[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 123-128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31981]
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FEDERAL RESERVE SYSTEM
[Docket No. R-0866]
Federal Reserve Bank Services
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice; request for comment.
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SUMMARY: The Board requests comment on the potential benefits and costs
of opening the Fedwire on-line book-entry securities transfer service
earlier in the day sometime after the implementation of expanded
Fedwire funds transfer operating hours, which is scheduled for 1997.
The Board also requests comment on new service capabilities that would
give banks the option of participating in earlier Fedwire securities
transfer hours and new service capabilities that would allow banks to
control their use of securities-related Federal Reserve intraday credit
during expanded hours and/or core operating hours. Finally, the Board
requests comment on the establishment of a firm closing time of 3:00
p.m. Eastern Time (ET) for transfers and 3:30 p.m. ET for reversals,
beginning in January 1996. The Board is seeking input at this time in
order to formulate a strategic direction for the Fedwire book-entry
securities transfer service. The Board will consult with the Department
of the Treasury before arriving at a decision regarding operating hours
and service capabilities.
DATES: Comments must be submitted on or before April 28, 1995.
ADDRESSES: Comments, which should refer to Docket No. R-0866, may be
mailed to Mr. William Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, DC 20551. Comments also may be delivered to Room B-2222 of
the Eccles building between 8:45 a.m. and 5:15 p.m. weekdays, or to the
guard station in the Eccles Building courtyard on 20th Street N.W.
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's
rules regarding availability of information.
FOR FURTHER INFORMATION CONTACT: Louise L. Roseman, Associate Director
(202/452-2789), Gayle Brett, Manager (202/452-2934), or Lisa Hoskins,
Project Leader (202/452-3437), Division of Reserve Bank Operations and
Payment Systems, Board of Governors of the Federal Reserve System. For
the hearing impaired only: Telecommunications [[Page 124]] Device for
the Deaf, Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: In February 1994, the Board announced
approval of the expansion of the Fedwire on-line funds transfer service
operating hours to 18 hours a day, from 12:30 a.m. to 6:30 p.m. Eastern
Time (ET), five days a week, beginning in early 1997 (59 FR 8981,
February 24, 1994).1 More recently, the Board has delayed the
implementation of the 12:30 a.m. ET opening until fourth quarter 1997.
(See notice elsewhere in today's Federal Register.)
\1\This decision was the result of staff study conducted in
response to a request for public comment in October 1992 regarding a
change in Fedwire operating hours. Currently, the Fedwire funds
transfer service operates 10 hours a day from 8:30 a.m. to 6:30 p.m.
ET.
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In its announcement on expanded Fedwire funds transfer hours, the
Board stated that the operating hours for the Fedwire book-entry
securities transfer service would not be expanded until public comment
was sought on new service capabilities that would give banks the
ability to choose whether to participate in expanded hours and to
control the receipt of securities that are delivered to them during
expanded and core operating hours.2
\2\As used in this notice, the term ``bank'' includes all
depository institutions including savings institutions and credit
unions.
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By deciding initially to expand only Fedwire funds transfer hours,
the Board recognized that an earlier opening of the Fedwire book-entry
securities transfer service would be inadvisable without providing
banks with the capability of controlling the timing of deliveries of
securities and associated debits to their funds accounts. The inability
to control the receipt of securities could lead to increased use of
intraday credit, with accompanying charges, during the earlier
operating hours.
In addition, the Board recognizes that the settlement of U.S.
government securities involves complex automated systems not only at
the Federal Reserve Banks but also at banks that provide clearance
services to the major dealers and brokers in U.S. government
securities, at the dealers and brokers themselves, and at the banks
that provide custodial services for large investors in U.S. government
securities. The changes that might be required at these entities to
support expanded book-entry securities transfer operations may be
significant. The operations of clearing corporations, securities
depositories, and other clearing organizations also may be affected.
Furthermore, earlier operating hours may require changes in market
practices, such as good delivery guidelines and time-of-day processing
of settlement instructions. Expanded operating hours also would
compress the time frame that market participants have to complete end-
of-day processing, as well as the time frame in which to assess and
react to any operational problems.
