[Federal Register Volume 63, Number 111 (Wednesday, June 10, 1998)]
[Notices]
[Pages 31777-31779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-15407]
[[Page 31777]]
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FEDERAL RESERVE SYSTEM
[Docket R-1014]
Federal Reserve Bank Services
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Request for comment.
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SUMMARY: The Board is requesting comment on whether the last fifteen
minutes of the Fedwire funds transfer operating day, from 6:15 p.m. to
6:30 p.m. Eastern Time, should be restricted to funds transfers sent
and received by banks for their own account in order to facilitate
banks' end-of-day management of their Federal Reserve accounts.
DATES: Comments must be submitted on or before August 12, 1998.
ADDRESSES: Comments, which should refer to Docket No. R-1014, may be
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W.,
Washington, D.C. 20551. Comments addressed to Ms. Johnson may also be
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m., and
to the security control room outside of those hours. Both the mail room
and the security control room are accessible from the courtyard
entrance on 20th Street between Constitution Avenue and C Street, N.W.
Comments may be inspected in room MP-500 between 9:00 a.m. and 5:00
p.m., except as provided in Section 261.8 of the Board's Rules
Regarding the Availability of Information, 12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT: Louise Roseman, Associate Director
(202/425-2789), Jeff Stehm, Manager (202/452-2217), or Gina Sellitto,
Financial Services Analyst (202/728-5848), Division of Reserve Bank
Operations and Payment Systems. For the hearing impaired only:
Telecommunications Device for the Deaf, Diane Jenkins (202/452-3544).
SUPPLEMENTARY INFORMATION: The Fedwire funds transfer system operates
from 12:30 a.m. to 6:30 p.m. Eastern Time (all times stated are Eastern
Time), with the last half hour of the operating day reserved for
settlement transfers.1 Settlement transfers are typically
used by banks to adjust their Federal Reserve account positions, as
well as their account positions at correspondent banks. Settlement
transfers may be two-party transfers sent and received by banks for
their own account, or they may contain third-party respondent bank
information when a respondent bank is the originator and/or beneficiary
of the payment order.2 To the extent that Fedwire settlement
transfers are received or requested unexpectedly just before the final
close of Fedwire, a bank's ability to manage its reserve position and
end-of-day Federal Reserve account position may be complicated. In
particular, last minute transfers received during the settlement period
for credit to a respondent bank customer may not be anticipated and
cannot be controlled by the receiving correspondent bank.
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\1\ A settlement transfer is a payment order in which the
originator and the beneficiary are each either: (i) a bank subject
to Federal Reserve reserve requirements (whether or not it actually
maintains reserve balances), or (ii) a participant in a net
settlement arrangement approved by a Reserve Bank as an eligible
originator or beneficiary of a settlement payment order sent during
the settlement period. A settlement transfer sent during the
settlement period must be designated by type code 16. For purposes
of this notice, the term ``bank'' is used to refer to any depository
institution.
\2\ For purposes of this notice, respondent transfers are
defined as Fedwire transfers in which there is an intermediary bank
between the originating bank and the Federal Reserve or between the
beneficiary's bank and the Federal Reserve.
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In response to the Board's request for comment on a return to a
system of lagged reserve requirements (62 FR 60671, November 12, 1997),
the New York Clearing House Association (NYCHA) requested that the
Board reconsider a two-part settlement period at the end of the Fedwire
operating day, in which the last fifteen minutes of the Fedwire funds
transfer operating day are reserved exclusively for transfers sent by
and received for a bank's own account. Under this proposed restriction,
funds transfers sent by banks on behalf of a respondent bank or funds
transfers received by banks for credit to a respondent bank would be
prohibited during the last fifteen minutes of the Fedwire day. NYCHA
believes such a restriction would facilitate reserve management by
allowing banks to anticipate more fully last minute payment flows from
and into their account at a Reserve Bank. In particular, NYCHA believes
that because respondent banks are able to use the entire Fedwire
settlement period (6:00 p.m. to 6:30 p.m.) to move funds into and out
of accounts at their correspondents, the correspondents cannot know
their reserve positions with certainty until Fedwire has
closed.3 This uncertainty in late-day funds movements adds
to the difficulty of reserve management for large money center
correspondents.
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\3\ NYCHA members have indicated that their concerns relate
primarily to late-in-the-day transfers on behalf of foreign
respondent banks, and that transfers on behalf of domestic
respondent banks are generally not performed after 6:15 p.m.
