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FEDERAL RESERVE B A «
OF WEW YORK
[
Circular No. 9 868 "1
May 31, 1985
I
RED U CIN G RISKS ON LAMGE-DOLLAR W IR E TRA N SFER SYSTEMS
New Daylight O verd raft Policy, Effective M arch 27, 1986
To the C hief Executive Officers o f A ll Depository Institutions
in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve System:
The Federal Reserve Board has issued a statement of its policy to control and reduce the risks to depository institu
tions participating in large-dollar wire transfer systems.
The policy calls on private networks and depository institutions to reduce their own credit risks. It also depends, in
part, on the role of the Federal Reserve and other financial institution regulators in examining, monitoring, and counseling
institutions.
Large-dollar networks are an integral part of the payments and clearing mechanism. Current data indicate that total
daylight overdrafts average $110 to $120 billion per day. A daylight overdraft occurs when an institution has sent funds
over Fedwire (the Federal Reserve wire transfer system) in excess of the balance in its reserve or clearing account, or it has
sent more funds over a private wire network than it has received.
Because a failure of a participant to settle its net position on a private large-dollar network could cause substantial
disruption in financial markets, one of the Board’s major objectives in establishing its policy is to reduce the possibility of
a settlement failure. This would be accomplished primarily through a reduction in the volume of overdrafts and by encour
aging institutions to exercise better control over exposures that remain.
In establishing its policy, the Board made it clear that it is not condoning the use of this practice by depository
institutions. While some degree of intra-day credit may be necessary to keep the payments mechanism operating
smoothly, the Board expects to see, over time, a reduction in both the total volume of daylight overdrafts and the number
of institutions with a pattern of substantial reliance on such credit. After reviewing the initial impact of the new policy, the
Board may adopt additional guidelines to reduce further the volume and incidence of daylight overdrafts and other use of
intra-day credit.
The Board’s policy becomes effective March 27, 1986.
The Board encourages each depository institution that incurs daylight overdrafts on Fedwire or participates on private
large-dollar wire networks voluntarily to adopt by December 31, 1985, a cross-system sender net debit cap (a sender net
debit cap that applies across all wire transfer systems as a total) following the guidelines that the Board established.1
The Board’s policy also states that no large-dollar payment network will be eligible for Federal Reserve net settle
ment services unless it:
1. requires each participant to establish a maximum net amount it is willing to receive from any sender (bilateral net
credit limit);
1 The cross-system cap selected should have two components: a ceiling on the net debit position that an institution could incur on any single day, and a limit
that the institution could incur on average over a two-week period. For example, if an institution rated itself as “average” under the Board’s guidelines, it would
not allow its net debit position to exceed 1.5 times its capital on any single day or 1.0 times its capital on average over a two-week period.
(OVER)
2. establishes a maximum ceiling on the amount of intra-day credit a sender may incur (sender net debit cap) reason
ably designed to reduce the risks to participants on that network;
3. develops and implements a system that will reject or hold any payment that would exceed either bilateral net credit
limits or the network’s sender net debit cap; and
4. agrees to provide transaction data to its Reserve Bank on request.
In addition to its policy action, the Board also requested comment by August 15, 1985 regarding:
— the treatment of Fedwire overdrafts resulting from transfer of book-entry securities;
— automated clearing house issues; and
— net settlement issues.
The Board also requested comment by June 17, 1985 on a proposed data collection for ex post monitoring of auto
mated clearing house transactions.
Enclosed is a copy of the Board’s policy statement regarding risks on large-dollar wire transfer systems (Docket
No. R-0515). Also enclosed is a copy of the Board’s notices requesting comments on (a) issues relating to risks
arising from the transfers of book-entry securities on Fedwire (Docket No. R-0515A), (b) issues relating to risks
arising from ACH transactions (Docket No. R-0515B), (c) issues relating to risks arising from the provision of net
settlement services to other than large-dollar transfer systems (Docket No. R-0515C), and (d) information requests
directed to ACHs (Docket No. R-0515D). Comments on the ACH information collection request matter should be
submitted by June 17, 1985\ comments on the other matters should be submitted by August 15, 1985.
Questions on the new daylight overdraft policy, and written comments on the above-mentioned matters, should
be directed to Cathy E. Minehan, Vice President (Tel. No. 212-791-7766), who will act as this District’s daylight
overdraft liaison officer. Her alternate will be George R. Juncker, Chief Compliance Examiner (Tel. No.
212-791-5183).
In order to explain the new risk-reduction policy to all Fedwire and private transfer-system participants, we plan
to conduct educational seminars in the early fall. In that connection, we would ask that you designate a senior man
agement representative in your institution with whom we might deal both to arrange the seminars and to facilitate
implementation of the new policy. Please advise Mrs. Minehan in writing of the name of your designated representa
tive by July 31, 1985.
E. G erald C o r r ig a n ,
President.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Daylight Overdraft Policy
FEDERAL RESER V E SYSTEM
[Docket No. R-0515]
Policy Statement Regarding Risks on
Large-DoHar Wire Transfer Systems
A G E N C Y : B oard of G o v ern o rs of the
F ed eral R eserve System .
a c t i o n : Policy sta te m e n t.
a d o p t v o lu n ta rily by D ecem b er 31, 1985,
a c ro ss-sy ste m se n d e r n e t d e b it cap
follow ing the g u id elin es se t out in an
a p p e n d ix to the B o ard 's policy
sta te m e n t.
E F F E C T IV E D A T E : M arch 27, 1986.
F O R F U R T H E R IN F O R M A T IO N C O N T A C T :
E d w a rd C. Ettin, D eputy D irecto r (202-
SUMMARY: In M arch, 1984, the B oard
req u e ste d public co m m en t on se v e ra l
p ro p o sed m eth o d s of red u cin g th e risks
to d ep o sito ry in s titu tio n s a s s o c ia te d
w ith th eir p a rtic ip a tio n on la rg e -d o lla r
elec tro n ic funds tra n sfe r sy stem s. A fter
studying the public co m m en ts a n d
recen t d a ta on the e x p o su re of
in stitu tio n s using su ch sy stem s, the
B oard h as fo rm u lated a p olicy to re d u c e
these risks. T he po licy re lie s in p a rt on
the efforts of d ep o sito ry in s titu tio n s to
red u ce their ow n ex p o su re s through the
use of b ila te ra l n e t c re d it lim its a n d
se n d e r n et d eb it cap s, a n d in p a rt on the
role of the F e d e ra l R e serv e a n d o th e r
fin an cial in s titu tio n re g u la to rs in
exam ining, m onitoring, a n d c o u n selin g
institutions.
Effective M arch 27,1986, no larged o lla r p ay m en t n e tw o rk w ill b e eligible
for F ed eral R eserv e n e t se ttle m e n t
se rv ices u n less.it (1) re q u ire s e ach
p a rtic ip a n t to e sta b lish b ila te ra l net
cred it lim its vis-a-v is e a c h o th e r
p a rtic ip a n t on th a t n etw o rk , (2)
e sta b lish e s a s e n d e r n e t d e b it c ap th a t is
re a s o n a b ly d esig n e d to re d u c e th e risk s
to p a rtic ip a n ts on th a t n e tw o rk , (3)
d e v elo p s a n d im p lem en ts a sy ste m th a t
will reject or hold a n y p a y m e n t th at
w ould b re a c h eith e r b ila te ra l n e t cred it
lim its or the n e tw o rk 's s e n d e r n e t d e b it
cap, an d (4) ag rees to p ro v id e
tra n sa c tio n d a ta to its R e serv e B ank on
request.
T he B oard also stro n g ly e n c o u ra g e s
e a c h in stitu tio n th a t ru n s d ay lig h t
o v e rd ra fts on F ed w ire o r p a rtic ip a te s on
a p riv a te larg e-d o lla r w ire n e tw o rk to
4 5 2 -3 3 6 8 ), D a v id B. H u m p h r e y ,
A s s i s t a n t D ir e c to r ( 2 0 2 -4 5 2 -2 5 5 7 ),
T e r r e n c e B e lto n , E c o n o m is t ( 2 0 2 - 4 5 2 2444), D iv is io n o f R e s e a r c h a n d
S t a tis tic s : E llio tt C. M c E n te e , A s s o c i a t e
D ir e c to r ( 2 0 2 -4 5 2 -2 2 3 1 ), N a n c y R.
W e s o lo v v s k i, O p e r a t io n s A n a ly s t ( 2 0 2 4 5 2 -3 4 3 7 ), D i v i s i o n o f F e d e r a l R e s e r v e
B a n k O p e r a tio n s ; J o se p h R. A l e x a n d e r ,
A tto r n e y ( 2 0 2 -4 5 2 -2 4 8 9 ). L e g a l D iv is io n ;
J effr e y C. M a r q u a r d t, E c o n o m is t ( 2 0 2 4 5 2 -2 3 6 0 ), D i v i s i o n o f I n te r n a tio n a l
F in a n c e ; A n t h o n y G . C o m y n , A s s i s t a n t
D ir e c to r ( 2 0 2 -4 5 2 -3 3 5 4 ), D i v i s i o n o f
B a n k in g S u p e r v is io n a n d R e g u la tio n ; or
Joy W . O ’C o n n e ll, T D D (2 0 2 -4 5 2 -3 2 4 4 ).
SUPPLEMENTARY INFORMATION: T h e
F e d e r a l R e s e r v e B o a r d h a s i s s u e d th e
f o llo w in g p o lic y s t a t e m e n t c o n c e r n in g
r e d u c in g r is k s o n la r g e -d o lla r e le c t r o n ic
f u n d s tr a n s fe r s y s t e m s :
R e d u c in g R is k s o n L arge- D o lla r
E le c tr o n ic F u n d s T r a n s fe r S y s t e m s
O v e r th e p a s t s e v e r a l y e a r s , th e B o a r d
h a s b e c o m e in c r e a s in g ly c o n c e r n e d
a b o u t th e r is k s th a t p a r t ic ip a t io n o n
la r g e -d o lla r p a y m e n t n e t w o r k s 1 p r e s e n t
1 In a changing technological and regulatory
environment, it is not possible or desirable to adopt
an ail inclusive and permanent definition of a
“large-dollar payment network” for the purpose of
Federal Reserve risk control policy. In determining
whether any particular network or system is a
’'large-dollar” system, the Board will consider any
of the following four factors: (1) The employment of
multilateral netting arrangements, (2) the use of
same-day settlement, (3) the routine processing of a
significant number of individual payments larger
than $50,000, and (4) the possibility that any one
participant could be exposed to a net debit position
at the time of settlement in excess of its capital.
to th e d e p o s it o r y in s t it u t io n s th a t
p a r tic ip a te o n th e m , to th e b a n k in g
s y s t e m , a n d to o th e r s e c t o r s o f th e
e c o n o m y . B e c a u s e p r iv a te w ir e
n e t w o r k s o p e r a t e b y th e t r a n s m is s io n o f
p a y m e n t m e s s a g e s th r o u g h o u t th e d a y
w it h s e t t le m e n t o f n e t p o s it i o n s a t th e
e n d o f th e d a y , th e n e t w o r k is e x p o s e d
to th e p o s s i b i l it y th a t a p a r t ic ip a n t c o u ld
b e u n w illin g or u n a b le to s e t t l e a la r g e
n e t d e b it p o s it io n . A fa ilu r e o f o n e
p a r tic ip a n t to s e t t l e c o u ld s e r io u s l y
j e o p a r d iz e th e f in a n c ia l p o s it i o n s o f its
n e t c r e d ito r s o n th a t n e t w o r k , w it h
s e r io u s r e p e r c u s s io n s s p r e a d in g fr o m
t h o s e p a r t ic ip a n t s to th e ir c r e d ito r s .
T h u s, a n u n e x p e c t e d s e t t l e m e n t fa ilu r e
c o u ld r e s u lt in s e r io u s d is r u p t io n s o f
m o n e y a n d f in a n c ia l m a r k e ts .
O n M a r c h 2 9 ,1 9 8 4 , th e B o a r d
r e q u e s t e d p u b lic c o m m e n t o n p o s s i b l e
c o m p o n e n t s o f a r is k r e d u c t io n p o lic y ,
in c lu d in g b o t h th e g o a l s th a t s u c h a
p o l i c y s h o u ld s e e k to a t t a in a n d s e v e r a l
p o s s i b l e m e t h o d s fo r c o n t r o llin g a n d
r e d u c in g risk . 4 9 FR 1 3 1 8 6 (A p r. 3 ,1 9 8 4 ).
A f t e r c o n s id e r in g th e c o m m e n t s ,
to g e th e r w it h r e c e n t d a t a o n th e
a c t iv i t i e s a n d e x p o s u r e s o f in s t it u t io n s
o n la r g e - d o lla r n e t w o r k s a n d th e
r e c o m m e n d a t io n s o f it3 s t a f f ,2 t h e B o a r d
h a s d e v e lo p e d a r is k r e d u c t io n p o lic y .
In f a s h io n in g t h is p o lic y , th e B o a r d ’s
fir s t c o n c e r n w a s r e d u c in g th e
p o s s i b i l it y o f a s e t t le m e n t fa ilu r e . T h is is
a c c o m p li s h e d p r im a r ily th r o u g h a
r e d u c t io n in th e v o l u m e o f in tr a -d a y
c r e d it e x p o s u r e s a n d b y e n c o u r a g in g
in s t it u t io n s to e x e r c i s e b e t t e r c o n tr o l
o v e r e x p o s u r e s th a t r e m a in . R e d u c t io n
a n d c o n tr o l o f c r e d it e x p o s u r e s a r e a l s o
im p o r ta n t in a t t a in in g a s e c o n d p r im a r y
2 The staff recommendations are contained in a
study. R educing R isk on L argeD ollar Transfer
S yste m s (May, 1985). Copies of this study are
available from each of the Fedaral Reserve Banks or
the Secretary of the Board.
PRINTED IN NEW YORK, FROM FEDERAL REGISTER. VOL. 50, NO. 99
[Enc. Cir. No. 9868]
g o a l: c o n t a in in g th e e f f e c t s o f a
s e t t le m e n t fa ilu r e s h o u ld o n e o c c u r .
T h e B o a r d is w e l l a w a r e th a t la r g e d o lla r n e t w o r k s a r e a n in te g r a l p a r t o f
th e p a y m e n t s a n d c le a r in g m e c h a n is m
a n d th a t it is o f v it a l im p o r t a n c e to k e e p
th e p a y m e n t s m e c h a n is m o p e r a tin g
w it h o u t s ig n if ic a n t d is r u p tio n . I n d e e d , it
is p r e c is e ly b e c a u s e o f th e im p o r ta n c e o f
a v o id in g s u c h d is r u p t io n s th a t th e B o a r d
is s e e k in g to r e d u c e th e r is k s o f
s e t t le m e n t f a ilu r e s th a t c o u ld c a u s e
t h e s e d is r u p tio n s . T h e B o a r d i s a l s o
a w a r e , h o w e v e r , th a t s o m e in t r a - d a y
c r e d it m a y b e n e c e s s a r y to k e e p th e
p a y m e n t s m e c h a n is m r u n n in g s m o o t h ly
a n d e f fic ie n t ly . W h ile it i s e s s e n t i a l to
r e d u c e a n d c o n tr o l in t r a - d a y c r e d it, th is
m u s t b e d o n e in a m a n n e r th a t w i l l
m in im iz e d is r u p t io n s to t h e p a y m e n t s
m e c h a n is m . T h e B o a r d a n t i c ip a t e s th a t
in r e ly in g la r g e ly o n t h e e f fo r t s o f
in d iv id u a l in s t it u t io n s to id e n t if y ,
c o n tr o l, a n d r e d u c e t h e ir e x p o s u r e s , a n d
b y e s t a b lis h in g g u i d e l in e s fo r u s e b y
in s t it u t io n s , th e g o a l o f r e d u c in g a n d
c o n tr o llin g r is k s w i l l n o t u n d u ly d isr u p t
th e s m o o t h o p e r a t io n o f th e p a y m e n t s
m e c h a n is m .
In e s t a b lis h in g s u c h a p o lic y , th e
B o a r d u n d e r lin e s th a t it i s n o t c o n d o n in g
d a y lig h t o v e r d r a fts . W h ile , a s n o te d ,
s o m e in t r a - d a y c r e d it m a y b e n e c e s s a r y ,
th e B o a r d a n t i c ip a t e s th a t a s a r e s u lt o f
its p o lic y , th e r e w i l l n o t b e a n i n c r e a s e
in th e n u m b e r o f in s t it u t io n s
c o n s i s t e n t l y r e ly in g o n d a y lig h t
o v e r d r a f t s o r o th e r in t r a - d a y c r e d it to
c o n d u c t th e ir b u s i n e s s , a n d e x p e c t s to
s e e , o v e r tim e , a r e d u c t io n in b o t h th e
v o lu m e o f in t r a - d a y c r e d it a n d th e
n u m b e r o f in s t it u t io n s w i t h a p a t t e r n ©I
s u b s t a n t ia l r e lia n c e o n s u c h p r a c t ic e s .
T h e p o l i c y p r e s e n t e d b e l o w i s p u r p o s e ly
d e s i g n e d to m in im iz e in it ia l d is r u p tio n s
a n d p e r m i ts t h e B o a r d t o m o n ito r t h e
im p a c t o f i t s p o l i c y o n f in a n c ia l m a r k e ts .
T h e B o a r d f u lly e x p e c t s th a t it w i l l, a fte r
r e v i e w o f th e in it ia l im p a c t o f it s
p o lic ie s , b e a d o p tin g g u id e lin e s
d e s i g n e d to r e d u c e fu r th e r th e v o lu m e
a n d i n c id e n c e o f d a y lig h t o v e r d r a f t s a n d
o th e r u s e s o f in tr a -d a y c r e d it. If
in s t it u t io n s a p p e a r n o t to b e c o o p e r a t in g
w it h th e s p ir it o f th e B o a r d ’s c u r r e n t or
fu tu re p o l i c i e s , th e B o a r d w i l l c o n s id e r
its other options—including regulatory
restraints.
The elements of the Board’s risk
reduction policy are set out below:
I. B ila te r a l N e t C r ed it L im its
In i t s e a r lie r s t a t e m e n t a n n o u n c in g a n
in te r im r is k -r e d u c tio n p o lic y , 4 9 FR a t
1 3 191, th e B o a r d s t a t e d th a t a n y la r g e d o lla r n e t w o r k o b t a in in g n e t s e t t le m e n t
s e r v ic e s fr o m a F e d e r a l R e s e r v e B a n k
w o u ld h a v e to r e q u ir e e a c h o f its
p a r t ic ip a n t s to e s t a b l i s 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 e a c h o th e r
p a r t ic ip a n t o n th a t n e t w o r k . In s e t t in g
b ila t e r a l n e t c r e d it lim its , e a c h
p a r t ic ip a n t d e t e r m in e s fo r i t s e l f th e
m a x im u m d o lla r a m o u n t o f n e t tr a n s fe r s
fi.e ., th e v a l u e o f r e c e i v e s in e x c e s s o f
th e v a l u e o f s e n d s ) th a t it i s w illin g to
a c c e p t fr o m e a c h o th e r p a r t ic ip a n t o n a
n e t w o r k . T h e B o a r d b e l i e v e s th a t
b ila t e r a l n e t c r e d it lim its r e d u c e r is k b y
e n a b lin g a n in s t it u t io n to i d e n t if y a n d
c o n tr o l th e e x p o s u r e it c o u ld f a c e in th e
e v e n t o f a s e t t le m e n t fa ilu r e .