Since the announcement on expanded Fedwire funds transfer
operating hours, Board, Reserve Bank, and Treasury staff have met with
a number of market participants, including banks and brokers and
dealers, to discuss the potential expansion of on-line Fedwire book-
entry securities transfer operating hours. While these participants
identified limited potential benefits from having the Fedwire
securities transfer service available in the early morning hours, they
emphasized the complexity of changes in market practices and processing
operations that would be required for an early opening of the Fedwire
book-entry securities transfer service.
The Board believes that earlier operating hours for the Fedwire
book-entry securities transfer service may have long-run efficiency and
risk management benefits for the market. For example, earlier operating
hours could provide a means to move collateral during the operating
hours of various payments systems around the world, obtain liquidity to
support other market activities during expanded hours, reduce
replacement cost risk in offshore trading activity, and reduce risk
during times of market stress. In addition, expanded operating hours
could be responsive to both existing and emerging needs of financial
markets, including overseas markets, which depend on the U.S.
government securities market as an investment, hedging, funding, and
balance sheet adjustment mechanism.
The Board recognizes that the financial markets served by the
Fedwire securities transfer system are increasingly reliant on state-
of-the-art technology in order to adapt quickly and flexibly to change
in the securities clearance and settlement process. For instance,
dealers and clearing banks are more and more dependent on systems that
can process significant amounts of time-critical information related to
trading and settlement activities. Such systems are a prerequisite for
dealers and banks that expect to compete in global securities markets.
In fact, some major market participants are rapidly adapting their
services to support global securities processing services across
multiple time zones and during expanded operating hours.
The Federal Reserve Banks currently are redesigning the Fedwire
book-entry securities transfer service to provide banks and their
customers with flexibility to adapt to changing markets. The new system
will enhance availability, strengthen contingency processing, and
expand the custody account structure.3 The new application also is
being designed to run on an expanded processing cycle. Although the
first release of the new application will be able to accommodate a
modest expansion of processing hours, the ability to expand operating
hours significantly would not be available until sometime after the
first release.
\3\The Federal Reserve Banks are in the process of centralizing
all of their critical payment applications. The securities transfer
application currently under development, called the National Book-
Entry System (NBES), will replace the two existing book-entry
applications, BESS and SHARE. BESS is operated in the New York and
Philadelphia Reserve Banks; the other ten Federal Reserve Banks
operate SHARE. The NBES will be phased in beginning in 1996 and will
be fully operational at a centralized site in 1997.
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The Federal Reserve's Book-Entry Securities Transfer System
The Federal Reserve Banks operate a book-entry system to support
the issuance, safekeeping, and transfer of U.S. Treasury and certain
federal, federally sponsored, and international agency securities.
Approximately 70 percent of securities transferred are U.S. Treasuries;
the remaining 30 percent are agency securities. The Fedwire book-entry
system supports both the primary and secondary markets in U.S.
government securities.
Banks that are eligible to access Federal Reserve services may
maintain book-entry securities accounts at a Federal Reserve
Bank.4 Dealers, brokers, and their customers and other investors
hold their securities in accounts at these banks. The book-entry system
provides an account structure that permits banks to segregate
securities held for their own account from securities held for third
parties.
\4\Under a policy adopted in 1986, the Federal Reserve Banks
also may maintain book-entry securities safekeeping accounts for
state treasurers. In addition, certain collateral facilities are
provided to a limited number of entities under the terms of Treasury
Department Circular 154 (31 CFR Part 225).
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On a daily basis, more than 47,000 Fedwire securities transfers are
originated with a value exceeding $600 billion. Approximately 8,500
banks have access to the Fedwire book-entry service. While fewer than
20 percent of these banks have on-line or electronic access, they
account for more than 99 percent of Fedwire securities transfers. More
than 60 percent of all transfers are [[Page 125]] originated by the two
major New York clearing banks.
The Fedwire book-entry securities transfer system is a delivery-
versus-payment (DVP) transfer mechanism, whereby the sender of a
security initiates a transfer resulting in the real-time simultaneous
debit and credit to the sender's securities and funds accounts and a
credit and debit to the receiver's securities and funds accounts. The
debits and credits associated with each securities transfer are final
and irrevocable at the time of the transfer. Securities transfers also
may be sent free of payment.5
\5\Under the current posting rules, principal and interest (P&I)
payments for Treasury and agency securities are to be posted to
Federal Reserve accounts by 9:15 a.m. ET; the Reserve Banks
currently make these payments at approximately 8:30 a.m. ET.