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In October 1989, the Board requested comment on a similar proposal
to segment the settlement period for the Fedwire funds transfer service
(54 FR 41681, October 11, 1989). Overall, commenters were divided as to
the benefits of this earlier proposal. Several commenters indicated
that there were no significant benefits to a segmented settlement
period and that restricting receipt of transfers by affiliates and
respondent banks during the last fifteen minutes would further impede
their ability to manage their accounts. Other commenters believed that
a segmented settlement period would unnecessarily complicate the
processing of funds transfers because new edit criteria and type codes
might be needed to monitor and restrict respondent transfers, requiring
changes to programs and operating procedures for both banks and Reserve
Banks. Commenters supporting this proposal noted that, in contrast to
transfers sent or received on its own behalf, a correspondent bank may
not be able to predict accurately transfers involving its respondent
accounts, thereby complicating management of its reserve position.
At that time, the Board did not adopt a segmented settlement period
given the concerns expressed by commenters and the lack of strong
industry support (55 FR 18755, May 4, 1990). The Board, however,
indicated that it would monitor developments with regard to reserve
account management and determine whether segmenting the settlement
period should be reconsidered at a later date.
NYCHA, in its February 5, 1998, letter to the Board, argues that
several developments have occurred since 1990 that make it more
difficult for banks to manage their reserve positions. These
developments include: (1) a significant reduction in reserve balances
resulting from reductions in reserve requirements in 1990 and 1992 and
the use of sweep accounts starting in 1994; and (2) a reduction in the
pool of available buyers of federal funds due to consolidation in the
banking industry. The unexpected receipt of funds for a respondent bank
very late in the day could result in the correspondent bank having more
reserves than planned, which may be difficult to invest late in the
day. Likewise, a late-in-the-day request to pay out funds on behalf of
a respondent bank may result in a reserve deficiency at the
correspondent bank that may be costly and difficult for the
correspondent to fund. NYCHA argues that unanticipated excess or
deficit reserve positions create uncertainty and volatility in the
federal funds market. NYCHA believes that a segmented
[[Page 31778]]
Fedwire funds transfer settlement period would allow each bank to
calculate its reserve position with greater precision and facilitate a
more efficient interbank funding market.
If a segmented settlement period were adopted, it might be
implemented through one of several approaches. Under one approach, if a
bank received an unanticipated respondent transfer after 6:15 p.m., it
could return the funds the same day. If this was not possible prior to
the final close of Fedwire, it could return the funds the next day and
request compensation from the sender (if the sender and receiver had a
compensation agreement) and/or request that the Federal Reserve
function an as-of adjustment to its reserve position and the reserve
position of the sending bank.4 5 As-of
adjustments may not have value for some receiving banks or provide a
disincentive to some sending banks. In particular, a receiving bank
with low reserve requirements that maintains balances at a Reserve Bank
primarily for payment clearing purposes would likely receive little
economic value from an as-of adjustment. Likewise, a sending bank with
a low reserve requirement may not consider an as-of adjustment to be a
sufficient incentive to stop sending respondent transfers after 6:15
p.m. Alternatively, compensation for respondent transfers processed
after a 6:15 p.m. deadline might be handled by private agreement
between the sending and receiving banks. For example, NYCHA has rules
governing the settlement of claims for compensation between NYCHA
member banks that arise from interbank funds payments.
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\4\ As-of adjustments are adjustments made at the discretion of
the Reserve Bank to the amount of calculated required reserves that
sending and receiving banks must maintain during a two-week reserve
maintenance period. As-of adjustments do not affect the actual level
of balances held by a bank at its Reserve Bank, but rather the level
of required reserves a bank must hold during a maintenance period.
\5\ This is similar to the process used to compensate banks for
third-party customer transfers sent after 6:00 p.m. as type code 16
messages. In this case, the Reserve Banks will function as-of
adjustments to the sending and receiving banks when the receiving
bank notifies the Reserve Bank of such a transfer. The use of as-of
adjustments for this purpose, however, occurs infrequently.
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Under another approach, the Fedwire funds transfer system might be
modified to incorporate new edit criteria to detect and reject type
code 16 funds transfers received after 6:15 p.m. that contain
respondent information in the beneficiary or originator message field
tags. Alternatively, a new funds transfer message type code to identify
two-party bank-to-bank transfers could be established by modifying the
Fedwire funds transfer system. If a transfer received after the
respondent transfer cut-off time (6:15 p.m.) did not bear the
appropriate type code, it would be rejected by the Fedwire funds
transfer system. This approach would likely require changes to banks'
internal systems in order to process a new message type code and may
require significant modifications to the Fedwire funds transfer system.
