[Federal Register Volume 60, Number 157 (Tuesday, August 15, 1995)]
[Notices]
[Pages 42417-42423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20136]
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[[Page 42418]]
FEDERAL RESERVE SYSTEM
[Docket No. R-0890]
Federal Reserve Payment System Risk Policy
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Policy statement.
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SUMMARY: The Board has approved certain modifications to its Fedwire
third-party access policy to clarify its applicability and to reduce
the administrative burden of several provisions. Some depository
institutions have entered into arrangements under which a third party
provides operating facilities for their Fedwire services; under such
arrangements, the third party's actions may result in a debit to the
institution's reserve or clearing account at a Federal Reserve Bank.
The policy provides important safeguards to both depository
institutions participating in third-party access arrangements and to
the Reserve Banks. Among other things, the policy requires depository
institutions to impose prudent controls over Fedwire funds transfers
and book-entry securities transfers initiated, received, or otherwise
processed on their behalf by a third-party service provider. These
policy modifications are interim modifications, pending the completion
of a broader review of supervisory policies that should be applicable
to outsourcing arrangements. The review may result in further
modifications to the policy; however, the Board believes that any
further modifications will be in the same general direction as those
made today. The Federal Reserve Banks will not approve any new third-
party access arrangements involving a foreign service provider, pending
further analysis of issues associated with such arrangements.
EFFECTIVE DATE: August 10, 1995.
FOR FURTHER INFORMATION CONTACT: Gayle Brett, Manager (202/452-2934) or
Lisa K. Hoskins, Project Leader (202/452-3437), Fedwire Payments,
Division of Reserve Bank Operations and Payment Systems; for the
hearing impaired only: Telecommunications Device for the Deaf, Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Background
Fedwire is the large-value payment mechanism owned and operated by
the Federal Reserve Banks. Fedwire provides depository institutions
with real-time gross settlement in central bank money of funds
transfers and book-entry securities transfers made for their own
account or on behalf of their customers. Typically, each depository
institution that holds an account at the Federal Reserve processes its
own transfers and accesses Fedwire directly. In some cases, however, a
depository institution accesses Fedwire through a third-party access
arrangement in which a service provider, acting as agent for a
depository institution, initiates payments that are posted to the
institution's account at the Federal Reserve. Third-party access
arrangements are a form of outsourcing. Depository institutions use
service providers to perform a number of functions, including customer
accounting, check and automated clearing house (ACH) processing, and
the processing and/or transmission of large-value funds and securities
transfers. Depository institutions have increasingly viewed outsourcing
arrangements as one way to reduce operating costs.
During the mid-1980s, the Board and Reserve Banks became concerned
about the credit exposure faced by depository institutions that
contracted with a third-party service provider to process Fedwire funds
transfers on their behalf. Due to the concerns raised about the legal,
supervisory, and payments system risk implications of such
arrangements, a moratorium on approving additional arrangements was
imposed in 1985 until these issues could be reviewed and guidelines
established.
In July 1987, the Board approved a set of conditions under which
Fedwire third-party access arrangements could be established, as part
of its payment system risk reduction policy (52 FR 29255, August 6,
1987). Specifically, the Board adopted a policy placing certain
conditions on the ability of a service provider to initiate Fedwire
transfers from a participant's reserve or clearing account held at the
Federal Reserve.1 The Board's original policy addressed two types
of arrangements. Where the service provider and the participant are not
affiliated, the participant must authorize each individual transfer
before it is sent to a Reserve Bank. Where the service provider and the
participant are affiliated, the participant may establish limits within
which the service provider is authorized to act. For purposes of the
policy, an affiliated service provider is defined as an organization
that has at least 80 percent common ownership with the participant.
\1\ The original issues surrounding third-party access
arrangements arose in the context of funds transfer arrangements,
and the language of the original policy reflected this orientation.
Board staff subsequently interpreted the policy to include Fedwire
book-entry securities transfer arrangements within its scope. Board
staff also interpreted the policy to cover all situations where
transfer instructions are not communicated directly to the Reserve
Bank by the sending bank, but rather are transmitted indirectly
through another entity.
