[Federal Register Volume 60, Number 157 (Tuesday, August 15, 1995)]
[Notices]
[Pages 42410-42413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20127]
[[Page 42409]]
_______________________________________________________________________
Part VII
Federal Reserve System
_______________________________________________________________________
Federal Reserve Bank Services; Notices
Federal Register / Vol. 60, No. 157 / Tuesday, August 15, 1995 /
Notices
[[Page 42410]]
FEDERAL RESERVE SYSTEM
[Docket No. R-0866]
Federal Reserve Bank Services
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Board has approved a firm closing time of 3:15 p.m.
Eastern Time (ET) for transfer originations and 3:30 p.m. ET for
reversals for the Fedwire book-entry securities transfer system.
Periodic extensions of this closing time may be granted only in
response to significant operating problems at a major bank or dealer or
to prevent market disruption. The Board also has authorized the Reserve
Banks to continue to close the Fedwire securities transfer service
earlier than the scheduled closing time on certain days when the U.S.
government and mortgage securities markets observe partial-day or full-
day holiday operations. The Board believes that the new schedule will
benefit market participants by reducing uncertainty about the final
closing time of the system, thus enabling participants to manage
resources more effectively and control costs with greater certainty
than today.
EFFECTIVE DATE: January 2, 1996.
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 Device for the Deaf,
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Background
In January 1995, the Board issued for comment a proposal to
establish a firm closing time of 3:00 p.m. ET 1 for Fedwire book-
entry securities transfer originations and 3:30 p.m. ET for reversals,
beginning in January 1996 (60 FR 123, January 3, 1995).2 The Board
also requested comments on the potential benefits, costs, and market
implications of opening the on-line Fedwire book-entry securities
transfer service earlier in the day and on new service capabilities
that would give depository institutions the option of participating in
the Fedwire securities transfer system during earlier hours. In
addition, the Board requested comment on new service capabilities that
would allow depository institutions to control their use of intraday
credit during expanded and/or core business hours.
\1\ All times are Eastern Time. For ease of reference throughout
this document, the closing time may be identified as 3:00/3:30 p.m.,
for example.
\2\ Currently, the Fedwire book-entry securities transfer
service has a published closing time of 2:30 p.m. for transfer
originations and 3:00 p.m. for reversals. Some Reserve Banks permit
the movement of securities within a participant's account (also
called repositioning) after the close of the reversal period.
---------------------------------------------------------------------------
The Board's action at this time is limited to establishing a firm
closing time for the Fedwire securities transfer service. The Board is
continuing to evaluate comments received on the potential benefits,
costs, and market implications of an earlier opening of the on-line
securities transfer service and potential new service capabilities.
Thirty-six commenters responded to the Board's proposal. About 60
percent of the commenters were commercial banks or bank holding
companies, including banks that provide government securities clearing
and settlement services to dealers and other firms. The following table
identifies the number of commenters by type of organization:
Commercial Banking Organizations 3.............................. 21
Credit Unions................................................... 2
Broker/Dealers 4................................................ 2
Clearing House Associations..................................... 2
Clearing Organization........................................... 1
Trade Associations.............................................. 3
Federal Home Loan Banks......................................... 2
Federal Reserve Banks........................................... 2
State Government................................................ 1
-------
Total public comments....................................... 36
Thirty-one commenters addressed the issue of a firm closing time
for the book-entry securities service. The major topics discussed by
these commenters include: (1) benefits of a firm closing time; (2)
selection of an appropriate closing time; and (3) extensions of the
scheduled closing time. The following discussion provides a summary of
the comments received and the Board's analysis of the issues raised.
\3\ Banks, bank holding companies, and operating subsidiaries of
banks or bank holding companies.
\4\ Entities extensively involved in trading book-entry U.S.
government or federal agency securities.
II. Benefits of Firm Closing Time
Thirty commenters supported the establishment of a firm closing
time for the Fedwire book-entry securities transfer service. Almost
half of these commenters stated specifically that a firm closing time
would reduce uncertainty about the final close and allow them to better
plan staffing and other resource needs, thus improving their ability to
control costs. In addition, Aubrey Lanston & Co. noted that ``a firm
closing time would complement advances that have been made in the last
year to reduce daylight overdraft charges, thus benefitting market
participants with little additional costs.''
Roughly one-third of the commenters addressing the concept of a
firm closing time expressed support for the concept if the Federal
Reserve Banks would exercise flexibility in granting ``emergency''
extensions. A few commenters believed that the current practice of
granting frequent extensions is adequate for their processing and
planning needs.