If a segmented settlement period is desirable, Fedwire restrictions
on respondent transfers sent after 6:15 p.m. may only need to be
applied to transfers sent by the Federal Reserve to a bank for credit
to its respondent bank's account. Correspondent banks could set their
own cutoff times for originating transfers on behalf of a respondent
bank customer, but they are unable to set similar controls over the
receipt of transfers for the benefit of their respondent customers. The
receipt of transfers for the benefit of a respondent bank customer,
therefore, may require Fedwire restrictions to assist the receiving
correspondent bank in managing its reserve position toward the end of
the day.
If a segmented settlement period were adopted, the Board proposes
that the Reserve Banks' procedures for granting an extension of Fedwire
deadlines be modified in order to preserve a thirty-minute settlement
period at the end of the Fedwire day, divided into two fifteen-minute
intervals--the first period for all types of settlement transfers and
the second period exclusively for settlement transfers sent and
received for banks' own accounts. Today, extensions of the third-party
customer transfer deadline past 6:00 p.m. generally result in a
fifteen-minute, rather than thirty-minute, settlement period. For
example, of the fifty-six extensions of the 6:00 p.m. third-party
customer deadline in 1997, fifty resulted in a compressed fifteen-
minute settlement period. If a segmented settlement period were
adopted, any extension of the third-party deadline may require an
extension of the final closing time in order to preserve a thirty
minute settlement period at the end of the day--fifteen minutes for all
settlement transfers and fifteen minutes exclusively for settlement
transfers for banks' own accounts.
Finally, if a segmented settlement period were adopted, operational
changes to banks' internal systems, and possibly to the Fedwire funds
transfer system, may be required in order to preclude respondent
transfers after 6:15 p.m. These potential system changes raise a
question of the appropriate timing for implementation given the Reserve
Banks' and banks' ongoing year 2000 readiness efforts and their desire
to limit the number of system changes prior to the millennium cutover.
The Board requests comment on whether the establishment of a
segmented settlement period at the end of the Fedwire operating day in
which respondent transfers would not be permitted during the last
fifteen minutes would enhance banks' ability to manage their reserve
positions late in the day. The Board requests comment on the following
questions:
1. What are the benefits of a 15-minute period from 6:15 p.m. to
6:30 p.m. during which respondent transfers would be prohibited? To
whom would these benefits likely accrue? Are there any significant
costs or other drawbacks to a segmented settlement period?
2. Because correspondent banks could manage unexpected outflows of
funds over Fedwire by setting their own internal cut-off time for
originating transfers on behalf of respondent bank customers, should
the Federal Reserve impose restrictions only on settlement transfers
where a respondent bank is the beneficiary bank?
3. How liquid is the fed funds market after 6:15 p.m.? Is the
liquidity in the fed funds market at that time of day sufficient to
allow the correspondent bank to invest any large inflows or cover any
outflows of funds received over Fedwire late in the day?
4. How would restrictions on respondent banks' ability to request
or receive Fedwire funds transfers late in the day affect their ability
to manage their reserve position?
5. If the Board were to adopt a segmented settlement period, what
responsibilities and/or penalties, if any, should be placed on the
sending bank if it does not comply with the 6:15 p.m. deadline? Should
the receiving bank have the ability to request an as-of adjustment with
a corresponding adjustment to the sending bank if a respondent transfer
is received after the 6:15 p.m. deadline? Will as-of adjustments
provide sufficient incentive for the sending bank to police its release
of respondent transfers after 6:15 p.m? Would there be a significant
cost or drawback to the receiving bank if as-of adjustments were not
functioned for these types of transactions?
6. Would it be preferable for the Federal Reserve to modify the
Fedwire funds transfer system by implementing a new message type code
or edit criteria to reject automatically transfers sent after the 6:15
p.m. that contain respondent bank information in the originator and/or
beneficiary fields? What costs or other burdens would such
[[Page 31779]]
operational modifications impose on Fedwire participants?
7. If the Fedwire 6:00 p.m. deadline for third-party customer
transfers is extended on a particular day, should a thirty-minute
settlement period be maintained at the end of the day, with the last
fifteen minutes of the settlement period reserved for settlement
transfers between banks for their own accounts?
8. If a segmented settlement period is approved, what is the
appropriate timeframe for its implementation, given banks' ongoing year
2000 readiness efforts?
9. Are there any other alternatives that could be implemented to
address this issue? For example, instead of Fedwire changes, could the
originating bank and/or receiving bank implement internal controls,
customer agreements, or other changes (e.g., industry agreements
regarding a deadline for respondent transfers) to restrict respondent
transfers toward the end of the Fedwire operating day?
By order of the Board of Governors of the Federal Reserve
System, June 5, 1998.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 98-15407 Filed 6-9-98; 8:45 am]
BILLING CODE 6210-01-P