A c c o r d in g ly , th e B o a r d h a s d e c id e d to
c o n t in u e t h is r e q u ir e m e n t a n d
s t r e n g t h e n it.
A f t e r th e e f f e c t iv e d a t e o f t h is p o l i c y
(M a r c h 2 7 ,1 9 8 6 ), n o p r iv a t e la r g e -d o lla r
p a y m e n t n e t w o r k w i l l b e e lig ib le fo r
R e s e r v e B a n k n e t s e t t le m e n t s e r v ic e s
u n l e s s it (1) r e q u ir e s e a c h p a r tic ip a n t to
e s t a b l i s 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 e a c h o th e r p a r t ic ip a n t o n th a t
n e t w o r k , a n d (2) e s t a b l i s h e s a s y s t e m
t h a t w i l l r e je c t o r h o ld a n y p a y m e n t th a t
w o u ld e x c e e d s u c h a lim it. (B ila te r a l n e t
c r e d it lim it s d o n o t a p p ly t o F e d w ir e
s i n c e th e F e d e r a l R e s e r v e , u n d e r
R e g u la t io n J p r o v id e s ir r e v o c a b le c r e d it
to th e r e c e iv e r w h e n a d v i c e o f c r e d it i s
g i v e n fo r th e tr a n s fe r . R e s e r v e B a n k s ,
h o w e v e r , m a y t a k e a c t io n to r e d u c e
th e ir c r e d it e x p o s u r e .
T h e f e d e r a l b a n k r e g u la to r s h a v e
a g r e e d th a t e x a m in e r s w ill, d u rin g
r e g u la r e x a m in a t io n s , r e v i e w a n d
c o m m e n t o n th e p r o c e d u r e s u s e d b y
e a c h in s t it u t io n in e s t a b lis h in g ,
m o n ito r in g , r e v ie w in g , a n d m o d ify in g
b ila t e r a l n e t c r e d it lim its , a n d e n s u r e
th a t in s t it u t io n s u n d e r s t a n d th e ir
p o t e n t i a l e x p o s u r e s w i t h e a c h o th e r
2
participant over more than one network
and in more than one market
II. Sender Ned Debt! Caps
Bilateral net credit limits are not
sufficient by themselves to reduce
aggregate risk on large-dollar payment
networks. The volume of daylight
exposure that each institution is willing
to accept from each other institution is
likely to be quite large when aggregated
across all receivers. Moreover, each
institution is unaware of the credit made
available to a given sender by other
potential receivers. For this reason, the
Board believes that bilateral net credit
limits must be supplemented by a limit
on the aggregate amount of risk that an
institution can present to the payments
system. Accordingly, the Board strongly
urges that the board of directors of each
institution either participating on a
large-dollar network or incurring
daylight overdrafts on Fedwire adopt a
sender net debit cap (a ceiling or ‘‘cap"
on the aggregate net debit position—the
value of all sends in excess of the value
of all receives—that it can incur during a
given interval).
Sender net debit caps—expressed as
multiples of capital—should be applied
across all large-dollar systems, i.e., to
the aggregate position of an institution
at a moment in time on all large-dollar
transfer systems combined. With this
“cross-system" sender net debit cap, net
debit positions on one system can be
offset by credit positions on other
systems.3 In addition to the crosssystem sender net debit cap, the Board
has extended its interim policy on
private network sender net debit caps.
As of the effective date of this policy,
each private network will, as a
condition for access to the Federal
Reserve net settlement service, be
■As noted below, however. Reserve Banks will
1
not permit daylight overdrafts on Fedwire to exceed
the cross-system cap established by an institution;
i.e., net credits on private wire systems will not be
able to be used to increase the Fedwire cap. A
similar arrangement will exist for private network
participants where net credits on Fedwire and other
private networks cannot be used to increase a
participant’s cap on a given private network.
r e q u ir e d to d e v e lo p a n d im p o s e o n its
p a r tic ip a n ts a n e t w o r k s e n d e r n e t d e b it
c a p r e a s o n a b ly d e s ig n e d to r e d u c e
in d iv id u a l in s t it u t io n r is k e x p o s u r e o n
th a t n e tw o r k . In a d d itio n , e a c h n e tw o r k
w ill b e r e q u ir e d to d e v e lo p a n d a p p ly a
m e c h a n is m fo r r e je c tin g or h o ld in g t h o s e
tr a n s fe r s th a t w o u ld c a u s e a n in s titu tio n
to e x c e e d its c a p .
In d e v e lo p in g its p o lic y to w a r d c r o s s
s y s t e m s e n d e r n e t d e b it c a p s , th e B o a r d
n o t e d th e v i e w s o f c o m m e n te r s s tr o n g ly
u rg in g th a t n e w r e g u la tio n s b e a v o id e d
a n d th a t v o lu n ta r y s e lf - p o lic in g
t e c h n iq u e s b e a t l e a s t tr ie d . In a d d itio n ,
th e B o a r d is u n c e r ta in a b o u t th e im p a c t
o f r e g u la to r y c o n tr o ls o n th e p a y m e n t s
m e c h a n is m . M o r e o v e r , th e B o a r d is
s e n s it i v e to th e p r a c tic a l d if f ic u lt ie s o f
s e l e c t in g r e g u la to r y c a p s for t h o u s a n d s
o f d e p o s it o r y in s t it u t io n s , e a c h w it h
d iffe r in g a b i lit ie s to d e a l wT r isk . A t
ith
th e s a m e tim e, th e B o a r d is c o n c e r n e d
th a t v o lu n ta r y s e n d e r n e t d e b it c a p s
m ig h t p r o v id e n o d is c ip lin e , e n d u p
tr e a tin g s im ila r ly s it u a t e d in s t it u t io n s
d iffe r e n tly , p la c e n o e f f e c t iv e lim it o n a n
in d iv id u a l in s t it u t io n ’s r is k e x p o s u r e ,
a n d p r o v id e n o r e m e d y fo r th e F e d e r a l
R e s e r v e s h o u ld it fin d a p a r tic u la r c a p
e x c e s s iv e ,
C o n s e q u e n tly , th e B o a r d 's p o l i c y c a lls
fo r a v o lu n ta r y c r o s s - s y s t e m s e n d e r n e t
d e b it c a p b o a r d o n a s p e c if ic s e t o f
g u id e lin e s a n d s o m e d e g r e e o f e x a m in e r
o v e r s ig h t .4 T h e B o a r d ’s p o lic y h a s n o
r e g u la to r y d im e n s io n e x c e p t (1)
p o t e n t ia l r e s p o n s e s to a n a c t u a l l e v e l o f
a g g r e g a te d a y lig h t c r e d it e x p o s u r e a t a n
in d iv id u a l in s titu tio n d e e m e d b y th e
in s t it u t io n ’s e x a m in e r to b e u n s a f e or
u n s o u n d , (2) e lim in a t io n o f a c c e s s to
d a y lig h t o v e r d r a fts o n F e d w ir e b y
in s t it u t io n s n o t e n g a g in g in th e s e lf e v a lu a t io n p r o c e s s , a n d (3) c o n tr o l o f
Fedwire overdrafts of individual
in s t it u t io n s d e t e r m in e d b y a R e s e r v e
B a n k to e x p o s e it to e x c e s s i v e r isk . If
e v e n t s s u b s e q u e n t ly d e m o n s t r a t e th a t
s e n io r m a n a g e m e n t a n d th e b o a r d s o f
d ir e c to r s o f d e p o s it o r y in s t it u t io n s d o
4The Board acknowledges with appreciation that
its policy draws heavily on the Final Report of the
Risk Control Task Force, Payments System
Committee, Association of Reseri'e City Bankers.
prepared with the assistance of the Bank
Administration Institute and Robert Morris
Associates (October, 1984).
n o t t a k e th e p r o p o s e d g u id e lin e s a n d
p r o c e d u r e s s e r io u s ly , th e B o a r d w ill
r e c o n s id e r its o p t io n s , in c lu d in g th e
a d o p t io n o f r e g u la tio n s d e s ig n e d to
i m p o s e e x p lic it lim its o n d a y lig h t c r e d it
ex p o su re.
A. D eterm ining Cep Category
T h e fir s t s t e p fo r a n in s t it u t io n in
e s t a b lis h in g its c r o s s - s y s t e m s e n d e r n e t
d e b it c a p is to d e te r m in e it s o w n c a p
c a t e g o r y b y e v a lu a t in g its
c r e d it w o r t h in e s s , c r e d it p o lic ie s , a n d
o p e r a t io n a l c o n t r o ls a n d p r o c e d u r e s .5*
T h e g u id e lin e s to b e u s e d b y e a c h
in s titu tio n in e s t a b lis h in g its c a p
c a t e g o r y a r e d e t a ile d in th e A p p e n d ix to
th is p o lic y s t a t e m e n t .
In a p p ly in g t h e s e g u id e lin e s , e a c h
in s titu tio n w o u ld b e e x p e c t e d to
m a in ta in a c o n f id e n t ia l file fo r e x a m in e r
r e v ie w th a t i n c lu d e s (1) w o r k s h e e t s a n d
s u p p o r tin g a n a l y s i s d e v e lo p e d in its
s e l f - e v a lu a t io n o f its o w n r isk c a te g o r y ,
{2] c o p i e s o f s e n io r m a n a g e m e n t r e p o r ts
to th e in s t it u t io n ’s b o a r d o f d ir e c to r s
r e g a r d in g th a t s e lf - e v a lu a t io n , a n d (3)
c o p i e s o f th e m in u t e s o f th e d i s c u s s i o n
o f th e b o a r d o f d ir e c to r s c o n c e r n in g th e
in s t it u t io n ’s a d o p t io n o f a c a p c a te g o r y .
T h e p r o c e s s o f s e lf - e v a lu a t io n , w it h
b o a r d o f d ir e c to r r e v ie w , s h o u ld b e
c o n d u c t e d a t l e a s t o n c e in e a c h s i x
m o n th p e r io d .
A s p a r t o f its n o r m a l e x a m in a t io n , th e
d e p o s it o r y in s titu tio n e x a m in e r s w ill
r e v ie w th e c o n t e n t s o f th e s e lf e v a lu a t io n f ile .8 T h e o b j e c t iv e o f th is
r e v i e w w ill b e to a s s u r e th a t th e
in s t it u t io n h a s s e r io u s l y a n d d ilig e n t ly
'This evaluation should be done on an individual
institution basis—treating as separate entities each
commercial bank, each Edge (and its branches),
each thrift institution, etc. While the Board realizes
that depository institution holding companies
usually act as integrated entities and that
performing the self-evaluation on an individual
institution basis may result in some increased costs,
consolidation presents to the Federal Reseve and
other financial institution regulators a number of
operating and policy complexities that must be
resolved. The Board will continue to review this
issue, but notes that many of the benefits of
consolidation can be obtained directly by intra
family wire transfers.
An exception is made in the case of U.S. agencies
and branches of foreign banks. Since these entities
have no existence separate from the foreign bank,
all the U.S. offices of foreign banks (excluding U.S.
chartered bank subsidiaries and U.S. chartered
Edge subsidiaries) should be treated as a
3
a p p lie d t h e g u id e lin e s , th a t th e
u n d e r ly in g a n a l y s i s a n d m e th o d o lo g y
w e r e r e a s o n a b le , a n d th a t th e r e s u lta n t
s e l f - e v a l u a t i o n w a s g e n e r a lly n o t
i n c o n s i s t e n t w it h th e e x a m in a t io n
r e p o r t. E x a m in e r c o m m e n t s , if a n y ,
w o u ld b e e x p e c t e d to b e f o r w a r d e d to
th e b o a r d o f d ir e c to r s o f th e in s titu tio n .
C o n s is t e n t w ith th e v o lu n ta r y n a tu r e o f
th e B o a r d ’s p o l i c y w it h r e g a r d to s e n d e r
n e t d e b it c a p s , h o w e v e r , it s h o u ld b e
e m p h a s iz e d th a t th e e x a m in e r c a n n o t
r eq u ire a m o d if ic a t io n o f th e s e lf e v a lu a t io n c a p c a t e g o r y u n l e s s th e l e v e l
o f d a y lig h t c r e d it u s e d b y th e in s titu tio n
c o n s t it u t e s a n u n s a f e or u n s o u n d
b a n k in g p r a c tic e .
B. Establishing S ender N e t D ebit Cap
T h e c a p c a t e g o r y r e s u ltin g fro m th e
s e l f - e v a l u a t i o n p r o c e s s s h o u ld b e u s e d
b y e a c h in s t it u t io n to e s t a b l i s h its c r o s s
s y s t e m s e n d e r n e t d e b it c a p . T h e c a p
l e v e l s , s e t a s m u ltip le s o f a d j u s t e d
p r im a r y c a p it a l.7 w o u ld b e a s f o llo w s :
Dual se n d er net debit cap
Cap c lass
H ig h .....................................................
Above a v e ra g e ..... ...........................
A v e ra g e ...............................................
No c a p .................................................
Two w eek
av erag e
2.0
1.5
1.0
0.0
Plus
single day
3.0
2.5
1.5
00
A n in s titu tio n w o u ld b e e x p e c t e d to
a v o id in c u r rin g c r o s s - s y s t e m net. d e b it s
th a t, o n a v e r a g e o v e r a t w o w e e k
p e r io d , e x c e e d e d th e t w o w e e k a v e r a g e ,
c a p and , o n a n y d a y , e x c e e d e d th e
s in g le d a y c a p . T h e t w o w e e k a v e r a g e
c a p p r o v id e s s o m e f l e x i b i l it y fo r
in s t it u t io n s a n d r e c o g n iz e s th a t
f lu c t u a t io n in p a y m e n t s c a n o c c u r fro m
d a y - t o - d a y . T h e p u r p o s e o f th e h ig h e r
single d a y c a p is to lim it excessive
d a y lig h t o v e r d r a f t s o n a n y d a y , a n d to
a s s u r e th a t in s t it u t io n s d e v e lo p in te r n a l
c o n t r o ls th a t f o c u s o n th e e x p o s u r e s
e a c h d a y , a s w e l l a s o v e r tim e .
consolidated family relying on the foreign bank's
capital.
'In the interim between examinations, examiners
may contact an institution about its cap if statistical
or supervisory reports or ad hoc information suggest
that there may have been a change in the
institution's position.
’ See Section II-C on capital, infra.
T h e t w o - w e e k a v e r a g e o v e r d r a ft
v o lu m e to b e m e a s u r e d a g a in s t th e c a p
is th e a v e r a g e o v e r a t w o - w e e k r e s e r v e
m a in t e n a n c e p e r io d o f a n in s t it u t io n ’s
d a ily m a x im u m n e t d e b it p o s it io n a c r o s s
a ll n e tw o r k . In c a lc u la t in g th e t w o w e e k
a v e r a g e , in d iv id u a l d a y s o n w h ic h a n
in s t it u t io n is in a n a g g r e g a te n e t c r e d it
p o s it io n a c r o s s a ll s y s t e m s th r o u g h o u t
th e d a y s h o u ld b e t r e a t e d a s if th e
in s t it u t io n w a s in a n e t p o s it io n o f z e r o ,
T h e n u m b e r o f d a y s to b e u s e d in
c a lc u la t in g th e a v e r a g e s h o u ld b e th e
n u m b e r o f b u s i n e s s d a y s th e
in s t it u t io n ’s R e s e r v e B a n k is o p e n d u rin g
th e r e s e r v e m a in t e n a n c e p e r io d .
It s h o u ld b e n o t e d th a t th e B o a r d h a s
p u r p o s e ly s e t th e r e c o m m e n d e d c a p s to
b e a s s o c i a t e d w ith e a c h c a t e g o r y a t
r e la t iv e ly h ig h l e v e l s s o th a t in s t it u t io n s
a n d th e ir e x a m in e r s c a n g a in e x p e r ie n c e
w it h c a p s w h il e m a in t a in in g a m a r g in o f
f le x i b i l it y fo r m o s t in s t it u t io n s . T h e
B o a r d w ill e v a lu a t e t h e s e c a p s
c o n t in u o u s ly , a n d e x p e c t s to h a v e
e n o u g h d a ta o n th e ir im p a c t to
r e c o m m e n d n e w , lo w e r c a p l e v e l s b y
M arch, 1987. T h e B o a rd m a y a ls o
r e c o m m e n d r e d u c in g th e a v e r a g in g
p e r io d , a n d m a y u lt im a t e ly r e c o m m e n d
a s in g le d a y c a p o n ly ,
c.
Capital
S e n d e r n e t d e b it c a p s s h o u ld b o
m u lt ip le s o f “a d j u s t e d p r im a r y c a p it a l,1
5
P rim a ry c a p it a l in c lu d e s c o m m o n s to c k ,
p e r p e tu a l-p r e fe r r e d s t o c k , s u r p lu s,
u n d iv id e d p r o fits , c o n t in g e n c y a n d o th e r
c a p it a l r e s e r v e s , q u a lif y in g m a n d a to r y
c o n v e r t ib le in s tr u m e n ts , a l l o w a n c e s for
p o s s ib le lo a n a n d le a s e lo s s e s
( e x c l u s iv e o f a n y a l lo c a t e d t r a n s fe r r isk
r e s e r v e s ) ,8 a n d m in o r ity in t e r e s t s in
e q u it y a c c o u n t s o f c o n s o l i d a t e d
s u b s id ia r ie s , b u t e x c l u d e s lim ite d -life
p r e fe r r e d s t o c k . “A d j u s t e d ” p r im a ry
c a p it a l is d e f in e d a s th e su m o f t h e s e
p r im a ry c a p it a l c o m p o n e n t s l e s s a ll
in t a n g ib le a s s e t s a n d d e fe r r e d n e t l o s s e s
o n l o a n s a n d o th e r a s s e t s s o ld . A d j u s t e d
p r im a ry c a p it a l fo r th rift in s t it u t io n s
8Allocated transfer risk reserves (“ATRR”) are
reserves against certain assets whose value has
been found by the federal bank regulatory agencies
to have been significantly impaired by protracted
transfer risk problems. Such reserves are not
considered capital by the agencies,
w o u ld in c lu d e a n y c a p it a l a s s i s t a n c e
p r o v id e d b y th e F e d e r a l D e p o s it
I n s u r a n c e C o r p o r a tio n in th e fo r m o f n e t
w o r th c e r t if ic a t e s p u r s u a n t to 12 U .S .C ,
1 7 2 9 (f) o r 18 2 3 (i).