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Since the third-party access policy went into effect, the Federal
Reserve Banks have approved approximately 500 third-party service
arrangements.2 During this time a number of issues and requests
for clarification have been raised with respect to the policy. These
questions relate to: (1) the circumstances under which line-of-credit
arrangements can be used; (2) the responsibility of a participant to
monitor its reserve or clearing account in line-of-credit arrangements;
(3) the need for a participant to have backup capabilities in the event
the Federal Reserve Bank terminates the arrangement; and (4) the duties
that may be assigned to personnel employed by the parties to the
arrangement.
\2\ The number of current arrangements is less than the number
approved because of mergers and changes in relationships between
participants and service providers. Because some of the approved
arrangements involved multiple participants using the same service
provider, however, there may be more than 500 Fedwire participants
currently using third-party service providers for Fedwire
processing.
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Issues also were raised about the scope of the policy. Questions of
scope include: (1) whether the policy applies to arrangements for book-
entry securities transfers as well as funds transfers; (2) whether the
policy applies to arrangements in which a service provider serves as a
communications link but does not process the transfers; (3) whether the
policy applies when an institution contracts with a third party to
process transfers that subsequently are routed through the participant
to the Reserve Bank; and (4) whether the policy applies to arrangements
in which the service provider is located outside the United States.
In considering modifications to the Fedwire third-party access
policy, the Board has determined that it would be useful to undertake a
broader review of supervisory policies that should be applicable to a
larger range of outsourcing arrangements. The staff has begun to review
broader issues relating to outsourcing generally, including, for
example, the extent to which termination backup requirements should
apply to other critical functions outsourced by banks and whether
foreign service provider arrangements should be subject to special
conditions. It is possible that the Board will modify further the
Fedwire third-party access policy following completion of the
[[Page 42419]]
study. The Board believes, however, that any additional modifications
to this policy are likely to be consistent with the changes made today
to reduce further the costs imposed by the policy.
II. Provision-by-Provision Analysis
The following identifies each provision of the revised Fedwire
third-party access policy and discusses how and why it differs from the
original policy provision.
A. Scope
Revised Provision
The Board will allow third-party access arrangements whereby a
sending or receiving institution (``the participant'') designates
another depository institution or other entity (``the service
provider'') to initiate, receive, and/or otherwise process Fedwire
funds transfers or book-entry securities transfers that are posted to
the participant's reserve or clearing account held at the Federal
Reserve, provided the following conditions are met: 3
\3\ This policy applies to third-party access arrangements in
which an office of the participant located outside the U.S. acts as
service provider by initiating, receiving, or otherwise processing
Fedwire transfers on behalf of the U.S. participant.
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Original Provision
The Board will allow, under certain conditions, arrangements by
which a depository institution or other entity (``the service
provider'') could initiate Fedwire transfers from the Federal Reserve
account of another depository institution (``the participant''). Such
arrangements will be permitted provided:
The original policy applied to arrangements where funds transfers
or book-entry securities transfers were charged or credited to a
depository institution's reserve or clearing account held at the
Federal Reserve and for which the depository institution did not
provide its transfer instructions directly to the Federal Reserve, but
rather transmitted its instructions indirectly through another entity.
The revised policy applies to the arrangements described above, as well
as arrangements where an institution contracts with a third party to
process transfers that subsequently are routed through the participant
to the Reserve Bank. The Board believes that, whenever a service
provider plays a role in processing Fedwire funds transfers or book-
entry securities transfers that affect the participant's reserve or
clearing account, the arrangement should be subject to the third-party
access policy. The revised policy governs all arrangements in which a
service provider has the operational ability to add or modify transfer
instructions that will be posted to the participant's reserve or
clearing account held at the Federal Reserve. As a result,
communications carriers whose sole job is to transmit transfer
instructions between entities are excluded from this policy.