Market participants have made significant operational improvements
over the last ten years, including increased reliability and processing
capability of their automated systems, that have affected average daily
volume patterns. In addition, a number of initiatives implemented by
the Federal Reserve Banks and market participants have altered the
intraday pattern of Fedwire securities transfers.5 For example,
prior to the implementation of daylight overdraft fees in April 1994,
about 20 percent of the value of securities transfers on Fedwire was
processed by 10:00 a.m., 40 percent by noon, and 75 percent by 2:00
p.m. Since January 1995, roughly 36 percent of the value of securities
transfers on Fedwire was processed by 10:00 a.m., 65 percent by noon
and 92 percent by 2:00 p.m. Over the last ten years, the average actual
closing time of the Fedwire securities transfer system has moved from
5:30 p.m. to 3:15 p.m.
\5\ Specific initiatives include: a $50 million maximum
transaction limit for Fedwire book-entry securities transfers;
Public Securities Association's ``good delivery guidelines''
designed to encourage earlier-in-the-day settlement of large
securities deliveries; and the assessment of fees for daylight
overdrafts incurred in accounts held at the Federal Reserve.
---------------------------------------------------------------------------
The Board believes that a firm closing time for the Fedwire
securities transfer service would allow market participants and the
Federal Reserve Banks to manage resources more effectively and control
costs with greater certainty than today. A firm closing time that
accommodates the large majority of actual current closing times will
reduce the frequency and duration of extensions and thus provide
increased certainty with respect to the final closing time.
III. Selection of Appropriate Closing Time
Twenty-five commenters supported the proposed closing time of 3:00/
3:30 p.m. Eleven commenters noted that establishing a closing time that
is later
[[Page 42411]]
than the current published closing time of 2:30/3:00 p.m. will provide
extra processing time for securities transfers, which may be useful for
some participants. Two commenters noted that the extra time would
relieve some of the pressure of acting upon late instructions for
outright sales and repo collateral activity and would facilitate a
smooth daily transition from securities to cash processing. One
commenter suggested that expanding the closing time in this manner
would relieve industry bottlenecks on heavy settlement days and help
prevent ``fails'' 6 on numerous occasions.
\6\ A ``fail'' occurs when the securities and cash are not
exchanged as agreed on the settlement date, usually because of
technical problems.
---------------------------------------------------------------------------
Seven commenters believed there would be no benefit to changing the
current closing time of 2:30/3:00 p.m. These commenters stated that the
current schedule is adequate for their processing needs and should not
be changed. For example, the Public Securities Association (PSA) noted
that the current closing time provides sufficient certainty to the
market for participants to plan for staffing and other needs. In
addition, while Chemical Bank stated that it did not oppose a 3:00/3:30
p.m. closing time, it indicated that it has been able to process
successfully its two highest volume days on record within the current
2:30 p.m. closing time for securities transfer originations. Chemical
Bank stated that there is no need to change the closing time, as long
as the Federal Reserve Banks have the flexibility to extend the closing
time when there are significant systems problems for a major
participant.
Eight commenters believed that the Board should establish a firm
closing time later than the proposed time of 3:00/3:30 p.m. While the
American Bankers Association (ABA) expressed support for the proposed
closing time, it noted that several of its members would support a
3:30/4:00 p.m. closing time to allow extra securities processing time.
Harris Trust and Savings Bank stated that while its customers would
benefit from the additional processing time associated with a 3:00/3:30
p.m. closing time, the bank prefers extending the closing time to 3:30/
4:00 p.m. to facilitate its broker customers' needs arising from
afternoon margin calls at the exchanges. The BOTCC argued that a 6:00
p.m. closing time would facilitate: (1) the afternoon settlement of
futures transactions by permitting securities to be sold or pledged to
meet related settlement obligations; (2) the collection of original
margin deficits in the afternoon by permitting the transfer of
securities to meet margin requirements; and (3) market participants'
ability to adhere to firm closing times. In addition, the BOTCC
suggested that a 6:00 p.m. closing time could benefit customers of
clearing members by increasing the likelihood that they would receive
the proceeds of payments from clearing members on a same-day basis.