A n y in s t it u t io n w ith n e g a t iv e a d j u s t e d
p r im a ry c a p it a l w i l l b e p e r m itte d to
in c u r d a y lig h t o v e r d r a f t s o n F e d w ir e
o n ly w it h th e p e r m is s io n o f its R e s e r v e
B a n k , a n d a ll s u c h o v e r d r a fts w ill h a v e
to b e c o lla t e r a liz e d .
In s o m e i n s t a n c e s , fu r th e r a d j u s t m e n t s
w i l l b e r e q u ir e d . F o r e x a m p le , v ir t u a lly
a ll E d g e A c t a n d a g r e e m e n t
c o r p o r a t io n s a r e s u b s id ia r ie s o f
d e p o s it o r y in s t it u t io n s th a t m a y
t h e m s e l v e s u s e in tr a -d a y c r e d it. T h e
s a m e c a p it a l w o u ld b e d o u b le - c o u n t e d if
b o th th e p a r e n t a n d th e E d g e A c t or
a g r e e m e n t c o r p o r a t io n s u b s id a r y u s e d
s u c h c r e d it b a s e d o n th e ir o w n c a p it a l
b a s e s . A c c o r d in g ly , i f a p a r e n t e l e c t s to
p e r m it its E d g e A c t o r a g r e e m e n t
c o r p o r a tio n s u b s id ia r y to u s e d a y lig h t
c r e d it, a n y a d j u s t e d p r im a r y c a p it a l
a ttr ib u ta b le to it s E d g e A c t o r a g r e e m e n t
c o r p o r a t io n s u b s id ia r y th a t is r e f le c t e d
o n th e p a r e n t ’s b a l a n c e s h e e t s h o u ld b e
s u b t r a c t e d fr o m th e p a r e n t ’s c a p it a l. T h e
p a r e n t c o u ld c h o o s e , h o w e v e r , n o t to
p e r m it its E d g e A c t or a g r e e m e n t
c o r p o r a t io n s u b s id ia r y to u s e in tr a -d a y
c r e d it, a n d u s e a ll o f it s (th e p a r e n t ’s)
c a p it a l fo r its o w n c a p .
In d e te r m in in g c r o s s - s y s t e m s e n d e r
n e t d e b it c a p l e v e l s , U .S . b r a n c h e s a n d
a g e n c ie s o f fo r e ig n b a n k s s h o u ld u s e th e
w o r ld - w id e c a p it a l o f th e fo r e ig n b a n k
e s t a b l i s h i n g th e b r a n c h e s a n d / o r
a g e n c ie s , n o t th a t b a n k ’s p a r e n t.
t e adjusted primary c p t l o
h
aia f
any U S bank s b i i r e oft e f r i n
.,
usdais
h oeg
bank should be subtracted from t e
h
fo r e ig n bank’ adjusted primary c p t l
s
aia
to avoid double c u t n .
onig
Further,
D e te r m in in g w o r ld - w id e c a p it a l fo r
U .S . a g e n c ie s a n d b r a n c h e s o f fo r e ig n
b a n k s p r o v id e s c o n s i d e r a b le
d e f in it io n a l a n d m e a s u r e m e n t p r o b le m s ,
U n d er current p ro ced u res, d a ta are
c o ll e c t e d th r o u g h th e Y - 7 r e p o r t, w h ic h
is s u b m it t e d a n n u a lly a n d is d u e fo u r
m o n t h s a fte r th e c l o s e o f a fo r e ig n
b a n k in g o r g a n iz a t io n 's f i s c a l y e a r .
These procedures r s l in t e Federal
eut h
Reserve’ f r i n bank c p t l data
s oeg
aia
being more than one year old a c r a n
t eti
times i t e reporting c c e Without
n h
yl.
4
more c rrent d t , timely monitoring o
u
aa
f
U S agency or branch adherence t
..
o
overdraft l m t t o s would prove
iiain
dfiut
ifcl.
I order t a l v a e these problems,
n
o leit
t e Board has directed iss a ft devise
h
t tf o
a r p r i g form t a would allow t e
eotn
ht
h
Federal Reserve t c l e t more t
o olc
imely
information on t e world-wide
h
shareholder equity c p t l o f r i n
aia f oeg
banks t a use intra-day credit To
ht
reduce r p rting burden, t e r p r
eo
h eot
would l k l allow a f r i n banking
iey
oeg
organization t a had not experienced
ht
l s e during a rep r i g period simply
oss
otn
t warrant t a f c r
o
h t a t ather than t
o
provide more frequent qua t t t v
niaie
c p t l information. Organizations th a t
aia
had experienced lo s s would be asked
se
t provide updated equity c p t l d t ,
o
aia aa
Any proposed information c l e t o
olcin
procedure w l be published f r
il
o
comment p i r t implementation.
ro o
11 A d d itio n a l Considerations
The contents of t e s l - v l a i n
h efeauto
cap category fl w l be considered
ie i l
c n i e t a by th i s i u i ns
ofdnil
e nttto’
examiner. S m l r y th a
i i a l , e ctual cap l v l
ee
selected by th i s i u i nw l be held
e nttto il
c n i e t a by t e Federal Reserve and
ofdnil
h
t e i s i u i ns examiner. F n l y t e
h nttto’
ial, h
Board notes t a exceptional
ht
circumstances may r quire an i s i u i n
e
nttto
t incur overdrafts i excess ofisc p
o
n
t a.
Such a pattern o overdrafts should be
f
discussed with t e Reserve Bank, with
h
s e i i plans developed t reduce t e
pcfc
o
h
intra-day c e i pos t o s as soon as
rdt iin
possible t a l v l within t e
o ee
h
institution’ c p
s a.
III. O th e r C o m p o n e n t s o f th e B o a r d ’s
P o lic y
A, D aylight O verdrafts on F edw ire
The B o a r d ’s c o n c e r n w it h r is k s o n
la r g e -d o lla r p a y m e n t s y s t e m s b e g a n
w it h it s c o n c e r n a b o u t d a y lig h t
o v e r d r a f t s o n F e d w ir e . In r e s p o n s e to
th is c o n c e r n , th e B o a r d , in 1 9 8 2 , r e q u ir e d
R e s e r v e B a n k s to c o u n s e l in s t it u t io n s
th a t r e g u la r ly in c u r r e d d a y lig h t
o v e r d r a f t s o n F e d w ir e in e x c e s s o f 50
p e r c e n t o f c a p ita l.
The Board i silconcerned with
s tl
these o e d a t , and believes t a i i
vrrfs
ht t s
appropriate t take e f c i e steps t
o
fetv
o
c o n tr o l r is k s to th e F e d e r a l R e s e r v e
B a n k s b y p la c in g m o r e e f f e c t iv e lim its
o n F e d w ir e d a y lig h t o v e r d r a fts .
T h e r e fo r e , b e g in n in g o n M a r c h 2 7 ,1 9 8 6 ,
th e B o a r d w ill e s t a b l i s h a F e d w ir e c a p
fo r e a c h d e p o s it o r y in s titu tio n . T h is c a p
w ill b e e q u a l to th e v o lu n ta r y c r o s s
s y s t e m c a p a d o p t e d b y th e in s titu tio n ,
r e d u c e d b y th e in s t it u t io n ’s a c t u a l n e t
d e b i t s o n o th e r n e t w o r k s a s d e t e r m in e d
in a n a fte r th e f a c t m e a s u r e m e n t
p r o c e s s . T h is c a p w i l l th u s b e m o n ito r e d
o n a n e x p o s t b a s is . ( R e s e r v e B a n k s,
h o w e v e r , w i l l m o n ito r a n in s t it u t io n ’s
F e d w ir e p o s it i o n s o n a r e a l-tim e b a s is
w h e n th e y b e l ie v e th a t th e in s t it u t io n is
e x p o s in g th e R e s e r v e B a n k to e x c e s s i v e
risk . R e a l tim e m o n ito r s w ill p e r m it
F e d e r a l R e s e r v e B a n k s to r e je c t fu n d s
t r a n s f e r e e b y — a n d to p e n d or h o ld
b o o k -e n tr y s e c u r it ie s r e c e i v e d for— th e
in s titu tio n w h e n s u c h t r a n s a c t io n s
e x p o s e th e R e s e r v e B a n k to e x c e s s i v e
risk .) T h e F e d w ir e c a p w ill n o t b e
in c r e a s e d b y th e in s t it u t io n ’s n e t c r e d its
o n o th e r n e t w o r k s . E a c h R e s e r v e B a n k
w ill, o f c o u r s e , r e ta in th e righ t to p r o te c t
its risk e x p o s u r e fro m in d iv id u a l
in s t it u t io n s b y r e s e r v in g th e righ t to
r e d u c e u n ila t e r a lly F e d w ir e c a p s ,
im p o s e c o lla t e r a liz a t io n or c le a r in g
b a l a n c e r e q u ir e m e n ts , h o ld or r e je c t
F e d w ir e tr a n s fe r s d u rin g th e d a y u n ti!
th e in s titu tio n h a s c o ll e c t e d b a l a n c e s in
its F e d e r a l R e s e r v e a c c o u n t, a n d — in
e x tr e m e c a s e s — ta k e th e p r o b le m
in s titu tio n o ff-lin e or p r o h ib it it from
u s in g F e d w ir e .
B. Book-entry Securities Transfers
I formulating isday i h overdraft
n
t
lgt
p l c e , th Board has always been
oiis e
concerned about t e impact t a
h
ht
overdraft r s r c i n could have on t e
etitos
h
U S government s c r t e market and
..
euiis
on th Board’ a i i y t conduct
e
s blt o
monetary p
olicy through open market
o e a i n . Accordingly t e Board,
prtos
h
pending development ofprocedures f r
o
c l a e a i i g such overdrafts— o other
oltrlzn
r
procedures f rreducing t e Reserve
o
h
Banks’r s exposure— had provisi n l y
ik
oal
exempted from q a t t t v overdraft
uniaie
c n r l those Fedwire d y i h
oto
algt
o
verdrafts r s l i g from th t a s e o
eutn
e rnfr f
book-entry s c r t e . 0
e u i i s 1*
In a r e la te d a c t io n (D o c k e t N o . R 0 5 1 5 A ), th e B o a r d is t o d a y r e q u e s tin g
c o m m e n t o n a s e r ie s o f p r o p o s a ls for
tr e a tin g F e d w ir e d a y lig h t o v e r d r a fts
r e s u ltin g fro m th e tr a n s e r o f b o o k -e n tr y
s e c u r it ie s . U n til th e B o a r d a d o p t s a n e w
p o lic y in th is a r e a , b o o k -e n tr y
o v e r d r a fts w ill r e m a in u n c o n s tr a in e d
a n d s e p a r a t e from a n y s e n d e r c a p s
a d o p t e d or p la c e d o n F e d w ir e fu n d s
tr a n sfe r s , e x c e p t a t p r o b le m in s t it u t io n s .
I n s titu tio n s th a t in c u r F e d w ir e
o v e r d r a f t s fo r th e fir s t tim e w ill b e
s u b j e c t e d to a 50 p e r c e n t o f c a p ita l lim it
p e n d in g c o m p le t io n o f th e s e lf e v a lu a t io n p r o c e d u r e d e s c r ib e d a b o v e .
I n s titu tio n s th a t d o n o t f o l lo w th e s e lf e v a lu a t io n p r o c e d u r e w i l l n o t b e
p e r m itte d to in c u r o v e r d r a fts o n
F e d w ir e .9
C. Automated Clearing Houses
When th Board frtbecame
e
is
concerned with r s s on l r e d l a
ik
ag-olr
payment systems, automated c e r n
laig
houses (ACHs) were regarded as s a l
mld l a systems. Recently, however, t e
olr
h
ACHs have been evolving i such a way
n
t a they appear t be taking on many o
ht
o
f
t ec a a t r s i so l r e - o l r
h hrceitc f agrdla
t a s e systems, and they t e e o e
rnfr
hrfr
present many o t e same r s s
f h
ik.
Accordingly, t e Board has dir c e
h
etd
iss a ft undertake a study o ACH
t tf o
f
r s .The study w l focus on ()whether
ik
il
1
t e ACH i an appropriate mechanism
h
s
f rmaking l r e d l a payments, ()
o
ag-olr
2
what kind ofc n r l should be
otos
implemented i ACH i i c e singly
f
s nra
’
'Under the self-policing policy adopted by the
Board, an institution that does not adopt a cap for
itself would be able to use without limit all credit
available to it over any p r iv a t e network, unless use
of such credit were found to constitute an unsafe or
unsound banking practice by the institution's
examiner. Such behavior, however, would not be
consistent with the spirit of the Board's policy.
i0 Such overdrafts occur when the institution
receiving book-entry securities has received more
book-entry securities against payment at a point in
time than it has sent. Since receipt of a book-entry
security and Fedwire payment to the sender of
securities are simultaneous, the sender of the
security receives Fedwire payment regardless of the
securities overdraft position of the receiver of the
securities. The definition used for a book-entry
securities overdraft means that such an overdraft
could occur even while the receiver’s funds account
was in credit balance.
5
u s e d fo r la r g e -d o lla r p a y m e n t s , a n d (3)
h o w d e p o s it o r y in s t it u t io n s n o w c o n tr o l
th e f i n a n c ia l r is k a s s o c i a t e d w it h A C H
d e b it a n d c r e d it t r a n s a c t io n s . A s p a r t o f
th is s tu d y , th e B o a r d , in a r e la t e d a c tio n ,
r e q u e s t in g p u b lic c o m m e n t o n a s e r ie s o f
q u e s t io n s o n A C H r isk . ( S e e D o c k e t N o .
B -0 5 1 5 B .)
U n til th e B o a r d ’s s t u d y o f A C H r is k is
c o m p le t e a n d th e B o a r d h a s fo r m u la te d
a n e w p o l i c y to d e a l w it h A C H r isk , th e
B o a r d i s m o d if y in g it s e x p o s t
m o n ito r in g or in tr a -d a y c r e d it to (1)
r e c o g n iz e th e p o t e n t ia l r is k s a s s o c i a t e d
w it h A C H t r a n s a c t io n s p r o c e s s e d b y
b o t h th e F e d e r a l R e s e r v e a n d p r iv a t e ly o p e r a t e d A C H s , a n d (2) in h ib it th e u s e
o f A C H s to c ir c u m v e n t th e r isk
r e d u c t io n p o l i c i e s th e B o a r d h a s
a d o p t e d fo r la r g e -d o lla r f u n d s tr a n s fe r
n e t w o r k s . S p e c if ic a lly , fo r p u r p o s e s o f
e x p o s t m o n ito r in g , g r o s s d e b it s
r e s u ltin g fr o m th e o r ig in a tio n o f c r e d it
t r a n s a c t io n s a n d th e g r o s s c r e d its
r e s u ltin g fro m th e r e c e ip t o f c r e d it
t r a n s a c t io n s w ill b e p o s t e d a t th e
R e s e r v e B a n k ’s o p e n in g o f b u s i n e s s o n
th e s e t t le m e n t d a te , a n d g r o s s c r e d its
r e s u ltin g fr o m th e o r ig in a tio n o f d e b it
t r a n s a c t io n s a n d th e g r o s s d e b it s
r e s u ltin g fro m th e r e c e ip t o f d e b it
t r a n s a c t io n s w i l l b e p o s t e d a t th e
R e s e r v e B a n k ’s c lo s e o f b u s i n e s s o n th e
s e t t le m e n t d a t e .11 A s a c o n d it io n o f
o b t a in in g n e t s e t t le m e n t s e r v ic e s ,
p r iv a t e ly - o p e r a t e d A C H s w ill b e
r e q u ir e d to p r o v id e to th e F e d e r a l
R e s e r v e th e d a te n e c e s s a r y to in c lu d e
s u c h tr a n s a c t io n s p r o c e s s e d o v e r th e ir
n e t w o r k s in th e F e d e r a l R e s e r v e ’s e x
p o s t m o n ito r in g s y s t e m . In a n o th e r
s e p a r a t e a c tio n , th e B o a r d is r e q u e s tin g
p u b lic c o m m e n t o n th e p a r a m e te r s o f
th is d a ta c o lle c t io n . ( S e e D o c k e t N o . R 0515D.J In a d d itio n , p e n d in g c o m p le t io n
o f th e A C H stu d y , th e B o a r d h a s
s u s p e n d e d c o n s id e r a t io n o f p r o v id in g
s a m e - d a y A C H s e t t le m e n t s e r v ic e b y
R e s e r v e B a n k s.
D. Net Settlement Services
W h ile th e B o a r d h a s th u s fa r b e e n
c o n c e r n e d m a in ly w it h r is k s o n la r g e -
11 This posting procedure is for ex post
monitoring purposes and will in no way change
when actual settlement entries are made or when
ACH transactions become final.
d o lla r fu n d s t r a n s fe r n e t w o r k s , th e
F e d e r a l R e s e r v e h a s lo n g p r o v id e d n e t
s e t t le m e n t s e r v ic e s to a v a r ie t y o f o th e r
p r iv a t e s e c t o r c le a r in g a r r a n g e m e n ts . In
a d d itio n to la r g e -d o lla r f u n d s tr a n s fe r
n e t w o r k s , t o d a y t h e s e in c lu d e c h e c k
c le a r in g h o u s e s , c r e d it c a r d p r o c e s s o r s ,
A C H s , a n d s m a ll- d o lla r f u n d s tr a n s fe r
n e tw o r k s , s u c h a s a u t o m a t e d te lle r
m a c h in e (A T M ] a n d p o in t - o f - s a le (P O S )
n e tw o r k s.
B e c a u s e th e te r m s o f th e s e t t le m e n t
a r r a n g e m e n ts v a r y a n d b e c a u s e th e r e
a r e q u e s t io n s r e g a r d in g th e r is k s th a t
th e s e a r r a n g e m e n ts e n t a il, th e B o a r d h a s
d ir e c t e d its s t a f f to c o n d u c t a th o r o u g h
r e v i e w o f n e t s e t t le m e n t r isk . In
c o n d u c t in g th is s tu d y , th e s t a f f w ill
a d d r e s s (1) w h e t h e r th e te r m s o f n e t
s e t t le m e n t a r r a n g e m e n ts s h o u ld v a r y
b a s e d o n th e t y p e o f t r a n s a c t io n s b e in g
s e t t le d , a n d (2) h o w d e p o s it o r y
in s t it u t io n s tr e a t or s h o u ld tr e a t n e t
s e t t le m e n t e n t r ie s fo r th e v a r io u s t y p e s
o f n e t s e t t l e m e n t a r r a n g e m e n ts .