The original policy is silent on whether the service provider can
be located outside the United States. The Reserve Banks have not
approved any such arrangements; however, several inquiries have been
received during the last few years. Such arrangements raise a number of
supervisory issues. In addition, because the original third-party
access policy applies only to arrangements where the service provider
is a separate legal entity from the participant, a Fedwire participant
could designate an office of its bank located outside the U.S. to
process Fedwire transfers on its behalf without obtaining prior
approval from the Reserve Bank. The Reserve Bank and the primary
regulator may be unaware of such an arrangement until discovered in the
course of an examination. The Board believes that many of the issues
that arise with respect to foreign service providers also arise when a
foreign office of a Fedwire participant processes that participant's
Fedwire transfers. Consequently, the Board has broadened the scope of
the policy to include such arrangements. Any existing arrangements
involving a foreign service provider must be reported promptly to the
participant's Reserve Bank. The Reserve Bank will work with the
participant and its primary supervisor to determine the extent to which
the arrangement complies with the policy and the appropriateness of the
arrangement. No new arrangements involving the outsourcing of Fedwire
processing to a foreign service provider will be approved by the
Reserve Banks pending the completion of the Board's analysis of issues
associated with foreign service provider arrangements.
B. Control of Credit-Granting Process
Revised Condition (#1)
The participant retains operational control of the credit-
granting process by (1) individually authorizing each funds or
securities transfer, or (2) establishing individual customer
transfer limits and a transfer limit for the participant's own
activity, within which the service provider can act. The transfer
limit could be a combination of the account balance and established
credit limits. For the purposes of this policy, these arrangements
are called ``line-of-credit arrangements.''
Original Condition (#1)
The institution whose account is being charged (the
``institution'') retains control of the credit-granting process by
individually approving each transfer or establishing credit limits
within which the service provider can act.
Original Condition (#12)
No individual with decision-making responsibilities relating to
the funds-transfer area may hold such a position in more than one
affiliated institution participating in an approved arrangement.
The Board believes that it is important for the participant to
retain operational control of the credit-granting process under a
third-party access arrangement. The revised language (1) clarifies that
this condition applies to both funds transfer and book-entry securities
transfer arrangements; (2) removes the restriction that line-of-credit
arrangements are permissible only where the service provider and
participant are affiliated organizations; 4 and (3) deletes the
condition in the original policy that no individual with decision-
making responsibilities related to Fedwire may hold such a position in
multiple institutions participating in the arrangement.
\4\ In original condition 2, line-of-credit arrangements were
limited to participants that used affiliated service providers.
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The Board believes that the participant can retain operational
control of the credit-granting process either by individually
authorizing each transfer based on specific parameters (e.g., customer
account balance and/or available credit line) or by permitting the
service provider to make the same decisions the participant would have
made based on the specific parameters established by the participant.
Therefore, the Board does not believe it is necessary to limit the
circumstances in which line-of-credit arrangements can be used. The
revised policy clarifies further that the transfer limits in line-of-
credit arrangements must be established by the participant for
individual customer activity and for the participant's own activity.
Some participants may prefer to establish lines of credit for certain
categories of transfers (e.g., customer activity), but to authorize
individual transfers for other categories (e.g., the participant's own
activity).
The original provision prohibiting an individual with Fedwire-
related responsibilities from holding such a position in multiple
institutions participating in the arrangement was intended to ensure
that a participant retains control of its reserve account and of its
credit-granting function and does
[[Page 42420]]
not effectively relinquish control of these functions to the service
provider. The Board believes that this condition has posed problems in
cases where an individual with Fedwire-related responsibilities is an
officer of multiple holding company affiliates that wished to establish
Fedwire third-party access arrangements. The Board has deleted this
specific provision from the revised policy, but continues to believe
that it is important that the participant retain operational control of
the establishment of criteria for approving Fedwire transfers handled
by the service provider.
C. Transfers That Would Exceed the Established Transfer Limit
Revised Condition (#2)
In funds transfer line-of-credit arrangements, the service
provider must have procedures in place and the operational ability
to ensure that a funds transfer that would exceed the established
transfer limit is not permitted without first obtaining the
participant's approval. In book-entry securities transfer line-of-
credit arrangements, the service provider must have procedures in
place and the operational ability to provide the participant with
timely notification of an incoming transfer that exceeds the
applicable limit and must act upon the participant's instructions to
accept or reverse the transfer accordingly.