Original issue payments for Treasury securities are posted beginning
at 9:15 a.m. Original issuances of agency securities are controlled
by the issuing agencies and typically are made during the mid-to-
late morning hours. These posting times were designed to permit a
short operational and funding ``window'' between the timing of P&I
and original issue payments. The Board expects that these posting
times would not change materially if the Fedwire book-entry
securities system were to be opened earlier.
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Potential Benefits of an Earlier Fedwire Book-Entry Securities Transfer
Opening Time
The Board believes that, in the longer term, an earlier opening of
the Fedwire book-entry securities transfer system may be beneficial to
the financial markets. First, financial markets might benefit from the
ability to move collateral related to a variety of secured transactions
in domestic and international markets. Some commenters to the 1992
proposal on early Fedwire funds transfer hours indicated that the
ability to transfer collateral to cover early morning margin positions
in the futures and options markets would be useful. In addition, many
large U.S. banks participate in various national payment and securities
settlement systems around the world. These systems are increasingly
moving towards the use of collateral, including cross-currency
collateral, to secure intraday and overnight credit.6 As such,
U.S. banks may need the ability to move U.S. government securities
during the operating hours of these national payment systems.
\6\Cross-currency collateral refers to securities denominated in
one currency used to collateralize obligations denominated in a
different currency.
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Second, an earlier opening of the Fedwire securities transfer
system may provide market participants with access to funding liquidity
to support other market activities during expanded hours. For example,
repurchase agreements using U.S. government securities can be very
effective liquid instruments for obtaining funding. The ability to
settle repurchase agreements in early morning hours may provide market
participants with an additional vehicle to obtain funding liquidity.
The need for such liquidity in early hours may arise from settlement of
foreign exchange transactions through multi lateral clearinghouses,
settlement of positions in the futures and options markets, or
interbank funds transfer activity.7
\7\On most days, participants in the futures and options markets
may not need access to the financial markets to cover their
settlement positions because such positions generally are small
enough to be covered by cash or lines of credit extended to
participants by their settlement banks. On peak settlement days,
however, settlement positions can be quite substantial, requiring
other sources of funding.
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Third, earlier book-entry securities transfer operating hours may
facilitate a reduction in replacement cost risk, that is, the time
between trade and settlement, for offshore trading activity in U.S.
government securities. Currently, U.S. Treasury securities are traded
on a 24-hour basis around the globe.8 A next-day trade executed in
Tokyo and settled in New York currently would not be settled until 30
to 37 hours after the close of the Tokyo trading day. Earlier Fedwire
securities transfer hours could facilitate a reduction in this lag.
\8\Although approximately 95 percent of the turnover of U.S.
Treasury securities occurs in the United States, active markets
exist in London and Tokyo as well.
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Finally, the routine availability of final, DVP securities
transfers on an expanded hours schedule could provide an important risk
management tool to the financial markets during periods of stress.
The Board requests comment on the potential benefits of expanded
book-entry securities transfer hours outlined above and any other
potential benefits.
Potential Receiver Control Features
If the Board were to adopt an earlier opening time for the Fedwire
book-entry securities transfer service, participation in earlier hours
would be voluntary. Unlike the Fedwire funds transfer service, however,
voluntary participation in expanded Fedwire securities transfer hours
would be more complex. Under current DVP design, banks do not have the
capability to control the timing of incoming securities deliveries and
associated debits to their funds accounts. Accordingly, banks have
limited control over the effect of securities-related debits on their
reserve account position and their use of Federal Reserve securities-
related intraday credit. Because of the inability to review transfers
prior to receipt, these control limitations may be compounded if the
securities delivery is not known or if the delivery amounts are
incorrect. Although receivers of securities can reverse transfers
received in error virtually immediately after delivery and payment
occur, they must actively monitor and manage their securities activity
in order to do so.
Opt-in Feature
If the Board decides that expanded Fedwire securities transfer
hours are desirable, the Board proposes that the NBES would provide an
``opt-in'' feature for securities transfer customers to ensure that
earlier hours could be provided without imposing significant, unwanted
operating costs on banks that did not have reason to participate in
earlier hours. Banks would be able to choose whether to participate
during expanded hours, and only transfers among banks that had elected
to participate would be allowed. No entries would be made against the
accounts of banks that had decided not to participate in earlier hours;
transfers sent by or to these banks would be rejected. Further, any
transfer rejected during expanded hours would have to be re-submitted
after 8:30 a.m. ET when all active accounts would be eligible to
receive and send securities transfers.