T o f a c il i t a t e th e s t a f f s s tu d y , th e
B o a r d is, in a r e la t e d a c t io n ( s e e D o c k e t
N o . R -0 5 1 5 C ), t o d a y r e q u e s t in g p u b lic
c o m m e n t o n a s e r ie s o f q u e s t io n s o n th e
n e t s e t t l e m e n t s e r v ic e .
E. Edge A c t a n d A greem ent
Corporations, U.S. B ranches and
A gencies o f Foreign Banks, and N e w
York A rticle X U Investm ent
Com panies 12
T h e r e a r e s p e c i a l r is k s a s s o c i a t e d
w it h th e p a r t ic ip a t io n o n la r g e -d o lla r
tr a n s fe r s y s t e m s o f t h e s e in s t it u t io n s .
S o m e o f th e m a r e m a jo r p a r t ic ip a n t s in
s u c h n e t w o r k s , o f t e n m a k in g a n d
r e c e iv in g a la r g e v o lu m e o f p a y m e n t s o n
b e h a l f o f a f f ilia t e s a n d th e ir p a r e n t
o r g a n iz a t io n s . T h e s i z e o f th e ir p a y m e n t
a c t iv i t i e s is g e n e r a lly q u ite la r g e r e la tiv e
to th eir U .S . c a p it a l (Gr c a p it a l
e q u iv a le n t ) , a n d th u s s e n d e r n e t d e b it
c a p s w o u ld te n d to c o n s t r a in s e v e r e ly
th e a b ilit y o f m a n y o f th e s e in s t it u t io n s
to p a r t ic ip a t e d ir e c tly in th e U .S . d o lla r
p a y m e n t s m e c h a n is m , fo r c in g th e m to
d e a l e ith e r th r o u g h th e ir U .S . p a r e n t (in
12
This section excludes discussion of foreignowned U.S. banks, including U.S. banks that are
either subsidiaries of foreign banks or of foreign
bank holding companies. These entities have U.S.
bank charters and capital in the U.S., and are
treated identically to any other U.S. bank.
th e c a s e o f E d g e s] or th r o u g h U .S .
c o r r e s p o n d e n t s or a f f ilia t e s (in th e c a s e
o f U .S . a g e n c ie s , b r a n c h e s , E d g e
s u b s id ia r ie s o f fo r e ig n b a n k s , a n d s o m e
N e w Y o r k in v e s t m e n t c o m p a n ie s ) .
In d e v e lo p in g its p o lic y fo r t h e s e
in s t it u t io n s , th e B o a r d h a s s o u g h t to
b a la n c e th e g o a l o f r e d u c in g a n d
m a n a g in g risk in th e p a y m e n t s s y s t e m ,
in c lu d in g r isk to th e F e d e r a l R e s e r v e ,
w it h th a t o f m in im iz in g th e a d v e r s e
e f f e c t s o n th e p a y m e n t s o p e r a t io n s o f
t h e s e in s t it u t io n s . In a d d itio n , th e
p r in c ip le o f fa ir a n d e q u it a b le tr e a tm e n t
e m b o d ie d in th e U .S . p o l i c y o f n a t io n a l
tr e a tm e n t fo r fo r e ig n b a n k in g
o r g a n iz a t io n s w a s g iv e n e x p lic it
c o n s id e r a t io n .
1. Edge A c t a n d A greem ent
Corporations. U n d e r c u r re n t B o a r d
p o lic y , a ll F e d w ir e o v e r d r a fts o f E d g e
a n d a g r e e m e n t c o r p o r a tio n s m u s t b e
fu lly c o lla t e r a liz e d . T h is p o lic y r e f le c t s
th e la c k o f a c c e s s o f t h e s e in s t it u t io n s to
th e d is c o u n t w i n d o w a n d th e p o s s i b i l it y
th a t th e p a r e n t o f a n E d g e or a g r e e m e n t
c o r p o r a tio n m a y b e u n a b le or u n w illin g
to c o v e r it s s u b s id ia r y ’s o v e r d r a ft o n a
tim e ly b a s is .
T h e B o a r d b e l i e v e s th a t E d g e A c t a n d
a g r e e m e n t c o r p o r a tio n s u b s id ia r ie s o f
U .S . b a n k s c a n , to g e th e r w it h th e ir
p a r e n ts , a r r a n g e th e ir a ffa ir s in a w a y
th a t w o u ld a l lo w th e m to c o n t in u e to
s e r v ic e th e ir c u s t o m e r s a t th e s a m e tim e
th a t r is k e x p o s u r e s a r e r e d u c e d .
S p e c if ic a lly , th e B o a r d n o t e s th a t th e
p a r e n t o f a n E d g e or a g r e e m e n t
c o r p o r a tio n c o u ld fu n d its s u b s id ia r y
d u rin g th e d a y o v e r F e d w ir e a n d / o r th e
p a r e n t c o u ld s u b s t it u t e i t s e l f fo r its
s u b s id ia r y o n p r iv a t e n e t w o r k s . I n d e e d ,
d a ta s u g g e s t th a t, in v ir t u a lly a ll c a s e s ,
th e c o n s o l i d a t e d E d g e a n d p a r e n t
o v e r d r a ft p o s it io n w o u ld b e w it h in th e
c a p lim its o f th e p a r e n t if it w e r e
e v a lu a t e d a s a n a b o v e a v e r a g e c a p
in s titu tio n , e v e n th o u g h th e E d g e ’s
o v e r d r a f t s a r e v e r y la r g e in r e la t io n to
th e E d g e ’s o w n c a p it a l. T h is s u g g e s t s
th a t s u c h a n a p p r o a c h b y th e p a r e n t
c o u ld b o th r e d u c e s y s t e m i c risk
e x p o s u r e a n d p e r m it th e E d g e
c o r p o r a tio n to c o n t in u e to s e r v ic e its
c u sto m e rs.
W ith r e s p e c t to E d g e a n d a g r e e m e n t
s u b s id ia r ie s o f fo r e ig n b a n k s , th e B o a r d
b e l i e v e s th a t b e c a u s e t h e y la c k a c c e s s
to th e d is c o u n t w i n d o w a n d r e a d y
6
a c c e s s to a U .S . a f f ilia t e th a t c a n
p r o v id e su p p o rt, th e s e in s t it u t io n s
s h o u ld b e tr e a t e d in th e s a m e m a n n e r a s
th e ir d o m e s t i c a ll y - o w n e d c o u n te r p a r ts .
T h e p o lic y o f n a t io n a l t r e a tm e n t a ls o
s u p p o r ts th is c o n c lu s io n .
A c c o r d in g ly , th e B o a r d h a s
d e t e r m in e d th a t a ll E d g e A c t a n d
a g r e e m e n t c o r p o r a t io n s w i l l c o n t in u e to
b e r e q u ir e d to c o ll a t e r a l iz e F e d w ir e
d a y lig h t o v e r d r a fts , a n d s tr o n g ly u rg es
th a t e a c h s u c h c o r p o r a tio n r e s tr a in its
u s e o f in tr a -d a y c r e d it b y e s t a b lis h in g
s e n d e r n e t d e b it c a p s b a s e d o n its o w n
c a p it a l in th e s a m e m a n n e r a s a n y o th e r
d o m e s t ic d e p o s it o r y in s titu tio n . In
a d d itio n , th e B o a r d u r g e s p a r e n ts o f
E d g e a n d a g r e e m e n t c o r p o r a t io n s to
s u b s t it u t e t h e m s e l v e s fo r th e ir E d g e or
a g r e e m e n t s u b s id ia r i e s o n p r iv a t e la r g e d o lla r n e t w o r k s .
F or p u r p o s e s o f s e n d e r n e t d e b it c a p s ,
th e B o a r d s u g g e s t s th a t a ll b r a n c h e s o f
th e s a m e E d g e or a g r e e m e n t c o r p o r a tio n
be c o n s o lid a te d . T h e c o n s o lid a te d
e n t i t y ’s o v e r d r a ft p o s it io n w i l l b e
m o n it o r e d b y th e R e s e r v e B a n k o f th e
E d g e or a g r e e m e n t c o r p o r a t io n ’s h e a d
o f f i c e . 13 T h e m o n ito r in g R e s e r v e B a n k ,
in c o n s u lt a t io n w it h t h o s e R e s e r v e
B a n k s in w h ic h th e E d g e o r a g r e e m e n t
b r a n c h e s o p e r a t e a n d th e m a n a g e m e n t
o f th e c o n s o l i d a t e d e n tity , c a n e it h e r (1)
d e t e r m in e th a t E d g e or a g r e e m e n t
b r a n c h e s o u t s id e it s D is t r ic t w i l l n o t b e
p e r m it t e d to ru n F e d w ir e o v e r d r a f t s , o r
(2) a l lo c a t e p a r t or a ll o f th e E d g e o r
a g r e e m e n t c o r p o r a t io n ’s F e d w ir e c a p
(a n d th e r e s p o n s ib i li t y o f a d m in is te r in g
p a r t or a ll o f th e c o lla t e r a l r e q u ir e m e n t)
to a R e s e r v e B a n k in w h ic h o n e or m o r e
o f th e b r a n c h e s o p e r a te .
2. U.S. B ranches a n d A gencies o f
Foreign Banks. A s n o t e d p r e v io u s ly , th e
B o a r d b e l i e v e s th a t U .S . b r a n c h e s a n d
a g e n c ie s o f fo r e ig n b a n k s s h o u ld
u n d e r g o th e s a m e s e l f - e v a l u a t i o n
p r o c e s s a s d o m e s t ic d e p o s it o r y
in s t it u t io n s , b u t th a t it b e d o n e o n th e
b a s i s o f a ll U .S . b r a n c h a n d a g e n c y
o p e r a t io n s , r a th e r th a n o n a b r a n c h - b y
b r a n c h , a g e n c y - b y - a g e n c y b a s is . In
s e t t in g a c r o s s - s y s t e m s e n d e r n e t d e b it
c a p , th e B o a r d b e l i e v e s th a t it is
a p p r o p r ia te th a t b r a n c h e s a n d a g e n c ie s
13
With the consent of the parties, a Reserve Bank
other than that of an Edge head office can assume
the management of these responsibilities.
d e v e lo p a c a p b a s e d o n th e w o r ld - w id e
c a p it a l o f th e fo r e ig n b a n k ( l e s s a n y
a d j u s t e d p r im a r y c a p it a l a ttr ib u ta b le to
s u b s id ia r y U .S . b a n k s a n d E d g e A c t or
a g r e e m e n t c o r p o r a tio n s r e f le c t e d in th e
fo r e ig n b a n k ’s w o r ld - w id e c a p it a l) . T h e
B o a r d h a s r e a c h e d th is c o n c lu s io n
b e c a u s e p u b lic c o m m e n t s a n d o th e r
d a ta i n d ic a t e th a t p r iv a te m a r k e t
p a r t ic ip a n t s v i e w th e in tr a -d a y c r e d it
r isk a s s o c i a t e d w ith U .S . o f f i c e s o f
fo r e ig n b a n k s in te r m s o f th e w o r ld - w id e
c r e d it w o r t h in e s s o f th e e n tir e fo r e ig n
bank.
In a s s e s s i n g th e F e d e r a l R e s e r v e ’s
o w n risk , h o w e v e r , th e B o a r d is still
c o n c e r n e d a b o u t th e la c k o f tim e ly
in fo r m a tio n file d w it h R e s e r v e B a n k s,
a n d th e F e d e r a l R e s e r v e ’s in a b ility to
m o n ito r d e v e lo p m e n t s c o n c e r n in g e a c h
fo r e ig n b a n k ’s n o n -U .S . o p e r a t io n s .
A c c o r d in g ly , th e B o a r d h a s d e te r m in e d
th a t, o n ly fo r p u r p o s e s o f d e te r m in in g
th e v o lu m e o f a fo r e ig n b a n k f a m ily ’s
u n c o lla t e r a liz e d F e d w ir e o v e r d r a fts , th e
m u lt ip le s d e v e lo p e d fro m th e s e lfe v a lu a t io n p r o c e s s ( S e c tio n II-B , a b o v e )
w i l l b e m u lt ip lie d b y th e c o n s o lid a t e d
U .S . c a p it a l e q u i v a l e n c y o f a ll o f its U .S .
a g e n c ie s a n d b r a n c h e s .14 A n y F e d w ir e
o v e r d r a f t s in e x c e s s o f th a t a m o u n t w ill
h a v e to b e c o lla t e r a liz e d . A n y u s e o f
in tr a -d a y c r e d it o n p r iv a te la r g e -d o lla r
n e t w o r k s w ill b e tr e a te d a s a n y o th e r
u s e o f in tr a -d a y c r e d it a n d , a s n o te d
a b o v e , th e to ta l c r o s s - s y s t e m c a p o f a
fo r e ig n b a n k ’s U .S . a g e n c ie s a n d
b r a n c h e s w i l l b e b a s e d o n th e w o r ld
w i d e c a p ita l o f th e fo r e ig n b a n k ( le s s th e
n o t e d a d ju s tm e n ts ).
T h e c r o s s - s y s t e m s e n d e r n e t d e b it c a p
fo r f a m ilie s o f b r a n c h e s a n d a g e n c ie s o f
th e s a m e fo r e ig n b a n k w i l l b e m o n ito r e d
b y th e R e s e r v e B a n k w h ic h e x e r c i s e s
th e F e d e r a l R e s e r v e ’s o v e r s ig h t
r e s p o n s ib i li t ie s u n d e r th e I n te r n a tio n a l
B a n k in g A c t. T h e a d m in is te r in g R e s e r v e
B a n k c a n , in c o n s u lt a t io n w it h R e s e r v e
B a n k s in w h ic h o th e r U .S . a g e n c ie s a n d /
or b r a n c h e s o f th e s a m e fo r e ig n b a n k
a r e l o c a t e d a n d th e m a n a g e m e n t o f th e
fo r e ig n b a n k ’s U .S . o p e r a t io n s ,
d e t e r m in e th a t b r a n c h e s a n d a g e n c ie s
o u t s id e its D is tr ic t e ith e r w ill n o t b e
p e r m itte d to in c u r F e d w ir e o v e r d r a f t s or
w ill a l lo c a t e p a rt or a ll o f th e fo r e ig n
f a m ily ’s F e d w ir e c a p (a n d th e
r e s p o n s ib ilit y fo r a d m in is te r in g p art or
a ll o f th e c o lla t e r a l r e q u ir e m e n t) to a
R e s e r v e B a n k in w h ic h o n e or m o r e o f
th e fo r e ig n o f f i c e s o p e r a t e .16
T h e B o a r d b e l i e v e s th a t th is a p p r o a c h
w ill lim it th e F e d e r a l R e s e r v e ’s r is k
w h ile g iv in g U .S . b r a n c h e s a n d a g e n c ie s
o f fo r e ig n b a n k s o p e n a c c e s s to th e U .S ,
p a y m e n t s m e c h a n is m in k e e p in g w it h
th e p o lic y o f n a t io n a l tr e a tm e n t.
3.
N e w York In vestm en t Companies,
I n v e s tm e n t c o m p a n ie s c h a r te r e d u n d e r
A r tic le XII o f th e N e w Y o rk B a n k in g
L a w a r e n o t s u b j e c t to r e s e r v e
r e q u ir e m e n ts a n d d o n o t h a v e a c c e s s to
th e d is c o u n t w i n d o w . B e c a u s e t h e y
c a n n o t m a in t a in a c c o u n t s w it h th e
F ed era l R e se r v e , th e y c a n n o t u se
F e d w ir e . S o m e a r e , h o w e v e r , a c t iv e
p a r tic ip a n ts o n p r iv a te n e t w o r k s , a n d
th e r e fo r e in tr o d u c e r is k in th e p a y m e n t s
s y s t e m m u c h lik e o th e r p a r tic ip a n ts ,
A c c o r d in g ly , th e B o a r d u r g e s th a t
i n v e s t m e n t c o m p a n ie s th a t p a r tic ip a te
o n p r iv a te la r g e - d o lla r n e t w o r k s
e s t a b lis h fo r t h e m s e l v e s a c r o s s - s y s t e m
s e n d e r n e t d e b it c a p u s in g th e
p r o c e d u r e s a n d g u i d e l in e s th e B o a r d h a s
e s t a b l i s h e d fo r d e p o s it o r y in s t it u t io n s ,
F,
B a n ke rs’B anks
B a n k e r s ’ b a n k s a r e e x e m p t fro m
r e s e r v e r e q u ir e m e n ts a n d d o n o t h a v e
r eg u la r a c c e s s to th e d is c o u n t w in d o w /,
T h e y d o , h o w e v e r , h a v e a c c e s s to
15
As in the case of Edge and agreement
corporations and their branches, with the approval
of the deisgnated administering Reserve Bank, a
second Reserve Bank may assume the responsibility
of managing and monitoring the cross-system
sender net debit cap of particular foreign branch
14
“Capital equivalency" will be defined as the and agency families. This would often be the case
when the payments activity and national
greater of (1) the sum of the amount of capital (but
administrative office of the foreign branch and
not surplus) which would be required of a national
agency family is located in one District, while the
bank being organized at each branch or agency
location, or (2) the sum of 5 per cent of the total
oversight responsibility under the Internaitonal
liabilities of each branch or agency, including
Banking Act is in another District. If a second
acceptances, but excluding (A) accrued expenses
Reserve Bank assumes management responsibility,
and (B) amounts due and other liabilities to offices,
monitoring data will be forwarded to the designated
branches, and subsidiaries of the foreign bank.
administrator for use in the supervisory process,
7
F e d e r a l R e s e r v e p a y m e n t s e r v ic e s . T o
p r o te c t R e s e r v e B a n k s fro m p o t e n t ia l
l o s s r e s u ltin g fr o m d a y lig h t o v e r d r a f t s
in c u r r e d b y b a n k e r s ’ b a n k s , th e B o a r d
a d o p t e d , in 198 2 , a p o l i c y th a t b a n k e r s ’
b a n k s s h o u ld r e fr a in fro m in c u r rin g
o v e r d r a f t s a n d p o s t c o lla t e r a l to c o v e r
a n y o v e r d r a f t s t h e y d o in c u r . B a n k e r s ’
b a n k s m a y v o lu n ta r ily g iv e u p th e ir
e x e m p tio n fr o m r e s e r v e r e q u ir e m e n ts ,
th u s g a in in g a c c e s s to th e d is c o u n t
w i n d o w a n d a v o id h a v in g to p o s t
c o lla t e r a l.
