expected
to comply fully with the policy statement by [insert date
eighteen months after the date of final adoption by the Board].
Large-dollar multilateral netting systems established subsequent
to [insert date of final adoption by the Board] will be expected
to comply fully with the policy statement, without benefit of a
transition period.
The Board intends to review periodically the scale and
nature of the credit, liquidity, and settlement risks in
privately operated large-dollar multilateral netting systems.
Operators of such systems should ensure that as the scale of
risks in their systems increase, risk management systems are
designed and operated to control the increased scale of risk.
The Board expects that over time, whenever systems are changed or
redesigned, significant attention will be given to the issue of
risk management in order to ensure that high standards of risk
control are achieved.
In addition, offshore, large-dollar multilateral
netting systems and multicurrency netting systems should at a
minimum be subject to oversight or supervision, as a system, by
the Federal Reserve, or by another relevant central bank or
supervisory authority. The Board recognizes that central banks
have common policy objectives with respect to large-value netting
arrangements. Accordingly, the Board expects that it will
cooperate, as necessary, with other central banks and foreign
banking supervisors in the application of the aforementioned
Lamfalussy Minimum Standards to offshore and multicurrency
systems.
In this regard, the Principles for Co-operative Central
Bank Oversight outlined in the Lamfalussy Report provide an
important international framework for cooperation.
By order of the Board of Governors of the Federal Reserve
System, July 12, 1994.
(Signed) William W. Wiles
William W. Wiles
Secretary of the Board
16
@FedFRASER