Banks that choose to participate during earlier hours would be
required to accept incoming transfers from the opening of the Fedwire
securities transfer service until the close of the securities transfer
service. In order to minimize rejected transfers during expanded hours,
the Federal Reserve Banks would provide banks with information
regarding the banks that had elected to participate. At least
initially, participation during earlier hours would likely consist of a
small group of banks; however, should the need arise, banks that
normally did not participate in expanded hours would have the option of
notifying the Reserve Bank late in the prior day that they wish to
participate in expanded hours the next day. This feature may be
particularly helpful during times of market stress.
Opt-in at Securities Account Level
The Board requests comment on the benefits and other implications
of providing banks the flexibility to participate during earlier
operating [[Page 126]] hours at the securities account level.9 If
this flexibility were provided, banks could elect to participate during
earlier hours with respect to specified securities accounts and not
participate with respect to other securities accounts. For example, a
bank could choose to opt-in for its securities account containing
dealer securities but not for its securities account containing
investment securities.
\9\A securities account is an account at a Reserve Bank
containing book-entry securities held for a participant. A
participant may use different securities accounts to segregate
securities held for different purposes.
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Other Receiver Control Features
The Board requests comment on the desirability and market
implications of incorporating certain receiver control features into
the NBES that would address difficulties banks have managing their
reserve account positions due to the receipt of unanticipated
securities transfers. Currently, the receipt of unanticipated
securities may trigger or increase a daylight overdraft in the
receiving bank's account. The Board requests comment on the potential
use of these features during expanded as well as core operating hours.
If implemented, the use of receiver control features would be optional.
The proposed receiver control features would rely on receipt
instructions submitted by the receiving bank. These instructions would
include CUSIP, sending and receiving bank, third-party information, and
par and payment amount of the transfer, as well as the day the
securities are expected to be received. Banks would enter these
instructions and transmit them to the NBES prior to or on the day of
anticipated receipt, and would have the ability to add and delete
instructions as necessary throughout the day.
The receiver control features differ in the action that would be
taken by the Reserve Bank based on its comparison of an incoming
securities transfer to the receipt instructions provided by the
receiving bank. The Reserve Bank simply could flag transfers that did
not match the receipt instructions; it could automatically reverse an
unmatched transfer; or it could reject an unmatched transfer. As
described below, the Board is particularly concerned with the potential
adverse market effects, including gridlock, of a receiver control
feature that would automatically reverse or reject a transfer to the
extent that such a feature is used with respect to a significant
proportion of Fedwire book-entry securities transfers.
1. Notification of Unmatched Transfers
Under the first possible receiver control feature, any securities
sent to the receiver could be processed with the associated accounting
entries to the bank's securities and funds accounts. If no receipt
instructions were found by the NBES, a message indicating or
``flagging'' the receipt of an unmatched transfer could be provided to
the receiver. The receiver could then review the transfer and determine
whether or not to reverse it. If a notification feature were provided,
it could be available for implementation during core business hours
soon after the conversion of all twelve Reserve Banks to the
NBES.10
\10\SHARE currently provides a simple matching capability that
allows receivers to enter receipt and deliver instructions to
facilitate the turnaround of securities. A similar feature will be
available during the implementation phase of the NBES to banks that
access the book-entry system via a Fedline connection.
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2. Automatic Reversal of Unmatched Transfers
Under the second possible receiver control feature, if no receipt
instructions were found, the NBES could automatically reverse the
transfer and associated accounting entries. This reversal would be
completed within a few minutes of the initial transfer and accounting
entries. If an automatic reversal feature were provided, it also could
be available for implementation during core business hours soon after
the conversion of all twelve Reserve Banks to the NBES.
3. Automatic Rejection of Unmatched Transfers
The Board also has considered a third possible receiver control
feature whereby transfers for which there were no matching instructions
found could be automatically rejected with no accounting entries made
to the sender's or receiver's funds or securities accounts. If an
automatic rejection feature were provided, it could not be made
available until a later release of the NBES.