Original Condition (#3)
The service provider must not permit or initiate transfers that
would exceed individual credit limits without first obtaining the
institution's permission.
The Board believes that it is important to retain the condition
that customer credit limits are operationally binding on the service
provider and that the service provider may not exceed those limits
without the participant's permission. The language of this condition
has been revised to distinguish between arrangements involving Fedwire
funds transfers and book-entry securities transfers. In a funds
transfer, the participant's reserve or clearing account held at the
Reserve Bank is debited when the transfer is processed; therefore,
transfer limits or controls must be in place before the transfer is
made. In a book-entry securities transfer, however, the participant's
reserve/clearing account is debited for each incoming transfer;
therefore, transfer limits can only be monitored in an ex post fashion.
As a result, the service provider must be able to notify the
participant in a timely manner about incoming transfers that exceed the
applicable limit so that the participant can instruct the service
provider to accept or reverse the transfer accordingly.
D. Posting Transfers and Responsibility for Account Management
Revised Condition (#3)
Transfers will be posted to the participant's reserve or
clearing account held at the Federal Reserve, and the participant
will remain responsible for managing its Federal Reserve account,
with respect to both its intraday and overnight positions. The
participant must be able to monitor transfer activity conducted on
its behalf.
Original Condition (#5)
All funds-transfer activity must be posted to the institution's
account, and the institution will remain responsible for its
account.
Original Condition (#9)
The institution must have the ability to monitor transfers being
made on its behalf.
The revised condition (1) eliminates the language that limits the
condition to funds-transfer activity; (2) clarifies that responsibility
for management of the participant's reserve or clearing account,
including control over daylight overdrafts, remains with the
participant; and (3) incorporates the requirement that the participant
be able to monitor its transfer activity.
E. Board of Directors' Approval
Revised Condition (#4)
The participant's board of directors must approve the role and
responsibilities of a service provider(s) that is not affiliated
with the participant through at least 80 percent common ownership.
In line-of-credit arrangements, the participant's board of directors
must approve the intraday overdraft limit for the activity to be
processed by the service provider and the credit limits for any
inter-affiliate funds transfers.5
\5\ In cases where a U.S. branch of a foreign bank wishes to be
a participant in an arrangement subject to this policy, and its
board of directors has a more limited role in the bank's management
than a U.S. board, the role and responsibilities of the service
provider should be reviewed by senior management at the foreign
bank's head office that exercises authority over the foreign bank
equivalent to the authority exercised by a board of directors over a
U.S. depository institution.
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Original Condition (#4)
The service provider must have the operational ability to ensure
that the aggregate funds-transfer activity of the institution does
not result in daylight overdrafts in excess of the institution's
cap.
Original Condition (#6)
The institution's board of directors must approve the specifics
of the arrangement, including (a) the operational transfer of its
funds-transfer activity to the service provider, (b) the net debit
cap for the activity to be processed by the service provider, and
(c) the credit limits for any inter-affiliate funds transfers.
The Board has modified this condition to: (1) Limit the
participant's board of directors' review of the roles and
responsibilities of the service provider to arrangements where the
service provider is not affiliated with the participant; (2) eliminate
the language that limits the condition to funds-transfer arrangements;
(3) clarify that certain issues to be considered by the board of
directors are pertinent only to line-of-credit arrangements; and (4)
encompass arrangements where more than one service provider handles a
participant's transfer activity. The Board also acknowledges that the
board of directors of a foreign bank might have more limited
responsibilities than those typical of a U.S. board and has indicated
that whatever body exercises similar authority in these situations
would be the appropriate decision-maker with respect to the provisions
of this policy that fall within the purview of a participant's board of
directors.
F. Backup
Revised Condition (#5)
The Board expects all participants to ensure that their Fedwire
operations could be resumed in a reasonable period of time in the
event of an operating outage, consistent with the requirement to
maintain adequate contingency backup capabilities as set forth in
the interagency policy (FFIEC SP-5, July 1989). A participant is not
relieved of such responsibility because it contracts with a service
provider.