T h e B o a r d h a s d e t e r m in e d to
c o n t in u e d th e p r e s e n t p o lic y ,
G. M onitoring
T h e B o a r d b e l i e v e s th a t e x - p o s t
m o n ito r in g is c o n s i s t e n t w it h th e
v o lu n ta r y , f le x ib le a p p r o a c h it h a s
a d o p t e d . U n d e r e x - p o s t m o n ito r in g , a n
in s titu tio n w it h a c r o s s - s y s t e m n e t d e b it
p o s it io n in e x c e s s o f its c a p w ill b e
c o n t a c t e d b y a F e d e r a l R e s e r v e B a n k ,1
"3
T h e R e s e r v e B a n k w ill c o u n s e l w it h
s u c h in s t it u t io n s , d i s c u s s in g w a y s to
r e d u c e th e ir e x c e s s u s e o f in tr a -d a y
c r e d it. N o r e g u la to r y a c t io n w i l l h e
ta k e n , b u t th e R e s e r v e B a n k m a y
° A d v is e th e a p p r o p r ia te e x a m in e r ,
w h o m a y r e c o m m e n d s u p e r v is o r y a c t io n
if th e v o lu m e o f c r o s s - s y s t e m o v e r d r a fts
a r e d e e m e d u n s a f e or u n s o u n d , a n d / o r
® T a k e a p p r o p r ia te a c t io n to lim it its
o w n risk e x p o s u r e o n F e d w ir e .
A F e d e r a l R e s e r v e B a n k w i l l a p p ly
r e a l-tim e m o n ito r in g to a n in d iv id u a l
in s t it u t io n ’s F e d w ir e p o s it io n w h e n th e
R e s e r v e B a n k b e l i e v e s th a t it f a c e s
e x e s s i v e r isk e x p o s u r e , e .g . fo r p r o b le m
b a n k s or fro m in s t it u t io n s w it h c h r o n ic
o v e r d r a f t s in e x c e s s o f w h a t th e R e s e r v e
B a n k th in k s is p r u d e n t. In s u c h a c a s e ,
th e R e s e r v e B a n k w i l l c o n tr o l its r is k
e x p o s u r e s b y m o n ito r in g th e i n s t it u t io n ’s
p o s it io n , r e je c tin g F e d w ir e tr a n s fe r s o f
fu n d s , a n d p e n d in g F e d w ir e b o o k - e n t r y
s e c u r it ie s tr a n s fe r s th a t w o u ld r e s u lt in
o v e r d r a f t s in e x c e s s o f a l e v e l th e
R e s e r v e B a n k ju d g e s to b e p r u d e n t,
In o r d e r th a t R e s e r v e B a n k s m a y
16 Even if the institution is not a state member
bank, the Reserve Bank can make this contact
because an overdraft is occurring on Fedwire or
because the institution is in a net debit position on a
wire system settling on the books of the Federal
Reserve.
p r o p e r ly m o n ito r th e u s e o f in tr a -d a y
c r e d it, n o fu tu re or e x is t in g la r g e -d o lla r
n e t w o r k w i l l b e p e r m itte d to s e t t l e o n
th e b o o k s o f a R e s e r v e B a n k u n l e s s its
m e m b e r s a u th o r iz e th e n e t w o r k to
p r o v id e p o s it io n d a t a to th e R e s e r v e
B a n k o n r e q u e s t,
H Avoidance of Risk Reduction
Measures
In its M a r c h 2 9 ,1 9 8 4 , p o l i c y
s t a t e m e n t , th e B o a r d s t a t e d th a t " u se o f
F e d w ir e fo r th e a v o i d a n c e o f F e d e r a l
R e s e r v e o r p r iv a te s e c t o r r is k r e d u c tio n
m e a s u r e s is n o t a p p r o p r ia t e ,” T h e B o a r d
a d o p t e d th is p o l i c y to p r e v e n t
in s t it u t io n s from p a r t ic ip a t in g in
b ila t e r a l n e ttin g a r r a n g e m e n t s w h e r e b y
t h e y w o u ld e x c h a n g e g r o s s p a y m e n t
m e s s a g e s d u rin g th a t d a y a n d s e t t l e a t
th e e n d o f th e d a y b y u s in g F e d w ir e to
a d ju s t n e t p o s it i o n s b ila t e r a lly . S u c h
a r r a n g e m e n ts w o u ld b e d iffic u lt fo r
R e s e r v e B a n k s to d e t e c t a n d w o u ld b e
o u t s id e o f F e d e r a l R e s e r v e a n d p r iv a te s e c t o r r is k c o n tr o l m e a s u r e s . T h e y s till,
h o w e v e r , p r e s e n t th e s a m e r is k s to th e
p a y m e n t s m e c h a n is m th a t o th e r n e t
s e t t le m e n t a r r a n g e m e n ts p r e s e n t
b e c a u s e s e t t le m e n t f a ilu r e s a r e s till
p o s s i b l e , a n d s u c h f a ilu r e s w o u ld h a v e
th e s a m e d e le t e r io u s c o n s e q u e n c e s a s
a n y o th e r s e t t le m e n t fa ilu r e s ,
T h e B o a r d , th e r e fo r e , r e a ffir m s its
p o l i c y th a t in s t it u t io n s m a y n o t u s e
F e d w ir e or o th e r p a y m e n t s n e t w o r k s a s
a m e th o d o f a v o id in g r is k r e d u c tio n
m easu res.
T h e B o a r d r e a liz e s , h o w e v e r , th a t
c e r t a in n e ttin g a r r a n g e m e n ts a r e n o t
in t e n d e d to a v o i d r is k r e d u c tio n
m e a su r e s . In d eed , th e y c a n th e m s e lv e s
r e d u c e risk . F or e x a m p le , in s t it u t io n s
m a y n e t g r o s s o b lig a t io n s p rio r to
s e t t le m e n t , w it h e a c h p a r tic ip a n t le g a lly
o b lig a t e d o n ly for th e r e s u lt a n t n e t
. p o s it io n . T h is a r r a n g e m e n t r e d u c e s r isk
b e c a u s e it r e p la c e s g r o s s o b lig a t io n s
w it h th e s m a lle r n e t o b lig a t io n , a n d
fa ilu r e s to s e t t le w o u ld a lm o s t a l w a y s
in v o lv e s m a lle r e x p o s u r e s (a n d l e s s
s y s t e m a t i c r isk ) th a n w it h b ila t e r a l n e t
s e t t le m e n t . T h e B o a r d ’s p o lic y o n
lim itin g a v o i d a n c e t e c h n iq u e s i s n o t
in t e n d e d to r e s tr ic t th is k in d o f n e ttin g
a r r a n g e m e n t,
L Lorge-Dollar Payment System
Advisory Group
D u rin g th e c o u r s e o f th e ir s t u d ie s o n
la r g e -d o lla r p a y m e n t s y s t e m risk , th e
B o a r d a n d R e s e r v e B a n k s t a f f h a v e met.
w it h in d iv id u a l d e p o s it o r y in s t it u t io n s ,
a d v is o r y g r o u p s , a n d tr a d e a s s o c i a t i o n s
to o b t a in in fo r m a tio n a n d a s s i s t a n c e in
u n d e r s ta n d in g th e r is k i s s u e a n d th e
im p lic a t io n s o f v a r io u s r is k r e d u c tio n
o p t io n s . S u c h c o n t a c t s a n d d i s c u s s i o n s
h a v e b e e n in v a lu a b le . T h e B o a r d a l s o
fo u n d i n v a lu a b le th e w o r k o f th e
F e d e r a l A d v is o r y a n d T h rift I n s titu tio n
A d v is o r y C o u n c ils ’ C o m m itte e o n
P a y m e n t S y s t e m R isk , a n d th e P a y m e n t
S y s t e m C o m m itte e o f th e A s s o c ia t i o n o f
R e s e r v e C ity B a n k e r s . T h e B o a r d h a s
th e r e fo r e d e c id e d to fo r m a liz e th is
c o n t a c t a n d , w it h th e c o n s u lt a t io n o f th e
F e d e r a l A d v is o r y C o u n c il a n d th e T h rift
I n s titu tio n s A d v is o r y C o u n c il, w all
a p p o in t k n o w l e d g e a b l e r e p r e s e n t a t iv e s
o f d e p o s it o r y in s t it u t io n s a c t iv e in th e
la r g e -d o lla r p a y m e n t s m a r k e t to s e r v e
o n a jo in t a d v is o r y c o m m it t e e w it h
B o a r d s t a f f r e p r e s e n t a t iv e s .
W h e n th e S tu d y G ro u p is im p a n e le d ,
th e B o a r d r e q u e s t s th a t it stu d y :
« T h e n eed , for s e t t le m e n t f in a lit y
a n d / o r p a y m e n t s f in a lit y to c u s to m e r
r e c e iv e r s o n p r iv a te w ir e n e tw o r k s ;
° T h e c o s ts a n d b e n e fits o f
c o n s o l i d a t i o n o f h o ld in g c o m p a n y
a f f i li a t e s fo r p u r p o s e s o f d e te r m in in g
s e n d e r n e t d e b it c a p s;
® th e e f f e c t iv e n e s s o f v o lu n ta r y
s e n d e r n e t d e b it c a p s in c o n tr o llin g a n d
r e d u c in g r is k e x p o s u r e ;
* th e n e e d fo r in tr a -d a y fu n d in g
m e c h a n is m s , in c lu d in g a F e d e r a l
R e s e r v e o v e r lin e f a c ilit y a n d or o th e r
s p e c i a l F e d w ir e s e r v ic e s ;
* th e b e s t tim in g for r e d u c t io n s in c a p
le v e ls ;
® th e n e e d fo r a f e d e r a l fu n d s
s e t t le m e n t w in d o w ; a n d
* o th e r m a tte r s o f m u tu a l in te r e s t,
/
Implementation Date
T h e B o a r d b e l i e v e s that, a n
im p le m e n t a t io n d a t e o f M a r c h 2 7 ,1 9 8 6 ,
w ill p r o v id e a m p le tim e fo r d e p o s it o r y
in s t it u t io n s a n d th e F e d e r a l R e s e r v e to
d e v e lo p p la n s a n d p r o c e d u r e s to
im p le m e n t th e B o a r d ’s p o lic y . T h e B o a r d
s t o n g ly r e c o m m e n d s th a t in s t it u t io n s
e s t a b l i s h th e ir s e n d e r n e t d e b it c a p s n o
la te r th a n D e c e m b e r 3 1 ,1 9 8 5 , to e n a b le
th e F e d e r a l R e s e r v e B a n k s to p r o v id e
8
i s i u i n with a th e month t il run
ntttos
re
ra
o t e new p l c s During t i i t r a
f h
oie.
hs n e v l
t e agencies may al o consult with
h
s
i s i u i n t a th former may be i v
ntttos h t e
lee
have chosen inappropriate c p .
as
No implementation date i proposed
s
f rany change i Board p l c e
o
n
oiis
regarding overdrafts a i i g from t e
rsn
h
t a s e o book-entry s c r t e , and
rnfr f
euiis
transactions or net settlement s r i e
evcs
g n r l y Such policy changes, i any,
eeal.
f
and t e re f c i e date w l be
hi f e t v
il
determined a t rf r h r s a fstudy and
fe u t e tf
p
ublic comment.
By order of the Board of Governors of the
Federal Reserve System, May 17,1935.
William W. Wiles,
Secretary o f the Board.
Appendix—Guidelines for Establishing Risk
Categories
This appendix presents the Board's
guidelines to be used by institutions in
determing their own classifications for
purposes of setting their own sender net debit
caps. The Board policy recognizes that
individual institutions may parceive that
special or unusual circumstances not
adequately captured in these guidelines may,
in the view of the institution’s management
and board of directors, be consistent with a
higher grade classification and higher sender
net debit cap. Such a position should be fully
supported by analysis and evidence included
in the file for examiner review, Examiners
will be critical if such special factors are not
fully documented, and will be especially
sensitive to evidence that special positive
factors are being emphasized and adverse
factors ignored or downplayed.
The guidelines address creditworthiness;
operational controls, policies, and
procedures; and credit policies and
procedures. The last section suggests how the
self-evaluation in each of these three areas is
to be combined into an overall assessment,
which is then to be the basis for determining
a sender net debit cap.
I. Creditworthiness
Self-assessment of creditworthiness should
begin by reference to an institution's most
recent examination report and, where
applicable, to peer group statistics contained
in the most recent Uniform Bank Performance
Report (UBPR) and to the most recent Bank
Holding Company Performance Report
(BHCPR). Additional data from other reports
and analyses should, of course, be used.
Major emphasis should be placed on asset
quality, capital, and earnings where an
institution’s relative standing can be
determined based upon quantifiable
E a O g g B B M a aBBaM— i —
measures. Liquidity and holding company
strength should be added in as modifying
factors which, if strongly positive or negative,
could influence the overall assessment of
creditworthiness. For each of the
characteristics that become the primary
determinants of the initial benchmark
assessment of creditworthiness, each
institution should rank itself using a scale
from "A” to “D"—with “A" being best and
* being worst.1 The institution's files
‘D"
maintained for examiner review of cap
determination should provide supporting
analysis for the self-ranking assigned for
each of the characteristics.
a. A sset quality: Asset quality should be
graded A through D in relation to (a) the
level, distribution, and severity of classified
assets; (b) the level and composition of non
accrual and reduced rate assets; (c) the
adequacy of valuation reserves; and (d)
demonstrated ability to administer and
correct problem credits. The self-analysis
should take peer group satistics into
consideration.**
2 Obviously, adequate
valuation reserves and a proven capacity to
police and collect problem credits mitigate to
some degree the weaknesses inherent in
given level of classified assets. In evaluating
asset quality, consideration should also be
given to any undue degree of concentration of
credits or investments, the nature and volume
of credits specially mentioned or classified,
lending policies, and the adequacy of credit
administration procedures. Evaluations of
asset quality significantly different from the
last examination report should be highlighted
and supported in the cap determination file.
b. Capital: In the self-evaluation of capital,
institutions should, as a starting point, note
that the federal guidelines call for a minimum
primary capital-to-asset ratio of 5.5 per cent
for commercial banks. In assigning an A to D
self-ranking for its capital position,
adjustments should be made for the volume
of risk assets; the level of off-balance sheet
risk; the volume of classified assets; and
bank growth experience, plans, prospects,
and peer group capital levels. Asset quality
should receive particular weight. Any
institution that ranks its capital more than
one grade above its asset quality has
significant burden of proof to justify such a
grade, and its cap file should contain specific
documentation.
c. Earnings: Earnings should also be graded
A to D with respect to (a) the ability to cover
*A rating of “A" means “high" or “strong:" “B“
means "above average;" “C" means “average:" and
“D” means “unacceptable,"
2In the case of classified assets, reference should
be made to nonperforming assets of peer group
institutions.
losses and provide for adequate capital, (b)
earnings trends, (c) peer group comparisons,
and (d) quality and composition of earnings.
Consideration must also be given to the inter
relationship that exist between the dividend
payout ratio, the rate of growth of retained
earnings, and the adequacy of bank capital.
A dividend payout rate that is excessive in
this context, would warrant a lower grade
despite a level of earnings that might
otherwise result in a more favorable
appraisal. Quality is also an important factor
in evaluating this dimension of an
institution's performance. Consideration
should be given to the adequacy of transfers
to the valuation reserve and the extent to
which extraordinary or nonrecurring items,
securities transactions, and tax effects
contribute to net income.
The self-grading for asset quality, capital,
and earnings should be combined into a
signle preliminary grade of creditworthiness
based on an average of the three components.
This preliminary grade would be affected by
two final considerations, which are graded
positive {-+-), neutral (0), or negative ( —).
d. Liquidity: In most instances, an analysis
of liquidity will indicate a stable funding
base with a reasonable cushion of assets or
untapped funding sources available to meet
contingencies. In such instances, liquidity
should be regarded as a neutral (0) factor in
assessing creditworthiness. Evidence of
frequent, unplanned borrowing from the
Federal Reserve’s discount window or
deterioration in the normal funding base
would be regarded as negative ( —), and,
depending upon the severity of the situation,
the preliminary grade might be downgraded.
Extremely liquid findings (-f} could cause an
upgrading of the preliminary rating but such
findings would usually need to demonstrate
asset liquidity as well as sound liability
management practices.
e. Holding company and affiliates: The
relative strength of other depository
institutions within the holding company, the
parent company itself, and nondepository
institution subsidiaries within the company
can also marginally affect the preliminary
grade, in general, if the regulators have
characterized the consolidated holding
company as in satisfactory condition in its
most recent inspection, the influence should
be regarded as neutral (0). If it was regarded
as less than satisfactory, the influence should
be regarded as negative ( —). Downgrading of
the preliminary grade would be expected if
significant losses were being incurred or
anticipated at the parent or nondepository
institution subsidiary leyel, if consolidated
capital was materially less than that of the
subsidiary institution(s), or if holding
9
a
u
BBBHiBHHBBSHB
company debt service necessitated excessive
dividends from the depository institution
subsidiaries. If the parent had a
demonstrated record of capital contributions
and other support for the depository
institution subsidiary, its influence would be
regarded as positive ( + ) and could raise the
preliminary grade upward.
These five factors become the initial and
minimum benchmark for the self-assessment.
Other considerations, such as major changes
in management or pending litigation that is
material, may be significant when evaluating
an institution. Further, in using any ratio in
the analysis of the first three factors, the
limitations of using a single ratio or even a
few ratios must be recognized. To the extent
that other factors or mitigating circumstances
are factored into the final grade on
creditworthiness, the reasoning for special
consideration should be clearly laid out for
the examiner’s review. Also, in a voluntary
self-assessment program, management should
recognize its own natural predisposition to
identify and emphasize positive factors while
downplaying adverse ones. To the extent
files do not document balanced analyses,
examiners should be critical.
U.S. B ranchescnd Agencies o f Foreign Banks
U.S. branches and agencies of foreign
banks pose special problems for assessing
creditworthiness because they do not have a
corporate identity in the United States
separate from that of the world-wide
institution. Conceptually, however, the same
analytical approach is appropriate, although
special considerations are necessary to
address data limitations.
In many cases, branches and/or agencies
belonging to a single family will be found in
several different geographic regions and
subject to different supervisory authorities.
Because the strength of the foreign bank,
including all of its parts, will largely
determine the strength of each branch or
agency in the United States, a single overall
assessm ent is necessary. Thus, branches and
agencies of foreign banks should assess
creditworthiness on the basis of the entire
family—excluding any subsidiary U.S.
chartered banks or Edge corporations of the
foreign bank—rather than on an individual
branch or agency basis.
For capital and earnings, the same
approach and standards used for domestic
depository institutions are appropriate. In
general, the analysis should be done using
available data on the foreign parent.