Some commenters observed that a later close of the Fedwire book-
entry securities transfer service will compress further the limited
time available to complete overnight batch accounting cycles in
anticipation of the 12:30 a.m. opening of the Fedwire funds transfer
service, beginning in late 1997. Specifically, seven commenters
indicated a fairly broad spectrum of end-of-day processing requirements
and capabilities, ranging from 4-5 hour to 10-12 hour processing
cycles. One commenter was unable to provide an estimate of the amount
of time required for overnight batch processing because of systems
changes it needed to make to accommodate interstate branch banking. In
addition, one commenter noted that a later closing time could cause
some participants to deliver securities ``at the last minute'' and
another commenter argued that a later closing time would delay its
funds settlement process.
The current published closing time has been in place since the
system was implemented in the late 1960s. Historically, the service has
routinely closed later than 2:30/3:00 p.m. to accommodate operating
problems and volume backlogs incurred by major participants. Recent
experience indicates that although market participants have made
substantial improvements to their automated systems and internal
operations, the increased efficiency has not enabled a stable closing
time of 2:30/3:00 p.m. During the first half of 1995, the Fedwire
securities transfer system was extended beyond the scheduled closing
time on 61 out of 126 days, or 48 percent of the business days; most of
these extensions were due to system/operating problems at a bank or
major dealer. Extensions were granted on eight occasions to allow one
of the clearing banks to complete its daily volume; generally, these
volume backlogs were satisfied by 3:30 p.m.
In the context of reviewing changes to the final closing time,
State Street Bank and Trust suggested that the Board also review the
need for a dealer-turnaround deadline, which currently is 2:45 p.m.
State Street suggested that the original reasons for granting broker/
dealers additional delivery time to customers are no longer valid in
today's automated environment and stated that this intermediary
deadline becomes more difficult to justify as operating hours are
expanded. State Street indicated that there are no ``class''
distinctions within other depositories.
Dealer-turnaround time was established by the PSA as an industry
guideline to promote the smooth functioning of the government
securities market. Operationally, broker/dealers prioritize their work
based on the PSA good delivery guidelines; processing transfers during
the day first to other broker/dealers and later to their customers. The
dealer-turnaround deadline has been reflected in the Federal Reserve
Banks' operating circulars; however, the Reserve Banks do not police
participant activity with respect to this time.
Whereas the Board's original proposal suggested a closing time of
3:00/3:30 p.m., the Board believes that establishing a firm closing
time of 3:15 p.m. for transfer originations and 3:30 p.m. for reversals
is consistent with current practice 7 and would enable an orderly
close of the government securities market. The Board believes that
these closing times will satisfy adequately the known processing needs
of market participants with respect to interbank transfers. The Board
believes that the new closing time provides sufficient opportunity for
market participants to complete daily deliveries, absent unusual
operating or computer problems.8 In addition, the Board's action
does not preclude the continuation of an industry standard for a
dealer-turnaround time if the industry believes it is needed.9 The
Board also believes that this new closing time will not interfere with
the normal end-of-day processing requirements of market participants
and Federal Reserve Banks. The Board encourages market participants to
continue efforts to improve the efficiency of back-office operations,
especially as these may be necessary in anticipation of expanded
Fedwire funds transfer service operating hours in late 1997.
\7\ The existing 2:45 p.m. deadline for dealer-to-customer
deliveries effectively results in a reversals-only period of 15
minutes.
\8\ Those Reserve Banks that permit repositioning after the
close of the reversal period may continue to do so.
\9\ The Federal Reserve Banks' book-entry securities operating
circulars will be modified to eliminate reference to a separate
deadline for dealer-to-customer deliveries.
---------------------------------------------------------------------------
The Board believes that establishing a closing time later than
3:15/3:30 p.m. for the Fedwire securities transfer service is not
warranted at present. It is
[[Page 42412]]
not clear that the potential benefits of closing later than 3:15/3:30
p.m. are sufficient to outweigh the costs of a later close. The
existing characteristics of the Fedwire securities transfer service,
especially the inability to control the receipt of securities transfers
delivered against payment, compel on-line participants to actively
monitor their accounts throughout the operating day. It is difficult to
justify requiring participants to incur the additional expense
associated with monitoring their Fedwire securities activity when there
is relatively little volume to be processed later in the day.10
While the BOTCC pointed out that a significantly later close of 6:00
p.m. would facilitate the afternoon settlement of futures transactions
and permit the transfer of securities to meet margin requirement, there
are significant costs associated with delaying the back-end processing
that takes place at depository institutions after the close of the
Fedwire book-entry securities transfer service. In addition, a 6:00
p.m. closing time for the Fedwire securities service may require a
later third-party deadline and final close for the Fedwire funds
transfer service. Also, decreasing the time between the close of the
Fedwire book-entry securities transfer service and the close of the
Fedwire funds transfer service allows less time to accommodate
securities-related extensions without resulting in Fedwire funds
transfer extensions. The Board is concerned about the possibility of
securities-related extensions affecting the ability of the funds
transfer service to close timely in light of its decision to open the
Fedwire funds transfer service at 12:30 a.m. ET, beginning late 1997.