Revised Condition (#6)
In cases where the service provider is not affiliated with the
participant through at least 80 percent common ownership, the
participant must be able to continue Fedwire operations if the
participant is unable to continue its service provider arrangement
(e.g., in the event the Reserve Bank or the participant's primary
supervisor terminates the service provider arrangement).
Original Condition (#8)
The institution must have adequate backup procedures and
facilities to cover equipment failure or other developments
affecting the adequacy of the service being provided. This backup
must provide the Reserve Bank with the ability to terminate a
service-provider arrangement.
The original backup requirement had two facets: (1) contingency
backup to enable recovery in the event of an operating outage and (2)
the ability of the participant to continue transfer activity in the
event the arrangement with the service provider is terminated. The
Board expects all Fedwire participants to maintain adequate contingency
backup capabilities in accordance with the policy adopted by the
federal banking regulatory agencies; a participant is not relieved of
such responsibility because it contracts with a service provider.
Revised condition #5 references explicitly the interagency policy that
requires a depository
[[Page 42421]]
institution to have contingency backup capabilities more broadly than
for Fedwire processing.
The original ``termination backup'' requirement provided the
participant's Reserve Bank with the flexibility to terminate an
arrangement if it determined that the service provider was in a
precarious financial condition, was performing its responsibilities in
an unsafe and unsound manner, or was otherwise jeopardizing the
condition of the participant. The termination backup requirement can be
satisfied either by (1) retaining the capability to perform the
functions internally that have been delegated to the service provider;
or (2) making arrangements with an alternate service provider to take
over these functions in the event that the arrangement must be
terminated.
The Board recognizes that the termination backup requirement may
have made third-party access arrangements impractical for some large
institutions, due to the expense required either to have the internal
capability to take over the functions of the service provider or to
arrange with a backup service provider that has the capability and
necessary software to assume these functions on short notice. This
condition could prevent some institutions from benefiting from the cost
savings that could be derived from a third-party access arrangement.
The Board has limited the termination backup requirement to
arrangements in which the service provider is not affiliated with the
participant. Most of the arrangements that have been approved to date
involve affiliated parties. In arrangements where the service provider
is affiliated with the participant, the participant is likely to have
information about the service provider that would enable the
participant to take actions to foster improvements in the financial
condition and/or operating controls of the service provider before the
situation deteriorates to the point that the Reserve Bank or the
participant's primary supervisor would be likely to terminate the
arrangement. The Board believes it is necessary at this time to retain
the termination backup requirement for unaffiliated service provider
arrangements in order to provide the Reserve Bank or the participant's
primary supervisor with a higher level of supervisory control over such
arrangements.
The Board notes that federal banking regulators currently do not
require depository institutions to provide equivalent termination
backup capabilities for other critical functions, such as customer
deposit accounting (e.g., demand deposit accounting, or DDA) and loan
processing, which provide management with information that may be
necessary to approve Fedwire funds transfers and securities transfers.
The Board plans to evaluate, as part of its broader review of
outsourcing generally, the extent to which the ``termination backup''
requirement should apply to other business applications/functions that
are outsourced to a third-party service provider, especially where
there are dependencies between such functions and the Fedwire funds
transfer and securities transfer services.
G. Consistency With Corporate Separateness and Branching Restrictions
Revised Condition (#7)
The participant must certify that the arrangement is consistent
with corporate separateness and does not violate branching
restrictions.
Original Condition (#10)
The institution must provide an opinion of counsel that the
arrangement is consistent with corporate separateness and does not
violate branching restrictions.
The third-party access policy raises potential concerns regarding
maintenance of separate corporate identities between the service
provider and the participant. Moreover, given the definition of
``branch'' as a location at which deposits are received, checks paid,
or money lent, certain third-party access arrangements may raise
questions regarding whether the location of the service provider is
deemed a branch of the participant. The Board believes that the
participant should carefully review the arrangement for consistency
with corporate separateness and state branching restrictions. Although
the participant may desire an opinion of counsel to make this
certification, the Board believes that the participant's certification
that the arrangement is consistent with corporate separateness and
branching restrictions is sufficient and that the Reserve Bank need not
require a copy of an opinion of counsel addressing these issues.