Branches and agencies may restate their data
to identify undisclosed reserves that are
functionally equivalent to capital and to
adjust earnings to reflect additions to such
reserves. To the extent that the self-
II. Operational Controls, Policies, and
Procedures
Two district components require analysis
in the operational area if an institution is to
be able to monitor its payments systems risk
effectively. These components are:
° monitoring of the position of the
institution on each payments system on
which it operates and across all systems as
an overall net position; and
° monitoring of individual customers and
the extent to which the institition extends
credit by making funds available before they
are collected, both when the institition is a
sender and a receiver of funds.
Average Daily Volume
System
Dollars
sent
Percent
of total
Dollars
received
In
d iv id u a l
S
y s te m
Real
Time
System
M
o n it o r in g
Periodic
Ca
p a b il it y
No
Interim
Monitor
ing
(Frequen
cy)
<
(
<
(
(
2. C H E S S .....
3. C H IP S .......
)
)
)
)
)
For systems that are monitored, the extent
of cross-system monitoring can then be
determined. By identifying which systems
used by the institution are monitored on a
cross-system basis to determine a net
exposure, an overall risk exposure can be
obtained. As with the individual system, a
summary table of cross-system monitoring
capability can be completed like the one
below.4
C
r o ss
I
1 !
1 1 1
Systems
Monitored
Together
-S
y s te m
Real
Time
M
C
o n it o r in g
Periodic
a p a b il it y
(Frequen
cy)
<
(
)
)
(
i
No
Interim
Monitoring
)
Based upon the cross-system monitoring
capability and the volume of business
handled by each system, a rating for the
institution’s controls for its cross-system
exposure c$n be obtained as follows;
Rating fo r Monitoring Institution Positions
Percent
of total
2 C H E S S .....
3 CHIPS. .
too
too
For each system in which the institution
participates, an acceptable level of risk
exposure needs to be identified against which
its position will be monitored. The monitoring
of each system should then be identified as
a To the extent that an institution uses other
payments systems with same-day settlement, the
list should be expanded to include them.
10
being: (1) On a real-time basis; (2) on a
periodic basis and at what periodicity; or (3)
not currently monitored or monitored only at
the end of the day. Completing the following
table summarizes the type of monitoring
activity for each system:
1 1 1
Both components are important to any
institition in its efforts to manage its
payments system risk. The significance of
monitoring the debit and credit flows to
determine one’s overall position and the
position of individual customers does not
decrease for smaller institutions. For both
components, the business activity is first
defined, areas of significant risk identified,
and the adequacy of controls reviewed.
Factors such as automation or the size of
the institution are not relevant except as they
affect the ability to monitor risks. References
to '‘real-time," therefore, address the
timeliness of information, and not the degree
of automation. Indeed, a manual system in a
small institution that records every
transaction may be far more effective as a
real-time monitor than a-fully automated and
integrated system in a major operation that
has yet to bring one area with substantial
risk exposure in the institution into the
monitored environment.
Based upon the analysis of the business
activities and the indentification of existing
monitoring capabilities, each component is
graded from "A” to “C” indicating a range of
“strong” to “satisfactory” to “unsatisfactory,”
using specific standards. These two separate
ratings of overall activity and individual
customers should then be combined into an
overall rating of operational controls,
policies, and procedures.
a. Monitoring Institution Positions Relative
to N et Debt Caps. Before evaluating its wire
transfer operations, each institution needs to
define the magnitude and relative importance
of each payment system in which it
participates. The table below seeks to define
the institutions's funds transfer
environment.3
1 1 I
assessment relies on these factors, the file
avail albe to the examiner should provide
supporting documentation.
For assessm ent of asset quality, additional
difficulties are encountered. While
information on the overall organization is
clearly the data that should be used, asset
quality information on the foreign bank or on
the consolidated organization is generally not
nvilable to either the manager of U.S.
operations or U.S. supervisory authorities.
Instead, only U.S. asset quality information is
available. Even then, organizations with
multiple branches or agencies will typically
have examinations of individual entities
conducted on different dates and by different
supervisors. Combining these results into a
single meaningful composite of U.S.
operations is therefore not easily
accomplished. Recognizing these
imperfections, the only practical approach
available in most cases is to extrapolate for
the overall family from w hatever information
is available in the U,S, operations.
Recognition should be given to the,
distortions th a t can arise when a single
international credit becomes problematic and
is booked entirely in or outside the U. Si for
control purposes. In instances where it rebooked in the U.S., the credit may unduly
overstate the severity of asset problems in
the U.S. by attributing it entirely to the U.S.
when it should more properly be attributed to
the overall family. Judgment is therefore
clearly appropriate in assessing a sset quality.
As in the case for domestic depository
institutions, asset quality, capital, and
earnings provide a benchmark for the
assessment of creditworthiness of the branch
or agency. Other factors, like liquidity or the
effect of affiliates, should be factored in as
appropriate. However, because the
assessm ent has already included the strength
of the foreign bank in measuring capital and
earnings, extra care should be taken to avoid
double counting the foreign bank in the
assessm ent of its U.S. branches and agencies.
Strong
a. 95% of total dollars sent and received are
monitored on a real-time basis or at 15
minute intervals or less and
b. a cross-system calculation of the
institution’s net debit/credit position is
computed and compared to established limits
on a real-time basis or at 15 minute intervals
or less.
4 System may often be listed on more than one
line. For example, a real-time cross-system monitor
on Fedwire and CHIPS might be combined with a
periodic monitoring on CHESS and GashWire to
give a periodic cross-system monitor on all four
systems.
Satisfactory
a. 80% of the total average daily dollar
volume sent is monitored on a real-time basis
or at 30 minute intervals or less; and
b. a cross-system calculation of the
institution’s net debit/credit position,
utilizing these data is computed and
compared to established limits on a real-time
basis or at 30 minute intervals or less.
Unsatisfactory—Any other condition.
b. Monitoring Customer Positions. Each
institution should have the capability of
monitoring the effect of all significant
transactions on the funds positions of
customers as the transactions occur during
the business day. At a minimum, the
institution should be aware of the positions
of customers that have a high-dollar volume
of funds transfer activity in relation to each
customer’s funds position or to the
institution's capital. Customer position should
reflect the collected status of funds sent and
received over payments systems, as well as
the effect of other activities, such as loan
advances, loan payments, and book transfers
{transfers between customers on the
institution’s own books) which may result
from instructions developed internally or
received over message systems, such as
Bankwire or S.W.I.F.T. Some customers
require frequent monitoring because the
volume of their daily transactions is large.
Others need to be monitored only as a result
of particularly large and unusual
transactions.
For customers that are significant users of
the payments system, three questions are
important:
Yes
No
1 Has the institution isolated its customers
which participate to a significant degree
in funds transfer systems as either send
ers or receivers of funds?................................
2. Can the institution monitor the positions
of these customers taking into account
3 Does the monitoring system include the
In monitoring customers for compliance
with intra-day overdraft position limits
established by credit policy and/or in
approving over-limit payments, transactions
other than those being transmitted and
received over payments systems need to be
considered ass they directly affect the intra
day position. Among the transaction sources
that should be considered-are message
systems such as Bankwire, S.W.I.F.T., and
Telex; internal book transfers; and the
institution’s own lending, investment, and
check processing operations. While it may
not be feasible or reasonable to monitor all
transactions from all areas, material
thresholds should be established by the
institution as criteria for monitoring
individual transactions or aggregate
transactions for a single customer that could
put the institution at risk. The files should
dearly document the reasons for including or
excluding other areas and justify threshold
limits sets.
Once customers have been identified and
individual transaction limits set. the
institution’s ability to monitor and control the
funds positions of its customers can be
determined. The following checklist identifies
the adequacy of controls:
Yes
No
I. Does the system for monitoring positions
of customers cover:
a. All significant sources generating
b
Total transactions over an estab-
2 Does the system halt any transaction in
excess of established limits from further
processing until appropriate action is
3. If documentation of action taken with
regard to over-limit transactions reflects
consistent exceptions attributed to a cus
tomer. is analysis of those accounts in4. Are reviews of the funds transfer environ
ment conducted by internal or external
auditors at least annually? (These reviews
should conform to the standards estab
lished by the Bank Administration Institute
and the Federal Financial Institutions Ex-
Institutions must be able to respond
positively to ali questions in this section on
monitoring customer positions if they are
honestly to evaluate their control as
satisfactory or strong. These ratings should
be obtained as follows:
Rating fo r Customer Monitoring System and
Controls
1. Strong—Responses to all of the above
are positive and comprehensive customer
monitoring is in force fo r both debits and
credits on a real-time basis or at intervals of
15 minutes or less.5
2. Satisfactory—Responses to all of the
above are positive and comprehensive
customer monitoring is in force for all debit
transactions greater than or equal to the
monitoring threshold on a real-time basis or
at intervals of 30 minutes or less.
5 tf an institution monitors on a worst case basis,
that is debits only, a strong rating may still be
justified if the limits established are no higher than
those appropriate for monitoring a net position.
11
3. Unsatisfactory—Any other condition.
O
C
verall
R
o n tr o ls
, P
Monitoring
Institution Positions
a t in g
fo r
o l ic ie s
,
O
and
p e r a t io n a l
P
r o c ed u r es
Monitoring
Customer
Positions and
Controls
S trong........................... Strong........................
Strong........................... Satisfactory..............
Satisfactory......... ....... S trong.......................
Satisfactory................. S atisfactory..............
Either Rated Unsatisfactory...........................
Overall Rating
Strong.
Satisfactory.
Satisfactory.
Satisfactory.
Unsatisfactory.
III. Credit Policies and Procedures
A simple two-way classification system for
credit policies and procedures should be
used. All institutions should have explicit,
written credit policies and the necessary
internal procedures in place to implement
these policies. Failure to have such policies
and procedures puts all participants in the
payments system at risk, and should preclude
a satisfactory overall rating and its
associated debit cap limit regardless of the
ratings for creditworthiness or monitoring
capabilities.
The following checklist identifies the
adequacy of credit policies and procedures:
Yes
1 Does the institution have a written credit
policy detailing normal and exception ap
proval and reporting procedures for all
loans and credit commitments, including
daylight overdraft and Material limits and
2 Are ail facilities and exposures approved
as part of acknowleged aggregate expo
sures to individual bank and commercial
3. Ooes the institution use monitoring sys
tems which identify usage in excess of
approved facilities and provide adeqate
information for review and evaluation of
4
Does the institutions have exception
identiiibation and approval systems which
are tailored to the speed, volume, and
size of credit approvals required by its
payment system generated exposures?.......
5. Are the institution's review systems
geared to single out and take action on
6.
Does senior management periodically
review and take action on aggregate ex-
7. Are all controls and procedures reviewed
and tested by the institution's internal
8. Is adequate training available and re
quired for operations, credit, and account
officer staff responsible for monitoring the
intra-day overdraft exposure system of
No
in completing the checklists, negative
responses should not be explained away in
order to obtain a satisfactory self assessment
except under extremely unusual
circumstances. Institutions that attempt to
explain shortcomings will be scrutinized very
closely by the examiners.
IV. Overall Assessment
The three component evaluations can be
combined into a single overall assessment
using the following table:
Credit policies
and
procedures
Operational
controls
policies and
procedures
Satisfactory..
Do..........
Strong..
...d o ....
D o ..........
D o..........
Satisfactory..
....do..............
...d o ..............
Satisfactory..
...d o ............
....do...........
Unsatisfac
tory.
Unsatisfactory- Strong or
Satisfac
tory.
Unsatisfactory. Unsatisfac
tory.
D o..........
D o ..........
Satisfactory.
Credit
worthiness
Overall
assessment
C .....
D .....
Any.
High cap.
Above average
cap.
Average cap.
No cap.
Above average
cap.
Average cap.
No cap.
No cap.
Any..
No cap.
A n y ..............
No Cap
C ..........
D ..........
A or B .
In completing the assignment for U.S.
branches and agencies of foreign banks that
are part of a single family operating in more
than one state, a single assessm ent for the
family should be conducted. If more than one
branch or agency has access to a largepayments system, the adequacy of
operational controls for each access point
should be assessed separately and combined
into a single assessment. A single cap should
then be determined and divided among the
entities having access. The file documenting
the assessm ent and its division among the
separate entities should be available to
examiners in the office through which the
Federal Reserve exercises its oversight
responsibilities under the International Bank
Act.
[FR Doc. 85-12313 Filed 5-21-85; 8:45 am]
12
A
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Docket No. R-0515A]
request for Comments on Proposals
Regarding Book-Entry Securities
Transfers
Board of Governors of the
federal Reserve System.
^C¥8@ : Request for comments.
W
summary: In
a related action today
Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
arge-dollar electronic funds transfer
systems. The Board did not, however,
esolve the issues of risks arising from
he transfers of book-entry securities on
7edwire. The Board is requesting,
herefore, comment on issues relating to
isks inherent such transfers,
sate: Comments must be received by
\ugust 15,1985.
ADDRESS: Comments, which should refer
o Docket No. R-0515A should be
iddressed to Mr. William W. W iles,
Secretary, Board of Governors of the
""ederal Reserve System, 20th and C
Streets, NW., Washington, D.C. 20551, or
lelivered to room B-2223 betw een 8:45
AM. and 5:15 P.M., except as provided
n | 261.6(a) of the Board’s Rules
tegarding Availability of Information,
.2 CFR 261.6(a).
r©R FURTHER BNF@RMATB@N CONTACTS
Edward C. Ettin, Deputy Director (202:52-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-452,444), Division of Research and
Statistics; Elliott C. McEntee, A ssociate
)irector (202-452-2231), Florence M.
foung, Adviser (202-452-3955), Nancy
t. W esolowski, Operations Analyst
202-452-3437), Division of Federal
teserve Bank Operations; Joseph R.
Alexander, Attorney (202-452-2489),
,egal Division; Jeffrey C. Marquardt,
Economist (202-452-2360), Division of
nternational Finance; Anthony G.
Tornyn, Assistant Director (202-452450), Division of Banking Supervision
ind Regulation; or Joy W. O’Connell,
TDD (202-452-3244).
s u ppl e m e n t a r y bnf@
rm &Y8@ : Over the
n
past several years, the Board has
become increasingly concerned with the
risks that on large-dollar payments
systems present to depository
institutions using them, to the banking
system, and to other sectors of the
economy. In March, 1984, the Board
issued for public comment a series of
proposals to reduce and control these
risks. In a related action today (Docket
No. R-0515), the Board issued a
statement of the policy it has formulated
to reduce these risks. The Board’s
policy, reflecting the need for flexibility
and the desires of those who
commented, relies heavily on the efforts
of participants to identify, control, and
reduce their own risks.
In formulating its policies to reduce
risks on large-dollar payments system s
and control daylight overdrafts of
Fedwire, the Board has alw ays been
concerned about the impact that
overdraft restrictions could have on the
U.S- government securities market. The
smooth functioning of this maket 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 has thus far exempted from
quatiative overdraft controls those
Fedwire daylight overdrafts resulting
from the transfer of book-entry
securities, ^ h e Board originally had
hoped to develop a plan whereby such
overdrafts would be collateralized with
the underlying securities being
transferred. It appears, however, that
*Such overdrafts are defined to occur when the
institution receiving book-entry securities has
received more book-entry securities against
payment at a point in time than it has sent. Since
receipt of a book-entry security and Fedwire
payment to the sender are simultaneous, the sender
of the security receives Fedwire payment regardless
of the securities overdraft position of the receiver of
the securities. The definition used for a book-entry
securities overdraft means that such an overdraft
could occur even while the receiver's funds account
was in credit balance,
depository institutions might not be
authorized to pledge all of these
securities because of arrangements they
may have with their customers.
Moreover, operational considerations
related to tracking the specific security
that caused, and therefore secured, a
particular overdraft amount rendered
this process unworkable.
The Board has developed, and is
requesting comment on, a proposal to
control the risks associated with
daylight overdrafts resulting from the
transfer of book-entry securities. The
plan would require institutions incurring
book-entry related overdrafts to select
one of three collateralization options:
Option 1. No Separate Collateral
Under this option, daylight overdrafts
on Fedwire resulting from book-entry
securities transactions would not be
differentiated from other daylight
overdrafts. Each institution’s sender net
debit cap would be applicable to the
sum of their securities overdrafts and
other (“funds”) daylight overdrafts
across all wire systems.
The Board expects that most of the
over 1,000 institutions that make bookentry securities transfers would elect
this option. Securities transfers
represent a small portion of most
institutions’ business activity. Thus,
there would be little benefit for these
institutions in establishing the
collateralization and tracking
procedures associated with the other
options.
Option 2. Stable Pool of Collateral
This option would allow institutions
to establish a separate pool of
collateral2 held at the Reserve Bank to
secure any daylight overdrafts arising
from their book-entry securities
business. Collateral in this pool would
be pledged by the institution to the
ESuch as collateral already on deposit at Reserve
Banks to secure potential discount window
advances.
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Federal Reserve, and the pledged
securities or other assets in this account
would not be eligible for transfer during
the regular business day. Changes in the
account could be made overnight,
Securities overdrafts in excess of the
value of the stable pool would be
included with “funds" daylight
exposures and covered by the net debit
caps that apply to such exposures.
A separate pool of collateral would be
useful to correspondent banks that
engage in a sizeable securities transfer
business but may not have the right to
pledge customer book-entry securities
being transferred, as required by option
3, below. These institutions generally
separate their securities traffic and
related funds transactions from other
business activity, and their securitiesrelated overdrafts would be too large to
be accommodated within the caps that
will apply to their other daylight
exposures. Therefore, a separate
securities collateral pool would be
essential to controlling and managing
their securities related risks.
Option 3. Pledge Account
Under this option, each institution
would enter into an agreement with its
Reserve Bank providing for the creation
of a special book-entry securities
account for deposit of securities that the
institution would warrant it has
authority to pledge to the Reserve Bank
to secure daylight overdrafts.
Consequently, each institution would
have a minimum of two securities
accounts—one to hold pledged
securities (“Pledge Account”) and one to
hold securities ineligible for pledge to
the Reserve Bank. The Reserve Bank
would rely on the institution’s warranty
of authority to pledge, which would
cover both securities owned by the
institution and customer securities that
the institution has a right to pledge by
virtue of its intra-day credit agreements
with its customers. It would be the
institution’s obligation to instruct
customers to direct their senders to
deliver eligible securities to the Pledge
Account. It would also be the
institution’s responsibility to transfer
ineligible securites out of the Pledge
Account promptly upon learning of their
ineligibility.
On the basis of this agreement, the
Reserve Bank would permit the
institution to incur a securities-related
overdraft. To determine when an
overdraft occurs, a separate dollar
balance would be kept for securities
transactions, At the beginning of each
day, a separate securities dollar balance
of zero ($0) would be established for
each institution, and such balance
would be recorded separately from
other activity in the account while the
securities wire is open. A securitiesrelated overdraft would occur when the
payments for securities received
exceeds the dollar credits posted to the
securities dollar balance. The
occurrence of a securities-related
overdraft w ill automatically trigger the
pledge of securities deposited in the
Pledge Account.