In considering these potential features, the Board understands that
most Fedwire book-entry securities transfer participants using
computer-interface connections already are able to provide features for
their customers that permit comparison of incoming securities against
pre-loaded instructions. Therefore, the Board proposes that, if a
notification of unmatched transfers and/or an automatic reversal of
unmatched transfers was implemented in the NBES, its availability be
limited to customers with a Fedline or equivalent connection.11
Because an automatic rejection of unmatched transfers cannot be
replicated by book-entry participants, the Board believes that, if
implemented in the NBES, this feature would have to be made available
to all Fedwire securities transfer customers.
\11\Off-line customers must provide receipt instructions to the
Federal Reserve Bank regarding anticipated incoming transfers prior
to the delivery of the securities. By no later than March 1, 1995,
any securities received for an off-line customer for which receipt
instructions have not been provided will be immediately reversed. As
such, off-line customers already are provided with a means to
control the delivery of unanticipated securities.
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The Board believes that an automatic reversal or automatic
rejection feature, if used by the larger book-entry securities
participants, could adversely affect the smooth functioning of the
government securities market. If a bank used the automatic reversal or
automatic rejection feature, it would have the responsibility to submit
receipt instructions to the NBES prior to the origination of the
securities transfer by the sender. The Board believes that significant
changes in how dealers and clearing banks exchange information to
facilitate securities settlement would be required if an automatic
reversal or automatic rejection feature were to be used by the clearing
banks. Under Public Securities Association good delivery guidelines for
dealers and clearing banks, dealers are required to submit delivery
instructions to clearing banks by 12:00 noon ET on the settlement date
for next-day trades and as soon as is practicable for same-day trades.
With an automatic reversal or automatic rejection feature, clearing
banks would be unable to ``hold'' transfers received in the morning for
the dealers to review, thus increasing the likelihood that a large
number of good trades would be reversed or rejected back to the sender.
The Board expects that banks would use an automatic reversal or
automatic rejection feature to control the effects of daylight
overdrafts in their accounts as a result of securities sent in error.
It is possible, however, that some banks would use these features to
control the time of day that anticipated securities deliveries are
received. For example, if a bank was expecting a large securities
delivery on a certain day but would not have funds available to cover
the receipt until the afternoon, it could delay loading receipt
instructions or load incomplete receipt instructions to ensure that
securities delivered in the morning would be reversed or rejected.
Public Securities Association good delivery guidelines stipulate that
counterparties must accept delivery of [[Page 127]] securities for
which they have executed a trade; thus any improper use of ``DKs,'' or
reversals, would be regulated by the market. These guidelines, however,
do not appear to address the treatment of rejected transfers. The use
of these features potentially could cause gridlock in the market if
banks manipulated the use of receipt instructions to control the time
of delivery of incoming securities. The Board requests comment on the
potential effects on the efficiency of the government securities market
if an automatic reversal or automatic rejection capability were to be
used by the major clearing and custody banks.
Operational and Procedural Changes Associated with Expanded Fedwire
Book-Entry Securities Transfer Hours
The Board anticipates that, at least initially, most banks would
elect not to participate in expanded book-entry transfer hours. The
Board believes that no costs would be imposed on banks that chose not
to participate.
Banks that have a need to participate in expanded hours would
incur increased costs that would likely fall into two categories: (1)
one-time costs to modify automated systems, and (2) ongoing costs to
maintain and staff securities processing operations during the expanded
hours.
Software and hardware modifications necessary for banks to operate
during expanded hours may include enhanced end-of-day processing,
capacity upgrades, enhanced contingency operations, and design features
that would permit certain customers the ability to transfer securities
while others would remain closed and possibly the ability to
accommodate the use of receipt instructions. These changes could
involve significant lead time and resources for development and
testing, particularly at clearing banks, custody banks, and dealers.
In addition to system changes, earlier Fedwire securities transfer
hours would affect the processing schedules of private clearing
organizations, dealers, and the clearing banks. For example, end-of-day
processing operations at clearing banks and trade comparison and
netting operations of the Government Securities Clearing Corporation
extend well beyond the close of the Fedwire securities transfer system
into early morning hours of the next day. These schedules may have to
be significantly condensed to accommodate an earlier Fedwire securities
transfer opening time.