H. Compliance With Applicable Laws and Regulations
Revised Condition (#8)
The participant must certify that the specifics of the
arrangement will allow the participant to comply with all applicable
state and federal laws and regulations governing the participant,
including, for example, retaining and making accessible records in
accordance with the regulations adopted under the Bank Secrecy Act.
Original Condition
None.
In clarifying the scope of the policy, the Board believes it is
important that the participant in a third-party access arrangement
certify that the arrangement will be established in such a way to allow
the participant to comply with all applicable state and federal laws
and regulations, particularly those associated with record retention
and availability of records, as required under the Bank Secrecy Act
regulations (31 CFR Part 103). If, subsequent to establishing an
arrangement, the Reserve Bank receives information that the operations
or activities of the participant or its service provider do not comply
with applicable state and federal laws and regulations, the Reserve
Bank may terminate the third-party access arrangement.
I. Primary Supervisor
Revised Condition (#9)
The participant's primary supervisor(s) must affirmatively state
in writing that it does not object to the arrangement.
Original Condition (#11)
The primary supervisor must not object to the arrangement.
The Board believes that it is important for the participant's
primary supervisor(s) to review, and affirmatively not object to, each
proposed third-party access arrangement. The provision has been
modified further to recognize that some state-chartered institutions
must inform both state and federal supervisors.
J. Audit Program
Revised Condition (#10)
The participant must have in place an adequate audit program to
review the arrangement at least annually to confirm that these
requirements are being met.
Original Condition (#13)
The institution must have in place an adequate audit program to
review the arrangements at least annually to confirm that these
requirements are being met.
The Board continues to believe that, because an agent is effecting
transfers to and from the participant's reserve or clearing account
held at the Federal Reserve and because the arrangement originally
approved may change over time, it is in the interest of the participant
to have its auditors confirm compliance with proper procedures.
[[Page 42422]]
K. Service Provider Examination
Revised Condition (#11)
The service provider must be subject to examination by the
appropriate federal depository institution regulatory
agency(ies).6
\6\ The U.S. federal depository institution regulatory
agency(ies) must be able to examine any aspects of the service
provider as may be necessary to assess the adequacy of the
operations and financial condition of the service provider.
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Original Condition (#2) 7
\7\ The ``affiliation'' requirement for line-of-credit
arrangements is discussed in the context of revised condition 1.
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The service provider must be an affiliate of the institution,
or, if the institution approves each individual transaction, an
unaffiliated company. All service providers must be subject to
examination.
Depository institution service providers are subject to examination
by the institution's primary supervisor. Service providers that are
nonbank subsidiaries of a bank holding company are subject to
examination by the Federal Reserve. Service providers that are not
depository institutions or affiliates of bank holding companies may be
subject to examination pursuant to the Bank Services Corporation
Act.8 Service providers that are subsidiaries of banks are subject
to examination by the parent bank's primary supervisor(s). The Board
believes that the service provider must acknowledge that it is subject
to examination by the appropriate federal depository institution
regulatory agency(ies). The requirement that the service provider be
subject to examination also applies to arrangements where the
participant's service provider arranges for a separate service provider
to handle the participant's Fedwire transfers.
\8\ Section 7(c) of the Bank Services Corporation Act provides
that `` * * * whenever a bank that is regularly examined by an
appropriate Federal banking agency * * * causes to be performed for
itself, by contract or otherwise, any services authorized under this
Act, whether on or off its premises * * * such performance shall be
subject to regulation and examination by such agency to the same
extent as if such services were being performed by the bank itself
on its own premises.''
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L. Agreements
Revised Condition (#12)
The participant and the service provider(s) must execute an
agreement with the relevant Reserve Bank(s) incorporating these
conditions.
Original Condition (#7)
The institution and the service provider must execute an
agreement with the relevant Reserve Banks delineating the terms of
the agreement.
This condition was revised to reflect the possibility that a
participant's transfer activity may be handled operationally by more
than one service provider in a given third-party access arrangement.