During the day, the institution may
continue to run a securities-related
overdraft provided that the Pledge
Account contains securities of a value
equal to the overdraft. If an incoming
transfer of securities ineligible for
pledge would increase the securitiesrelated overdraft beyond the value of
the collateral, a separate pool of nontransferrable collateral provided
specifically for securities transfers could
be used to secure the remaining
exposure. Overdrafts above the sum of
the pledged book-entry and definitive
collateral pool would be included in
“funds only” overdrafts subject to the
institution’s sender net debit cap. In this
fashion, the entire securities-related
daylight overdraft would either be
secured by the pool of pledge-eligible
securities, by a separate nontransferrable pool of collateral, or
combined with “funds” daylight
exposures.
Of the three options presented, this
one relies most heavily on the quality of
a financial institution’s internal
management and control. In contrast to
the other two approaches, this option
does ot result in any de-facto cap on
daylight exposure; indeed, this approach
can yield a result in which such
exposures are limited only by the
capacity of banks to collateralize their
own credit extensions to dealers. This
option also does little to require changes
in market practices, such as the intra
day receipt/delivery matching process,
that clearly exacerbate the level of
2
intra-day risk exposure. In that regard,
the Board proposes that institutions
selecting this option be examined by the
Federal Reserve and other bank
supervisors to ensure that the
collateralization process is property
administered by participating banks.
Proper administration should both
protect the interests of third parties in
securities, and encourage changes over
time in market practices of large
clearing banks in w ays that w ill reduce
Reserve Bank and system ic exposure.
Such changes and careful supervision of
depository institution management and
control of the securities clearing
business are necessary before the
Federal Reserve, federal and state bank
supervisors, market participants, and
investors can be truly comfortable with
this option.
This proposed option differs in a
major w ay from an approach favored by
the large clearing institutions. These
institutions maintain that the value of
the collateral in the Pledge Account will
almost certainly not cover securitiesrelated daylight overdraft amounts. This
is because some portion of their daylight
overdrafts arises out of transactions for
trust accounts or involves securities that
cannot be pledged to the Reserve Bank.
The clearing banks maintain, however,
that they should have enough collateral
in the Pledge Account to secure aBout 90
percent of their securitries-related
daylight overdraft, and have argued that
option 3 should provide a percentage of
unsecured credit of at least 10 percent
for book-entry overdrafts. The purpose
of this unsecured credit would be to
provide flexibility to the large clearers,
and to avoid as much as possible any
mixing of their securities business with
other funding activity. They do agree,
however, that if collateral value in the
Pledge Account fell below 90 percent of
the overdraft, the remaining amounts
would be covered by a separate pool of
securities, or be combined with other
funds exposures under the applicable
net debit cap.
Another issue is whether it would be
necessary to perform a market value
check on the securities being transferred
by book-entry. Under the current
securities transfer process, there is no
check that the cash debit associated
with a securities transfer has any
relationship to the market value of the
securities. The transferring institution
specifies the purchase price, but it can
send securities against no payment, or
conceivably, for an amount much
greater than the value of the securities.
The cash credit for securities being
transferred is made simultaneously with
the transfer at the purchase price and
the receiving institution is immediately
debited for the same amount. This
procedure dates from the origins of the
book-entry process in the early 1960s.
The Federal Reserve assumed the risk of
ensuring that the cash credits given to
the originators of securities transfers
would be ultimately covered by the
recipient who would be debited. Clearly,
this process is in conflict with the
current emphasis on daylight exposure
measurement and control.
The Federal Reserve has not
previously considered a market value
check necessary, but has relied upon
sending and receiving institutions to
adjust under/and over-payments
through the reversal process. However,
the possibility that the purchase price
and the value of securities being
transferred could be seriously out of line
provides an opportunity for the seller of
securities to acquire, at least
temporarily, cash in a fraudulent way.
Moreover, this deficiency could
seriously undermine the
collateralization process recommended
under option 3, since the Reserve Banks
would have no assurance that collateral
amounts held in the Pledge Accounts
were actually worth the funds extended
to the purchaser for .them in the form of
a daylight overdraft. Thus, the Board
Proposes that the securities transfer
system used by Reserve Banks be
modified to include a reasonableness
check between the purchase price and
the market value of the securities being
transferred. This may be difficult
operationally and require market
changes. However, this control
deficiency will have to be addressed if
the collateralization process is to be
meaningful.
The Board requests comments from
the public on all aspects of this
proposal; specifically:
1. Will the choice among the three
options proposed meet the needs of all
institutions involved in the book-entry
securities market? Will any type of
institution or any particular institution
be seriously disadvantaged by the
collateralization proposal? If so, what
further collateralization or other
option(s) might be proposed, recognizing
that the aim is to secure daylight
exposures arising out of securities
transfers to the greatest degree
possible— to include such exposure
-or
within an institution’s sender net debit
cap—with the least impact on the
government securities markets? Will
implementation of any of the proposals
have any impact on the ability of market
participants to turn items around? Will
the proposals require any significant
extension of the time that the securities
wire must remain open?
2. What will it cost for an institution
to implement the option it would likely
choose (please specify the option)? Will
the option chosen be costly to operate?
If so, w ill this affect the efficiency of the
U.S. government securities market?
3. Should institutions choosing option
3 (“Pledge Account”) be allowed an
amount of unsecured credit on any
overdraft amount as has been indicated
is needed by the large clearing
institutions? If not, could such
institutions supplement the Pledge
Account with non-transferrabie
collateral up to 100 percent of their
book-entry securities overdraft? If not,
can the amount uncovered be included
with all other daylight overdrafts and
subject to net debit caps? Wr
hat are the
costs and market implications of these
approaches?
4. If the Federal Reserve adopts the
proposed market value check on the
purchase price of securities being
transfered, market participants may also
have to adopt such a practice. Are such
measures necessary? If so, how much
would such a development effort cost?
By order of the Board of Governors of the
Federal Reserve System, May 17,1985.
William W. W iles,
Secretary of the Board.
[FR Doc. 85-12314 Filed 5-21-85; 8:45 am]
B
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Docket No. R-0515B]
Request for Comments @ Proposals
rs
Regarding Automated Clearing Houses
AGENCY: Board of Governors of the
Federal Reserve System.
ACHON: Request for comments.
SUMMARY: In a related action today
(Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
large-dollar electronic funds transfer
systems. The Board did not, however,
resolve the issues of risks arising from
automated clearing house (ACH)
transactions. The Board is requesting,
therefore, comment on issues relating to
risks inherent in such transfers.
DATE: Comments must be received
August 15,1985.
by
a d d r e ss : Comments,
which should refer
to Docket No. R-Q515B should be
addressed to Mr. William W. Wiles,
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW, Washington, D.C. 20551, or
delivered to room B-2223 between 8:45
A.M. and 5:15 P.M. Comments received
may be inspected in room B-1122
between 8:45 A.M. and 5:15 P.M., except
as provided in § 261.6(a) of the Board’s
Rules Regarding Availability of
Information, 12 CFR 261.6(a).
FOR FURTHER INFORMATION CONTACT:
Edward C. Ettin, Deputy Director (202452-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-4522444), Division of Research and
Statistics: Elliott C. McEntee, Associate
Director (202-452-2231), Florence M.
Young, Adviser (202-452-3955), Nancy
R. W esolowski, Operations Analyst
(202-452-3437), Division of Federal
Reserve Bank Operations: Joseph R.
Alexander, Attorney (202-452-2489),
Legal Division; Jeffrey C. Marquardt,
Economist (202-452-2360), Division of
International Finance; Anthony G.
Comyn, Assistant Director (202-452-
3450), Division of Banking Supervision
and Regulation; or Joy W. O’Connell,
TDD (202-452-3244).
SUPPLEMENTARY INFORMATION: Over the
past several years, the Board has
become increasingly concerned with the
risks that large-dollar payments systems
present to depository institutions using
them, to the banking system, and to
other sectors of the economy. In March,
1984, the Board issued for public
comment a series of proposals to reduce
and control these risks. In a related
action today (Docket No. R-0515), the
Board issued a statement of the policy it
has formulated to reduce these risks.
The Board’s policy, reflecting the need
for flexibility and the desires of those
who commented, relies heavily on the
efforts of participants to identify,
control, and reduce their own risks.
Since the automated clearing house
(ACH) mechanism w as designed in the
early 1970s, it has been considered to be
a substitute for recurring consumer
payments that are typically made by
paper check. All ACH payments are
value dated, with settlement occurring
one or two days after transactions are
submitted to a Federal Reserve Bank or
a privately-operated ACH. In addition,
to encourage consumer acceptance,
credit transactions,1 such as salary and
pension payments, are generally treated
as irrevocable payments on the
settlement date, that is, the credits are
made available to the receiving
depository institutions at the opening of
business on the settlement date and
cannot generally be revoked. In this
respect, ACH credit transactions are
like Fedwire transfers. Federal Reserve
ACH debit transactions,2 such as
mortgage and insurance premium*
1When credit transactions are sent through the
ACH, funds are transferred from the originator to
the receiver.
* When debit transactions are processed, funds
are transferred to the originator from the receiver.
payments, are treated as provisional
payments and, like checks, they may be
returned if funds are not in the account.
It should be noted that ACH
participants appear to treat both ACH
debit and credit transactions processed
by privately operated ACHs like
transactions processed by the Federal
Reserve.
Because the ACH has been view ed as
a small-dollar payment system, the issue
of financial risk to ACH participants
and operators had not been a serious
concern. The characteristics of the ACH
mechanism, however, are beginning to
change. Improvements in automated
system s have resulted in shorter
processing times. Further, both the
Federal Reserve and privately operated
ACHs have been considering offering
same-day ACH services with
considerably more attractive deposit
times than are presently available.
Besides the improvements being made in
processing times, the types of payments
made through the ACH are changing.
Corporations are now using the ACH to
concentrate balances at lead banks, to
fund accounts of geographically
dispersed operating units, to repay
loans, and to make vendor payments.
These new uses for the ACH mechanism
have contributed to the increasing
number of large-dollar payments
processed.
Currently, payments amounting to $1.0
million and more are regularly
processed through the ACH. Based on a
one-week survey conducted during
January, 1985, approximately 900 ACH
transactions amounting to $1.0 million or
more were processed daily. While these
transactions represented only about 0.1
percent of the daily average number of
commercial ACH payments, they
accounted for nearly 50 percent of the
daily average dollar value of such ACH
payments. The majority of these
transactions were revocable debit
transactions. Only 5 percent were credit
transactions, and they accounted for
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 50, NO. 99
[Enc. Cir. No. 9868]
about 3 percent of the daily average
dollar value of commercial ACH
payments.
Some of the changes that are being
observed in the ACH have been
encouraged by the Federal Reserve and
ACH associations, because they
improve the efficiency of the nation’s
payments mechanism. For example, the
use of ACH cash concentration debits to
accumulate funds at corporations’ lead
banks is more timely, more reliable, and
less costly than the use of paper
depository transfer checks. Similarly,
the use of ACH corporate trade
payments is expected to lead to
significant operating efficiencies. Both
cash concentration debits and corporate
trade payments tend to be fairly high
value payments.
The difference between the Federal
Reserve’s fees for ACH and Fedwire
transactions also provides incentives for
depository institutions to use the ACH
for large-doilar transfers that are not
time-critical. The Federal Reserve
assesses depository institutions
transaction fees of 1.0 cent and 1.8 cents
to originate ACH intra- and
interregional payments, respectively,
and 55 cents to send a Fedwire. Fixed
fees are also assesses to originators of
ACH and Fedwire transactions.
Therefore* the total cost of originating
either type of payment varies across
depository institutions based on
transaction volumes, but is typically
much lower for ACH transactions.
Finally, the proposed ex post
monitoring procedures for large-doilar
funds transfer system s are likely to
provide incentives for some depository
institutions to use ihe ACH as a
substitute for funds transferred over
large-doilar networks. Specifically, the
ex post monitoring procedures for
daylight overdrafts measure only wire
transfers of funds as they occur. All
other “off-line" transactions, including
check, ACH, and definitive securities,
are netted and are posted ex post at
either the opening or closing of business.
To give depository institutions the
greatest benefit or least disadvantage, if
the sum of “off-line” transactions results
in a net credit, the net credit is posted in
the ex post monitoring system as though
it occurred at the opening of business. If
the sum results in a net debit, it is
posted as though it occurred at the close
of business. Therefore, if a depository
institution repaid federal funds
borrowings or originated other largedoilar credit payments over the ACH—
all of which are irrevocable to the
receiver—the debits to the originator’s
reserve account would be measured in
the ex post monitoring system with
other “off-line" transactions. If the net of
these transactions were a debit, it would
be posted at the end of the day, with no
impact on the intra-day debit position of
the sender. As a result, the procedures
would enable depository institutions to
circumvent the sender net debit caps
placed on wire transfer systems.
Thus, it appears that the ACH may be
evolving into a payments mechanism
with many similarities to large-doilar
funds transfer systems. The financial
risks, however, are difficult to quantify.
In cases where depository institutions
make funds available to customers for
ACH credit transactions before the
payments are final, they are exposed to
temporal risk because they may not be
able to collect from the sender at the
time of settlement. In addition, ACH
participants may be exposed to risk in
handling ACH debit transactions. While
ACH debit transactions are treated as
provisional payments by the Federal
Reserve, it is not clear that originators of
debit transactions alw ays treat the
funds received as provisional to their
customers. If depository institutions
treat the funds as final and make them
available to their customers, they may
not be able to recover the funds if the
receiving institution returns the
transaction. If a depository institution
were unable to recover funds from a
customer for a return of a large cash
concentration debit, it could affect the
institution’s liquidity and its ability to
settle for other payments or other
settlement arrangements.
Because of the changes occurring in
the ACH mechanism and the increasing
use of the ACH for large-doilar
payments, the Board believes that it
should undertake a thorough review of
ACH risk. Pending completion of the
study, the Board has decided to
postpone further consideration of sameday finality for ACH services. In
addition, until this study is completed,
the Board believes its ex post
2
monitoring procedures to calculate
depository institutions’ intra-day net
debit positions should be modified in
order to (1) recognize the potential risks
associated with ACH transactions
processed by both the Federal Reserve
and privately operated ACHs, and (2)
inhibit the use of the ACH to circumvent
risk reduction policies. Specifically, the
Board plans to make the following
modifications to its ex post monitoring
procedures: (1) Post the gross debits
resulting from the origination of ACH
credit transactions and the gross credits
resulting from the receipt of credit
transactions at the opening of business
on the settlement date, and (2) post the
gross credits resulting from the
origination of debit transactions and the
gross debits resulting from the receipt of
debit transaction at the close of
business on the settlement date.3 This
procedure would result in posting the
net of ACH credit transactions in the ex
post monitoring system at the opening of
business on the settlement date and in
posting the net of ACH debit
transactions at the close of business on
the settlement date.
In order to assist the Board in its
consideration of ACH risk, the public is
requested to respond to the following
questions:
1. Should the ACH be used for
handling large-doilar payments?
(a)
If it should not be, what controls
should be implemented to limit its use to
small-dollar payments? For example,
(1)
Should restrictions on the dollar
amount of ACH credit and/or debit
transactions processed by the Federal
Reserve and privately operated ACHs
be imposed?
(i)
Should restrictions be set for the
gross dollar amounts of all transactions,
the daily overage dollar amount of all
transaction, the dollar value per deposit
or file, the dollar value per batch, or the
dollar value of individual transactions?
(iij At what dollar value should the
cut-off be?
(iiij Should implementation of
procedures to limit large-doilar
payments be a condition of the Federal
3 This posting procedure is for ex post monitoring
only and will in no way change the time that actual
settlement entries are made or the time that ACH
transactions become final.
Reserve's granting net settlement
services to privately operated ACHs?
(2) Should restrictions be placed on
the types of transactions processed
through the ACH?
(i] Should returns of federal funds be
prohibited?
(ii) Should corporate-to-corporate
payments, which are frequently largedollar payments, be prohibited?
(3) How effective would restrictions
on dollar amounts and transaction types
be?
(b)
If the ACH should be used for
large-dollar payments, what controls
should be implemented?
(1) Should ACH transactions be
included in monitoring institutions’
sender net debit caps? If so, should ACH
credit and debit transactions be treated
differently?
(2) Should participants in privately
operated ACHs be required to
"guarantee" settlement? Should the
“guarantee” apply to consumer/smalldollar payments only and/or to
corporate/large-dollar payments, or
both?
(3) Should controls be placed on largedollar ACH transactions only, that is,
transactions over $25,000, over $100,000,
or $500,000?
2. Currently, funds provided to
receivers of ACH credit transactions
processed by Reserve Banks are
generally treated as final payments at
the opening of business on the
settlement date. Funds provided to
originators of ACH debit transactions
processed by the Reserve Banks are
posted on the settlement date but are
considered provisional payments until
the business day following the
settlement date. Net settlement entries,
reflecting the net of both debit and
credit transactions, for privately
operated ACHs are posted on the
settlement date, but are generally
considered provisional payments until
the business day following the
settlement date.
(a) How does your institution treat
credits received as the result of
originating debit transactions for
customers? Are the funds treated as
provisional or final payments? Are there
differences in the treatment of retail and
wholesale payments or in the treatment
of small-dollar and large-dollar
payments? Are holds placed on the
funds?
(b) If your institution participates in a
privately operated ACH, are funds
treated as provisional or final payments
to customers before the Federal Reserve
net settlement entries become final? Are
credit payments received for consumers
and corporations treated differently?
(c) Should the Federal Reserve change
the way it treats ACH credit
transactions, that is, treat credit
transactions as provisional until the
business day following the settlement
date rather than as final at the opening
of business on the settlement date?
fd) If all ACH transactions, both
debits and credits, were treated as
provisional payments, how would use of
the ACH be affected? W ould your
institution make any changes in the way
it currently handles incoming ACH
credit transactions, such as modifying
funds availability policies?
(e)
Should net settlement services
provided to privately operated ACHs
3
provide same-day or next-day finality
for net settlement entries? If net
settlement entries are considered
provisional until the business day
following settlement date, what risks if
any would your institution face?
3. What is your institution’s
perception of the degree of ACH risk
associated with cash concentration
debits and disbursements, corporate
trade payments, and so forth? Do you
believe that there are different degrees
of risk associated with debit versus
credit transactions?
4. Does your institution monitor or
limit the dollar amounts and/or types of
ACH transactions that are originated for
your customers?
5. How does your institution see the
changes occuring in the ACH—such as
the use of the ACH for large-dollar
payments and the potential for sameday ACH—affecting the w ay it handles
ACH transactions?
6. In order to determine whether the
interim changes in the Board’s ex post
monitoring procedures should be
adopted as final procedures, please
indicate how the interim procedures
would affect your institution’s use of the
ACH and its operating costs?