The Board requests comment on system modifications that would be
required for banks to participate during earlier operating hours as
well as the costs associated with implementing these modifications. The
Board also requests comment on the incremental ongoing costs associated
with operating during expanded hours. Further, the Board requests
comment on the changes that would be required in the operations of
private clearing organizations, dealers, and clearing banks in order to
accommodate earlier Fedwire securities transfer hours, and associated
costs.
The increase in Federal Reserve Bank ongoing operating costs to
support a potential expansion of Fedwire securities transfer hours is
expected to be small relative to the total cost of providing the
Fedwire securities transfer service. Changes in the Fedwire securities
transfer system to accommodate expanded hours processing would require
significant lead time.
Fedwire Book-Entry Securities Transfer System Closing Time
The Board also requests comment on a proposal to close the Fedwire
securities transfer service at 3:00 p.m. ET for transfers and 3:30 p.m.
ET for reversals, beginning in January 1996. The current published
closing time is 2:30 p.m. ET for transfers and 3:00 p.m. ET for
reversals; however, until recently these times were extended routinely
to accommodate transaction processing volumes at large market
participants.12 By establishing a firm closing time, extensions
would be granted only in response to significant operating problems at
a bank or major dealer or to prevent market disruption.
\12\Since 1985 the average actual closing time has moved from
5:30 p.m. ET to 3:30 p.m. ET.
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The present closing time was established with the creation of the
Fedwire book-entry system in the late 1960s. The closing time has
remained unchanged even though the size of the government securities
market has grown tremendously in terms of volume and number of issues
in the past two decades.
Prior to April 1994, about 20 percent of the value of securities
transfers on Fedwire were processed by 10:00 a.m. ET, 40 percent by
noon, and 75 percent by 2:00 p.m. The Fedwire securities transfer
system typically closed at 4:00 p.m., one hour past its designated
closing time. Since the implementation of daylight overdraft pricing on
April 14, 1994, efficiencies gained in the trading and processing
operations of dealers and clearing banks have altered the securities
transfer processing cycle. Currently, almost 40 percent of the value of
securities transfers are processed by 10:00 a.m., more than 60 percent
by noon, and 90 percent by 2:00 p.m. The Fedwire securities transfer
system has been closing on average by 3:30 p.m., including the reversal
period.
The Board believes that a firm closing time for the Fedwire
securities transfer service would benefit market participants by
reducing uncertainty. Both the Federal Reserve and market participants
would be better able to plan staffing and other resource needs and
thereby control costs with greater certainty than today.
In addition, the Board believes a firm closing time would be
desirable in an expanded Fedwire funds transfer operating hours
environment. Because the end-of-day processing time at banks that
participate in expanded funds transfer hours will be compressed by a
12:30 a.m. ET opening, routine securities extensions that in turn
affect the closing of the funds wire at 6:30 p.m. ET would further
compress the time available for back-office processing.
Competitive Impact Analysis
In considering an operational or legal change that would affect a
Federal Reserve Bank priced service, the Board determines whether the
change would have a direct and material adverse effect on the ability
of other service providers to compete effectively with the Federal
Reserve in providing similar services, due to differing legal powers or
constraints or due to a dominant market position of the Federal Reserve
deriving from such legal differences.
Other providers of securities transfer services do not provide
services that are directly comparable to the Fedwire book-entry
securities transfer service, because only the Federal Reserve Banks can
provide final delivery-versus-payment of securities settled in central
bank money. There are other private-sector systems, however, such as
the Government Securities Clearing Corporation and the Participants
Trust Company, that facilitate primary and secondary market trades of
U.S. Treasury and agency securities. Other transactions involving U.S.
government securities may be cleared and settled on the books of banks
to the extent that the counterparties are customers of the same bank.
The Board does not believe that expansion of Fedwire book-entry
securities transfer operating hours, the implementation of receiver
control features on the Fedwire book-entry securities transfer system,
or the establishment of a firm closing time for the Fedwire securities
transfer system would have a direct and material [[Page 128]] adverse
effect on the ability of other service providers to offer similar
services. These private-sector service providers could expand their
operating hours to coincide with Fedwire operating hours, and could
provide receiver control features to their participants. The Federal
Reserve Banks, however, would maintain their unique position of
providing risk-free central bank settlement.