The Reserve Banks have indicated that the conditions under which these
arrangements could be established will be set forth in uniform
appendices to the Fedwire funds transfer and book-entry securities
transfer operating circulars. The uniform operating circular appendices
would replace the individual comprehensive legal agreements that are
currently used in most districts; would be easier to modify; and would
govern arrangements of which the Reserve Bank otherwise may not be
aware (for example, arrangements where transfers are processed by a
service provider but transmitted to the Reserve Bank by the
participant). The appendices to the operating circulars will include a
model letter certifying compliance with circular requirements that
would be signed by the participant and the service provider(s). Such a
letter could be useful in the event that a service provider, especially
a non-depository institution, may not have agreed to abide by the terms
of the Reserve Bank operating circular through the general agreement.
The Board believes that it is not necessary for Reserve Banks to obtain
new agreements for existing arrangements because the revised policy is
less restrictive than the original policy.
M. Review and Approval of Proposed Arrangements
Revised Condition (Closing Paragraph)
The Federal Reserve Bank is responsible for approving each
proposed Fedwire third-party access arrangement. In a proposed
arrangement in which the participant is not affiliated through at
least 80 percent common ownership with the service provider and
where the participant is owned by one of the 50 largest bank holding
companies (based on consolidated assets), the Directors of the
Division of Reserve Bank Operations and Payment Systems and the
Division of Banking Supervision and Regulation must concur with the
arrangement.
Original Condition (Closing paragraph)
In order to ensure consistency with the Board's policy, each new
arrangement should be reviewed by the Director of the Division of
Federal Reserve Bank Operations prior to approval by the Reserve
Bank.
The Reserve Banks are responsible for approving proposed Fedwire
third-party access arrangements before they become operational. Under
the original policy, approval of all proposed arrangements was subject
to review by Board staff. The Board believes that, given the number of
existing third-party access arrangements, establishment of such
arrangements has become more routine. Therefore, the Board has
eliminated the requirement for Board staff review of most third-party
access arrangements. The Board has retained, however, the requirement
that Board staff review arrangements where the service provider is
unaffiliated with the participant, and the participant is owned by one
of the 50 largest bank holding companies (based on consolidated assets)
before Reserve Bank approval. The Board believes that greater scrutiny
of this subset of arrangements is warranted due to the significant
value of the Fedwire transfers that would be handled by a service
provider that is not affiliated with the participant.
III. Effective Date
The revised Fedwire third-party access policy becomes effective
immediately. Existing Fedwire arrangements must comply by March 1,
1996. All arrangements established after the effective date must comply
with the policy when established.
IV. 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.
The Federal Reserve Banks' Fedwire funds transfer and book-entry
securities transfer services provide real-time gross settlement in
central bank money. While these services cannot be duplicated by
private-sector service providers, banks can make large-dollar funds
transfers through other systems, such as CHIPS, or through
correspondent book transfers, although these transactions have
attributes that differ from Fedwire transfers. Similarly, there are
private-sector securities clearing and/or settlement systems, 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's third-party access policy places conditions on
arrangements in which a Fedwire participant may contract with another
organization to
[[Page 42423]]
initiate, receive, or otherwise process Fedwire transfers. The Board
has revised the policy to clarify its scope and reduce its
administrative and operational burden. Neither the original nor the
revised policy adversely affects the ability of other service providers
to compete with the Federal Reserve Banks to provide funds transfer or
securities transfer services.
V. Policy Statement
The Board has amended its ``Federal Reserve System Policy Statement
on Payments System Risk'' under the heading ``I. Federal Reserve
Policy'' by replacing ``G. Third-party access arrangements'' with the
following:
G. Fedwire Third-Party Access Policy
The Board will allow third-party access arrangements whereby a
sending or receiving institution (``the participant'') designates
another depository institution or other entity (``the service
provider'') to initiate, receive, and/or otherwise process Fedwire
funds transfers or book-entry securities transfers that are posted to
the participant's reserve or clearing account held at the Federal
Reserve, provided the following conditions are met: 1
\1\ This policy applies to third-party access arrangements in
which an office of the participant located outside the United States
acts as service provider by initiating, receiving, or otherwise
processing Fedwire transfers on behalf of the U.S. participant.