Despite these concerns, the Board is willing to consider later closing
times for the book-entry securities transfer service in the future and
will continue to assess changes in market behavior and intraday volume
patterns, as well as improvements in the efficiency of back office
operations, that may call for such modifications.
\10\ Recent data indicate that, on average, less than one
percent of the aggregate value of securities transfers processed
over Fedwire remains to be processed after 3:00 p.m.
---------------------------------------------------------------------------
IV. Extensions of the Scheduled Closing Time
Nine commenters emphasized the need for Federal Reserve flexibility
in granting extensions for unusual circumstances. In addition, five
commenters encouraged the Board to provide guidance as to what
circumstances would warrant extension of the scheduled closing time.
Specifically, some commenters argued that extensions should be granted
only to accommodate significant operating or computer problems at a
depository institution or major dealer or to prevent market disruption.
PSA suggested that extensions also should be granted to accommodate the
processing volume of large market participants. Two commenters stated
that the Board should develop more ``equitable'' guidelines for
granting extensions, arguing that the criteria should be more relevant
to the industry as a whole. For example, State Street Bank and Trust
observed that the ``current extension guidelines ($500 million or more
in straight sells) favor the few banks which process the majority of
securities transfers.''
Although market participants have improved significantly their
automated systems over time, operational problems occasionally arise
that interfere with the timely settlement of a participant's Fedwire
securities transfers. An operating problem at a participant that
originates and/or receives a significant volume of daily Fedwire
securities transfers could affect the government securities market
broadly by contributing to settlement gridlock. Settlement gridlock, if
prolonged, could lead to systemic liquidity problems among dealers and
other financial institutions, which could contribute to increased
credit risks.
The Board believes that it is essential for the Federal Reserve
Banks to have the flexibility to extend the closing time of the Fedwire
book-entry securities transfer system on an as-needed basis to
facilitate the smooth functioning of the government securities market
and to minimize the systemic risks that may arise due to significant
operating problems at one or more depository institutions or major
dealers. The Board believes that granting extensions in such
circumstances provides for the orderly functioning of the government
securities market and minimizes the number of failed trades. Because
the Board expects all on-line participants to invest in the necessary
automation resources to process peak volumes as well as normal volumes,
the Federal Reserve Banks generally will not grant extensions based on
circumstances arising from volume backlogs at a participant.
V. Other Issues
Commenters raised several other issues relating to the closing time
for the Fedwire book-entry securities transfer service. Specifically,
these suggestions include implementing a free delivery period,
considering an earlier close on certain days, and monitoring/
disciplining participants for improper actions during the reversal
processing period.
A. Free Delivery Period
Bank of America suggested that in conjunction with implementing a
firm closing time of 3:00/3:30 p.m., the Board should consider allowing
depository institutions to make bank-to-bank transfers free-of-payment
(also called ``free deliveries'') for an hour after the close of the
reversal period. Bank of America noted that depository institutions and
their customers could use this processing window (i.e., from 3:31 p.m.
to 4:30 p.m) to resolve major difficulties, such as correcting any
operational errors or financing securities that inadvertently remained
in the dealer's account. The bank stated that if payment were required
for a securities transfer to be delivered during this period, the buyer
could send the payment via the Fedwire funds transfer system. Bank of
America believes that this new service should be implemented in January
1996.
At present, the Federal Reserve Banks' Fedwire book-entry
securities transfer applications are unable to establish different
closing times for interbank transfers that are ``free'' versus those
that are against payment. The Federal Reserve Banks plan to implement
new software for the book-entry securities transfer service, called the
National Book-Entry System (NBES), beginning in 1996. NBES will have
the capability to differentiate certain types of transactions by time-
of-day, which would enable the Reserve Banks to establish a special
period for free deliveries of securities, for example. The
functionality for processing ``free'' bank-to-bank transfers after the
close of the period for delivery-versus-payment transfers may be made
operational in the future pending additional analysis.