Request for Comment
The Board requests comment on the potential benefits, costs, and
market effects associated with expanding its on-line book-entry
securities service operating hours and the receiver control features
that should be incorporated in NBES if operating hours are
significantly expanded or that should be available during core business
hours. The Board also requests comment on establishing a firm closing
time of 3:00/3:30 p.m. ET for the Fedwire book-entry securities
transfer service. Specifically, the Board requests comment on the
following:
Potential Benefits of an Earlier Fedwire Book-Entry Securities Transfer
Opening Time
1. Do the commenters concur with the benefits described in this
notice for opening the Fedwire book-entry on-line securities transfer
service earlier in the day? Are there benefits beyond those identified
in this notice to expanded Fedwire securities operating hours?
2. Should the Board open the Fedwire securities transfer service
earlier in the day? If so, would sometime shortly after the
implementation of expanded Fedwire funds transfer hours be a reasonable
effective date (i.e. 1998-1999)? What is the optimal opening time in
the short-term (i.e. 1998-1999)? The long-term?
3. If the Board were to implement an earlier (12:30 a.m. ET or
other) opening time for the Fedwire securities transfer service in the
1998-1999 time frame, do commenters believe that they would participate
during the expanded hours?
Potential Receiver Control Features
4. Should the ability to opt-in to expanded Fedwire securities
transfer hours be provided at the securities account level? Why or why
not?
5. Would the first two receiver control features, i.e. (1)
notification of unmatched transfers, (2) automatic reversal of
unmatched transfers, provide an adequate means for Fedline customers to
control the use of securities-related intraday credit during earlier
operating hours? If so, which feature(s) would be useful and why? Would
either of these features be useful for Fedline customers during core
operating hours? If so, which feature(s) would be useful and why?
6. Are receiver control features incorporated in the systems of
computer-interface banks today? Please describe these features. To what
extent are these features used by customers of computer-interface
banks? Should notification of unmatched transfers or automatic reversal
of unmatched transfers be provided to computer-interface banks? If yes,
which feature(s) should be provided to computer-interface banks?
7. What would be the effects on the efficiency of the government
securities market if an automatic reversal or automatic rejection
feature were to be used during core or earlier operating hours by
clearing banks? If either of these features were provided, what is the
likelihood that the feature(s) would be used to control the time-of-day
of the receipt of incoming securities? Would the market effects of
automatic rejection differ from those of automatic reversal? If yes, in
what ways?
8. Are there other features that should be considered for the
National Book-Entry System for use during expanded hours only (e.g.
free deliveries only, separate type codes)? Please describe.
9. Should any of the possible receiver control features described
in this notice and any other receiver control feature described by the
commenter be offered at the securities account level?
10. Would the implementation of expanded securities transfer
operating hours or receiver control features require revisions to PSA
good delivery guidelines or accounting practices? If yes, what changes
would be required?
Operational and Procedural Changes Associated with Expanded Fedwire
Book-Entry Securities Transfer Hours
11. What changes would need to be made to the automated systems,
operating procedures and/or policies of banks and their customers in
order to participate in the Fedwire book-entry securities transfer
system during expanded hours if an earlier opening time were adopted?
What costs (e.g. systems, staff, operational, contingency) would be
incurred as a result of earlier Fedwire securities transfer hours?
Please explain and differentiate between short- and long-term costs and
between capital investments and operating costs.
12. How would an expansion of book-entry operating hours affect the
operations of other securities depositories or clearing organizations
and the entities that use the services of these organizations (e.g.
Participants Trust Company, Government Securities Clearing
Corporation)? Please describe. What costs would be incurred as a result
of any operational changes at these institutions?
13. Do the potential benefits of expanded hours outweigh the
potential costs in the short-term? The long-term?
Fedwire Book-Entry Securities Transfer System Closing Time
14. Should the Board implement a firm closing time for the Fedwire
securities transfer service? If so, would a 3:00/3:30 p.m. ET firm
closing time be appropriate? Would January 1, 1996 be an appropriate
effective date for implementing a firm closing time?
15. Should a later closing time be considered for the securities
transfer service instead of or in addition to an earlier opening time?
16. How much time is necessary between the close of the Fedwire
book-entry service and the opening of the Fedwire funds transfer
service in the short-term? The long-term?
By order of the Board of Governors of the Federal Reserve
System, December 21, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31981 Filed 12-30-94; 8:45am]
BILLING CODE 6210-01-P