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1. The participant retains operational control of the credit-
granting process by (1) individually authorizing each funds or
securities transfer, or (2) establishing individual customer transfer
limits and a transfer limit for the participant's own activity, within
which the service provider can act. The transfer limit could be a
combination of the account balance and established credit limits. For
the purposes of this policy, these arrangements are called ``line-of-
credit arrangements.''
2. In funds transfer line-of-credit arrangements, the service
provider must have procedures in place and the operational ability to
ensure that a funds transfer that would exceed the established transfer
limit is not permitted without first obtaining the participant's
approval. In book-entry securities transfer line-of-credit
arrangements, the service provider must have procedures in place and
the operational ability to provide the participant with timely
notification of an incoming transfer that exceeds the applicable limit
and must act upon the participant's instructions to accept or reverse
the transfer accordingly.
3. Transfers will be posted to the participant's reserve or
clearing account held at the Federal Reserve, and the participant will
remain responsible for managing its Federal Reserve account, with
respect to both its intraday and overnight positions. The participant
must be able to monitor transfer activity conducted on its behalf.
4. The participant's board of directors must approve the role and
responsibilities of a service provider(s) that is not affiliated with
the participant through at least 80 percent common ownership. In line-
of-credit arrangements, the participant's board of directors must
approve the intraday overdraft limit for the activity to be processed
by the service provider and the credit limits for any inter-affiliate
funds transfers.2
\2\ In cases where a U.S. branch of a foreign bank wishes to be
a participant in an arrangement subject to this policy, and its
board of directors has a more limited role in the bank's management
than a U.S. board, the role and responsibilities of the service
provider should be reviewed by senior management at the foreign
bank's head office that exercises authority over the foreign bank
equivalent to the authority exercised by a board of directors over a
U.S. depository institution.
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5. The Board expects all participants to ensure that their Fedwire
operations could be resumed in a reasonable period of time in the event
of an operating outage, consistent with the requirement to maintain
adequate contingency backup capabilities as set forth in the
interagency policy (FFIEC SP-5, July 1989). A participant is not
relieved of such responsibility because it contracts with a service
provider.
6. In cases where the service provider is not affiliated with the
participant through at least 80 percent common ownership, the
participant must be able to continue Fedwire operations if the
participant is unable to continue its service provider arrangement
(e.g., in the event the Reserve Bank or the participant's primary
supervisor terminates the service provider arrangement).
7. The participant must certify that the arrangement is consistent
with corporate separateness and does not violate branching
restrictions.
8. The participant must certify that the specifics of the
arrangement will allow the participant to comply with all applicable
state and federal laws and regulations governing the participant,
including, for example, retaining and making accessible records in
accordance with the regulations adopted under the Bank Secrecy Act.
9. The participant's primary supervisor(s) must affirmatively state
in writing that it does not object to the arrangement.
10. The participant must have in place an adequate audit program to
review the arrangement at least annually to confirm that these
requirements are being met.
11. The service provider must be subject to examination by the
appropriate federal depository institution regulatory
agency(ies).3
\3\ The U.S. federal depository institution regulatory
agency(ies) must be able to examine any aspects of the service
provider as may be necessary to assess the adequacy of the
operations and financial condition of the service provider.
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12. The participant and the service provider(s) must execute an
agreement with the relevant Reserve Bank(s) incorporating these
conditions.
The Federal Reserve Bank is responsible for approving each proposed
Fedwire third-party access arrangement. In a proposed arrangement in
which the participant is not affiliated through at least 80 percent
common ownership with the service provider and where the participant is
owned by one of the 50 largest bank holding companies (based on
consolidated assets), the Directors of the Division of Reserve Bank
Operations and Payment Systems and the Division of Banking Supervision
and Regulation must concur with the arrangement.
By order of the Board of Governors of the Federal Reserve
System, August 9, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-20136 Filed 8-14-95; 8:45 am]
BILLING CODE 6210-01-P
