[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]



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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.<SUP>1</SUP> 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.<SUP>2</SUP> 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.<SUP>3</SUP> 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

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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.<SUP>4 </SUP><SUP>5</SUP>  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

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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