B. Earlier Close on Certain Market Holidays
Crestar Financial Corporation suggested that the Board should
consider closing the Fedwire book-entry securities transfer service
earlier on days when the government securities market is closed and/or
closes early. Crestar stated that ``typically these are days when staff
schedules vacations and there might be significant system wide savings
if coverage did not have to be provided.''
Each year, PSA announces a holiday schedule recommending full-day
and partial-day closings of markets for U.S. government and mortgage
securities and money market instruments. Typically, there is little
Fedwire securities transfer volume to be processed on such days. As a
result, the Federal Reserve Banks
[[Page 42413]]
generally have been able to close the Fedwire securities transfer
system earlier than 2:30/3:00 p.m. on certain days designated in the
PSA holiday schedule, such as Good Friday. For example, on April 14,
1995 (Good Friday), depository institutions in the Second Federal
Reserve District originated a combined total of about 650 securities
transfers, which were all completed by noon, compared with average
volume of over 38,000 securities transfers originated per day during
March 1995. Thus, the Federal Reserve Banks were able to close the
system at 1:30 p.m. on that day.
As noted earlier, the characteristics of the Fedwire securities
transfer service, especially the inability to control the receipt of
securities transfer delivered against payment, compel on-line
participants to actively monitor their accounts throughout the
operating day. It is difficult to justify requiring participants to
incur the additional expense associated with monitoring their Fedwire
securities activity on those days when no volume is processed later in
the day.
The Board believes that it is appropriate for the Federal Reserve
Banks to continue to close the Fedwire securities transfer service
earlier than the published closing time on all or some days designated
by the PSA as full or partial market holidays, when there is relatively
little volume to be processed. Shortly after the PSA publishes its
annual holiday schedule, the Federal Reserve Banks will issue a notice
identifying the days on which it plans to close the securities transfer
service earlier than 3:15/3:30 p.m. In addition, the Federal Reserve
Banks will notify participants of the scheduled early close
approximately two weeks in advance of the particular date that Fedwire
will be closed early, coincident with PSA's reminder notices for the
recommended market holiday.
C. Monitoring Improper Actions During Reversal Period
Two commenters expressed concern about the practices of some
institutions that send securities transfer originations during the
reversals-only period. One of these commenters inquired about the
Federal Reserve's ability to monitor and/or report such practices,
indicating that the Federal Reserve should penalize institutions for
improper use of the transfer reversal code.
The Federal Reserve Banks' book-entry securities services uniform
operating circular sets forth the terms and conditions governing access
to the Fedwire book-entry securities transfer service. In particular,
paragraph 21 of this circular indicates that a participant should not
send a transfer message for the first time during the reversals-only
period by using a reversal code and provides the receiver of such a
transfer with the ability to request an as-of adjustment for improper
use of the reversal code. The circular notes that use of the reversal
code to resend a transfer initially sent during the origination period
and improperly reversed is not a misuse of the reversal code. The Board
believes that this provision provides sufficient protection to
receivers of improper transfer messages and, as a result, it is not
necessary to institute additional measures at this time.
VI. Effective Date of Proposed Changes
Almost all of the commenters responding to the proposal believed
that January 1996 is a reasonable effective date for establishing a
firm closing time for the Fedwire book-entry securities transfer
service. One commenter, however, suggested that it would be more
prudent to establish an effective date that is after the implementation
of the National Book-Entry System.
The Board believes that the benefits associated with establishing a
firm closing time of 3:15/3:30 p.m. for the Fedwire securities transfer
service justify a near-term effective date that permits institutions to
make any necessary internal operational/procedural changes. The Board
believes that an effective date of January 2, 1996 is reasonable
because the new closing time does not represent a material change from
average actual experience.
VII. Competitive Impact Analysis
The Board assesses the competitive impact of changes that may have
a substantial effect on payment system participants. In particular, the
Board assesses whether a proposed change would have a direct and
material adverse effect on the ability of other service providers to
compete effectively with the Federal Reserve Banks in providing similar
services and whether such effects are due to legal differences or due
to a dominant market position 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/or agency securities. Other transactions involving
U.S. government securities may be cleared and settled on the books of
depository institutions to the extent that the counterparties are
customers of the same depository institution.
The Board does not believe that the establishment of a firm closing
time for the Fedwire securities transfer system would have a direct and
material adverse effect on the ability of other service providers to
offer similar services. The Federal Reserve Banks, however, would
maintain their unique position of providing risk-free central bank
settlement.
By order of the Board of Governors of the Federal Reserve
System, August 9, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-20127 Filed 8-14-95; 8:45 am]
BILLING CODE 6210-01-P