7. What alternative methods for
controlling ACH risk should the Federal
Reserve consider in its analysis?
By order of the Board of Governors of the
Federal Reserve System, May 17,1985,
William W. Wiles,
Secretary o f the Board.
[FR Doc. 85-12315 Filed 5-21 -85; 8:45 am]
c
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Cornyn, A ssistant Director (202-4523450), Division of Banking Supervision
and Regulation; or Joy W. O’Connell,
TDD (202-452-3244).
[DockeS No. R-051SC]
Request for Comments on Net
Settlement Arrangements
A0EMBY: Board of Governors of the
Federal Reserve System.
A TBQ : Request for comments.
C M
In a related action today
(Docket No. R-0515), the Board issued a
statement of its policy to reduce risks on
large-dollar electronic funds transfer
systems. The Board did not, however,
resolve the issues of risks arising from
the provision of net settlement services
to other than large-dollar transfer
systems. The Board is requesting,
therefore, comment on issues relating to
risks inherent to such arrangements.
©AYE: Comments must be received by
August 15,1985.
a b b ^e s s : Comments, which should refer
to Docket No. R-0515C should be
addressed to Mr. William W. W iles,
Secretary, Board of Governors of the
Federal Reserve System, 20th and C
Streets, N.W., Washington, D.C. 20551,
or delivered to room B-2223 betw een
8:45 A.M. and 5:15 P.M. Comments
received may be inspected in room B 1122 betw een 8:45 A.M. and 5:15 P.M.,
except as provided in § 261.6(a) of the
Board’s Rules Regarding Availability of
Information, 12 CFR 281.6(a).
SUMMARY:
FOR FURTHER INFQRSyJATJOW CONTACT:
Edward C. Ettin, Deputy Director (202452-3368), David B. Humphrey,
Assistant Director (202-452-2557),
Terrence Belton, Economist (202-4522444), Division of Research and
Statistics; Elliott C. McEntee, A ssociate
Director (202-452-2231), Florence M.
Young, Adviser (202-452-3955), Nancy
R. W esolowski, Operations Analyst
(202-452-3437), Division of Federal
Reserve Bank Operations; Joseph R.
Alexander, Attorney (202-452-2489),
Legal Division; Jeffrey C. Marquardt,
Economist (202-452-2360), Division of
International Finance; Anthony G.
SUFFLE^IMTARY 8MF®RftSATS0&3: Over the
past several years, the Board has
become increasingly concerned with the
risks that large-dollar payments system s
present to depository institutions using
them, to the banking system, and to
other sectors of the economy. In March,
1984, the Board issued for public
comment a series of proposals to reduce
and control these risks. In a related
action today (Docket No. R-0515), the
Board issued a statement of the policy it
has formulated to reduce these risks.
The Board’s policy, reflecting the need
for flexibility and the desires of those
who commented, relies heavily on the
efforts of participants to identify,
control, and reduce their own risks.
Currently, the Federal Reserve
provides net settlement services to a
variety of private sector clearing
arrangements in addition to large-dollar
funds transfer networks; e .g ., check
clearing houses, credit card processors,
automated clearing houses (ACHs), and
small-dollar funds transfer networks,
such as, automated teller machine
(ATM) and point-of-sale (POS)
networks.
The finality accorded net settlement
entries varies. In most cases, net
settlement entries that the Federal
Reserve processes for large-dollar funds
transfer networks are accorded sameday finality. Net settlement entries for
some check clearing house
arrangements are also treated as final
qn the business day they are received.
Net settlement entries for ATM, POS,
and some ACHs are considered
provisional until the business day
following the receipt of the settlement
data.
From the perspective of the Federal
Reserve, the potential for financial loss
is greater when settlement entries are
accorded same-day finality and lower
when next-day finality is provided. This
is because the risk of loss increases as
the time the Reserve banks have to
ensure that institutions possess
sufficient balances to cover net debit
positions is reduced. Conversely, for
depository institutions participating in
private clearing arrangements, financial
risk declines as the time between the
exchange of transaction data (or the
settlement date in the case of the ACH)
and the finality of settlement entries is
reduced. Therefore, same day finality
reduces temporal risk for participants in
private clearing arrangements, shifting
that risk to the Federal Reserve. As
private sector, temporal risk is reduced,
systemic risk is also reduced.
The second factor concerning the risk
faced by depository institutions
participating in private clearing
arrangements is the treatment that they
accord the transactions that are
exchanged in these arrangements. If
funds are made available to customers
as the transaction data are received—a
common practice for participants on
funds transfer networks—or on a
specified settlement date—in the case of
participants in ACH networks—then the
timing of finality for settlement entries
directly affects the risk faced by the
participating institutions. On the other
hand, if the underlying transactions are
treated as provisional payments to
customers and funds are not made
available immediately, the timing of
finality of settlement entries may not
substantially increase participating
institutions’ risk.
Because the Board is reconsidering
certain aspects of risks associated with
providing net settlement services, it is
requesting public comment on the
following issues:
1. Should the terms of net settlement
arrangements vary based on the type oftransactions being settled?
(a) If they should vary, should the
differences be reflected in the finality
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 50, NO. 99
[Enc. Cir. No. 9868]
(OVER)
a c c o r d e d s e t t le m e n t e n t r ie s ( s a m e - d a y
o r n e x t - d a y ) o r b e r e f le c t e d o n th e
c o n t r o ls im p o s e d in th e g r o u p o f
d e p o s it o r y in s t it u t io n s r e q u e s tin g n e t
s e t t l e m e n t s e r v ic e s ?
(b ) If th e y s h o u ld v a r y , w h a t t y p e s o f
s e t t l e m e n t s h o u ld b e p r o v id e d to:
P r iv a te ly o p e r a t e d A C H s?
* A T M n e tw o r k s ?
0 P O S n e tw o r k s ?
0 C h e c k c le a r in g h o u s e s ?
° C r e d it c a r d p r o c e s s o r s ?
2. i f t h e y s h o u ld n o t v a r y , p l e a s e
e x p l a in w h y .
3, H o w d o th e te r m s o f s e t t le m e n t
a r r a n g e m e n ts a f f e c t th e w a y y o u r
d e p o s it o r y in s t it u t io n h a n d l e s th e
f o llo w in g u n d e r ly in g t r a n s a c t io n s , th a t
is , a s fin a l o r p r o v is io n a l p a y m e n ts :
• A C H tr a n s a c t io n s ?
e A T M tr a n s a c t io n s ?
® P O S tr a n s a c t io n s ?
® C h eck s?
° C r e d it c a r d s?
4.
If th e te r m s o f n e t s e t t le m e n t
a r r a n g e m e n ts d o n o t a f f e c t th e w a y y o u r
in s t it u t io n h a n d le s th e u n d e r ly in g
tr a n sa c tio n 's, w h a t fa c to r s a re
c o n s i d e r e d in d e te r m in in g th e tr e a tm e n t
accord ed :
* A C H tr a n s a c tio n s ?
° A T M tr a n s a c tio n s ?
s P O S tr a n s a c tio n s ?
8 C h eck s?
B C r e d it c a r d s?
2
5.
S h o u ld in s t it u t io n s p a r t ic ip a t in g in
p r iv a t e c le a r in g a r r a n g e m e n ts
'‘g u a r a n t e e ” s e t t le m e n t o r p r o v id e a
m e a n s w h e r e b y se ttle m e n t is a ssu r e d ,
s u c h a s , th r o u g h th e u s e o f in s u r a n c e ,
in d e m in if ic a t io n , or c o lla t e r a l, in th e
e v e n t th a t o n e o r m o r e p a r t ic ip a n t s m a y
b e u n a b le to s e t t le ? W h a t t y p e o f
" s e t t le m e n t g u a r a n t e e ” a r r a n g e m e n t
w o u ld b e m o s t e f f e c t iv e ?
By order of the Board of Governors of the
Federal Reserve System, May 17,1985.
W illiam W. W iles,
Secretary o f the Board.
[FR Doc. 85-12316, Filed 5-21-85; 8:45 am]
D
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Docket No. R-0515D]
Request for Comment on information
Collection Request Directed to
Automated Clearing Houses
AGENCY: B o a r d o f G o v e r n o r s o f th e
F ed er a l R e se r v e S y ste m .
ACTION: R e q u e s t fo r c o m m e n ts .
summary:
In r e la t e d a c t io n t o d a y
( D o c k e t N o . R -0 5 1 5 ), th e B o a r d i s s u e d a
s t a t e m e n t o f its p o lic y to r e d u c e r is k s o n
la r g e -d o lla r e le c t r o n ic f u n d s tr a n s fe r
s y s t e m s . A s p a rt o f th is p o lic y , th e
B o a r d h a s r e q u ir e d th a t a u t o m a t e d
c le a r in g h o u s e s (A C H s ) o b t a in in g n e t
s e t t le m e n t s e r v ic e s from th e F e d e r a l
R e s e r v e m u st, a m o n g o th e r th in g s ,
p r o v id e th e F e d e r a l R e s e r v e w it h c e r ta in
in fo r m a tio n . A c c o r d in g ly , th e B o a r d is
r e q u e s tin g c o m m e n t o n th e p a r a m e te r s
o f th is in fo r m a tio n c o ll e c t i o n r e q u e s t.
DATE: C o m m e n ts m u s t b e r e c e i v e d b y
Jun e 17, 1 985.
ADDRESS: C o m m e n ts , w h ic h s h o u ld r efe r
to D o c k e t N o . R -0 5 1 5 D s h o u ld b e
a d d r e s s e d to M r. W illia m W . W ile s ,
S e c r e ta 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 s e r v e S y s t e m , 2 0 th a n d C
S t r e e t s , N .W ., W a s h in g t o n , D .C . 20551,
o r d e liv e r e d to r o o m B -2 2 2 3 b e t w e e n
8:45 A .M . a n d 5:15 P .M . C o m m e n ts
r e c e i v e d m a y b e i n s p e c t e d in r o o m B 1 1 2 2 b e t w e e n 8:45 A .M . a n d 5:15 P .M ..
e x c e p t a s p r o v id e d in § 2 6 1 .6 (a ) o f th e
B o a r d ’s R u le s R e g a r d in g A v a i l a b i li t y o f
In fo r m a tio n , 1 2 C F R 2 6 1 .6 (a ).
A c o p y o f th e c o m m e n t s m a y a l s o b e
s u b m it t e d to th e O M B d e s k o f f ic e r fo r
th e B o a rd : M r. R o b e r t N e a l, O f f ic e o£
In fo r m a tio n a n d R e g u la to r y A ffa ir s ,
O f f ic e o f M a n a g e m e n t a n d B u d g e t, N e w
E x e c u t iv e O f f ic e B u ild in g , R o o m 3208,
W a s h in g to n , D .C . 205 0 3.
FOR FURTHER INFORMATION CONTACT:
E d w a r d C. E ttin , D e p u ty D ir e c to r ( 2 0 2 4 5 2 -3 3 6 8 ), D a v id B. H u m p h r e y ,
A s s i s t a n t D ir e c to r (2 0 2 -4 5 2 -2 5 5 7 ),
D iv is io n o f R e s e a r c h a n d S t a tis tic s ;
E llio tt C. M c E n te e , A s s o c i a t e D ir e c to r
(2 0 2 -4 5 2 -2 2 3 1 ), F lo r e n c e M . Y o u n g ,
A d v is e r (2 0 2 -4 5 2 -3 9 5 5 ), D i v i s i o n o f
F e d e r a l R e s e r v e B a n k O p e r a tio n s ;
J o se p h R. A l e x a n d e r , A t t o r n e y ( 2 0 2 - 4 5 2 2489), L e g a l D iv is io n ; o r Joy W .
O ’C o n n e ll, T D D (2 0 2 -4 5 2 -3 2 4 4 ).
A c o p y o f th e r e q u e s t fo r c le a r a n c e
(S F 83), s u p p o r tin g s t a t e m e n t ,
in s tr u c tio n s , a n d o th e r d o c u m e n t s th a t
w ill b e p l a c e d in to O M B ’s p u b lic d o c k e t
f ile s o n c e th e c o ll e c t i o n is a p p r o v e d
m a y b e r e q u e s t e d fr o m th e a g e n c y
c le a r a n c e o ffic e r , w h o s e n a m e a p p e a r s
b e lo w . F e d e r a l R e s e r v e B o a r d C le a r a n c e
O ffic er : M s. C y n th ia G la s s m a n , D iv is io n
o f R e s e a r c h a n d S t a t is t ic s , 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 s e r v e
S y s t e m , W a s h in g t o n , D .C . 20551 ( 2 0 2 4 5 2 -3 8 2 9 ).
SUPPLEMENTARY INFORMATION: O v e r th e
p a s t s e v e r a l y e a r s , th e B o a r d h a s
b e c o m e in c r e a s in g ly c o n c e r n e d a b o u t
th e r is k s th a t la r g e -d o lla r p a y m e n t s
s y s t e m s p r e s e n t to d e p o s it o r y
in s t it u t io n s u s in g th e m , to th e b a n k in g
s y s t e m , a n d to o th e r s e c t o r s o f th e
e c o n o m y . In a r e la t e d a c t io n t o d a y
(D o c k e t N o . R -0 5 1 5 ). th e B o a r d i s s u e d a
s t a t e m e n t o f th e p o l i c y it h a s fo r m u la te d
to r e d u c e t h e s e r is k s.
T h e B o a r d 's p o l i c y s t a t e m e n t n o te d
th a t its c o n c e r n w it h r is k s o n la r g e d o lla r p a y m e n t s y s t e m s d id n o t
o r ig in a lly e n c o m p a s s th e r is k s p o s e d b y
A C H s b e c a u s e th e A C H w a s r e g a r d e d
a s a s m a ll- d o lla r p a y m e n t s s y s t e m .
R e c e n tly , h o w e v e r , th e A C H h a s b e e n
e v o lv in g in s u c h a w a y th a t it a p p e a r s to
b e ta k in g o n m a n y o f th e c h a r a c t e r is t ic s
o f la r g e -d o lla r s y s t e m s a n d
c o n s e q u e n t ly p r e s e n t s m a n y o f th e s a m e
r isk s. A c c o r d in g ly , th e B o a r d h a s
d ir e c t e d its s t a f f to u n d e r ta k e a s t u d y o f
A C H r isk a n d is r e q u e s tin g c o m m e n t o n
v a r io u s a s p e c t s o f s u c h r is k s . ( S e e
D o c k e t N o . R -0 5 1 5 B .)
Until the Board's study of ACH risk is
complete and the Board has formulated
a new policy to deal with such risk, the
Board is modifying its procedures for ex
post monitoring of intra-day credit
exposures to (1) recognize the potential
risks associated with ACH transactions
processed by both the Federal Reserve
and privately operated ACHs, and (2)
inhibit the use of the ACH to circumvent
the Board’s risk reduction policies
adopted today. Specifically, the Board
intends that, for the purpose of ex post
monitoring, gross debits resulting from
the origination of credit transactions
and gross credits resulting from the
receipt of credit transactions will be
posted at the Reserve Bank’s opening of
business on the settlement date, and
gross credits resulting from the
origination of debit transactions and the
gross debits resulting from the receipt of
debit transactions will be posted at the
Reserve Bank’s close of business on the
settlement date.1 This procedure would
result in posting the net of ACH credit
transactions in the ex post monitoring
system at the opening of business on the
settlement date and in posting the net of
ACH debit transactions at the close of
business on the settlement date.
The Board has also determined that
privately operated ACHs will not be
eligible to receive Federal Reserve net
settlement services unless they agree to
provide the Federal Reserve with the
data necessary to include transactions
processed over their networks in the ex
post monitoring system. Under the new
ex post monitoring proceeding, the
1 This posting procedure is for ex post monitoring
purposes only and will in no way change when
actual settlement entries are made and when ACH
transactions become final. Generally, funds
provided to receivers of ACH credit transactions
processed by Reserve Banks are treated as final
payments at the opening of business on the
settlement date. Funds provided to originators of
ACH debit transactions processed by the Reserve
Banks are posted on the settlement date, but are
considered provisional payments until the business
day following the settlement date.
PRINTED IN NEW YORK, FROM FEDERAL REGISTER, VOL. 50, NO. 99
[Enc. Cir. No. 9868]
(OVER)
in fo r m a tio n th a t w i l l b e r e q u ir e d fro m
e a c h A C H w i l l b e th e t o t a l d o lla r v a lu e
for e a c h A C H p a r tic ip a n t o f th e
f o llo w in g e le m e n t s : (1) G r o s s d e b it s
r e s u ltin g fr o m th e o r ig in a tio n o f c r e d it
t r a n s a c t io n s , (2) g r o s s c r e d it s r e s u ltin g
fro m th e r e c e ip t o f c r e d it t r a n s a c t io n s ,
(3) g r o s s c r e d it s r e s u ltin g fr o m th e
o r ig in a tio n o f d e b it t r a n s a c t io n s , a n d (4)
g r o s s d e b i t s r e s u ltin g fr o m th e r e c e ip t o f
d e b it t r a n s a c t io n s . B e g in n in g S e p te m b e r
3 0 ,1 9 8 5 , t h e in fo r m a tio n i s to b e
p r o v id e d to th e R e s e r v e B a n k p r o v id in g
th e n e t s e t t le m e n t s e r v ic e .
The Board requests comment on the
following aspects of this information
collection request:
1. Which of the following would be
least costly or burdensome:
(a) to provide each of the four data
elements for each participant regardless
of the amount of each element?
(b) to provide for each participant
only the value of the data element when
it exceeds a specified amount, e.g.,
P a p e r w o r k R e d u c t io n A c t o f 1 9 8 0 , 4 4
U .S .C . s e c t i o n 3507, a n d th e r e g u la t io n s
i s s u e d th e r e u n d e r , 5 C F R 1 3 2 0 .1 2 , t h e s e
in f o r m a t io n c o ll e c t i o n r e q u e s t s w i l l b e
s u b m it t e d to th e B o a r d fo r r e v i e w u n d e r
d e l e g a t e d a u th o r ity fr o m th e O f f ic e o f
M a n a g e m e n t a n d B u d g e t a fte r
c o n s i d e r a t io n o f t h e c o m m e n t s r e c e i v e d
d u r in g th e 3 0 d a y c o m m e n t p e r io d .
$5,000; $10,000; $25,000; $50,000; $ 1 0 0 ,0 0 0 .
2. Given the Board’s objectives, is
there any w ay in which it could obtain
this information in any less costly or
burdensome manner for the purposes of
ex post monitoring?
In a c c o r d a n c e w it h s e c t i o n 3 5 0 7 o f th e
2
By order of the Board of Governors of the
Federal Reserve System, May 17,1985.
William W. Wiles,
Secretary o f the Board.
[FR Doc. 85-12317 Filed 5-21-85; 8:45 am]
@FedFRASER