34888 Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices

1The Committee on Employee Benefits considers

matters relating to the Retirement, Thrift, LongTerm Disability Income, and Insurance Plans for

employees of the Federal Reserve System.

1Report of the Committee on Interbank Netting

Schemes of the Central Banks of the Group of Ten

Countries (Bank for International Settlements,

November 1990) presented a set of minimum

standards for netting schemes (Lamfalussy

Minimum Standards).

FEDERAL RESERVE SYSTEM

Sunshine Act Meeting

AGENCY HOLDING THE MEETING:

Committee on Employee Benefits of the

Federal Reserve System.1

TIME AND DATE: 2:30 p.m., Wednesday,

July 1, 1998.

PLACE: Marriner S. Eccles Federal

Reserve Board Building, 20th and C

Streets, NW., Washington, D.C. 20551.

STATUS: Closed.

MATTERS TO BE CONSIDERED:

1. Proposals relating to Federal

Reserve System benefits.

2. Issues relating to potential

litigation.

3. Any items carried forward from a

previously announced meeting.

CONTACT PERSON FOR MORE INFORMATION:

Lynn S. Fox, Assistant to the Board;

202–452–3204.

SUPPLEMENTARY INFORMATION: You may

contact the Board’s Web site at http://

www.bog.frb.fed.us for an electronic

announcement of this meeting. (The

Web site also includes procedural and

other information about the meeting.)

Dated: June 24, 1998.

Robert deV. Frierson,

Associate Secretary of the Board.

[FR Doc. 98–17236 Filed 6–24–98; 12:40 pm]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–0987]

Policy Statement on Privately Operated

Multilateral Settlement Systems

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Policy statement.

SUMMARY: As part of its payment system

risk reduction program, the Board of

Governors is adopting a policy

statement on Privately Operated

Multilateral Settlement Systems, which

integrates its existing policies on

Privately Operated Large-Dollar

Multilateral Netting Systems and Private

Small-Dollar Clearing and Settlement

Systems into one comprehensive policy.

EFFECTIVE DATE: January 4, 1999.

FOR FURTHER INFORMATION CONTACT:

Jeffrey C. Marquardt, Assistant Director

(202/452–2360) or Paul Bettge, Assistant

Director (202/452–3174); Oliver Ireland,

Associate General Counsel (202/452–

3625); for the hearing impaired only,

Telecommunications Device for the

Deaf, Diane Jenkins (202/452–3544).

SUPPLEMENTARY INFORMATION:

I. The Proposed Policy Statement

In November, 1997, the Board issued

for public comment a proposal to adopt

a policy statement on Privately

Operated Multilateral Settlement

Systems (62 FR 60713, Nov. 12, 1997).

The proposed policy statement was

designed to integrate several of the

Board’s existing policies on payment

system risk into a more comprehensive

and consistent framework. The

proposed policy statement addressed

risks in multilateral settlement

arrangements for both ‘‘small-dollar’’

payments, such as clearinghouses for

checks and automated clearing house

(ACH) payments and systems for

settlement of ‘‘large-dollar’’ payments,

which are typically used for interbank

and financial market transactions. The

proposal was intended to provide a

flexible, risk-based approach to risk

management in these systems and not

mandate uniform, rigid requirements for

all systems.

The proposed policy statement

identified fundamental categories of

risk, including credit, liquidity,

operational, legal, and systemic risk,

that may arise in different types of

multilateral settlement arrangements.

Systems would be expected to address

any material risks in each category. For

each type of risk, the policy statement

included first, a discussion of risk

factors designed to identify those

multilateral settlement systems where

risks may be heightened relative to other

means of settlement. Second, threshold

criteria were intended to identify more

clearly systems in which these risk

factors were not likely to arise. These

criteria were intended to simplify

administration of the policy and reduce

potential regulatory burden on systems

where the Board’s analysis suggests that

risks may be minimal. (An Appendix

published with the proposed policy

statement also provided examples of the

likely application of the policy

statement to specific types of systems.)

Third, the proposed policy statement

provided illustrations of the types of

risk management measures that may be

appropriate given the particular risk

factors identified. Particularly for

multilateral settlement systems that are

not likely to raise systemic risk

concerns, these illustrations were

intended to provide flexible guidance

rather than an exhaustive or prescriptive

set of requirements, such that systems

would be encouraged to implement risk

management measures commensurate

with the scale and scope of risks.

For multilateral settlement systems

that were considered sufficiently large

to raise potential systemic risk concerns,

the proposed policy statement would

have imposed higher risk management

standards. Those larger systems that met

proposed systemic risk criteria would

have been expected to demonstrate

robust policies and procedures for

addressing settlement failures and

disruptions. Certain of those larger

multilateral settlement systems would

also have been required to meet the

same requirements of the Board’s

existing policy statement on Privately

Operated Large-Dollar Multilateral

Netting Systems (Large-Dollar Policy

Statement), including meeting the

Lamfalussy Minimum Standards.1

The Board also proposed to repeal its

existing risk policies for certain ‘‘smalldollar’’ payments clearing and

settlement arrangements. The earlier

policies were designed to address

specific situations that arose in the

Federal Reserve’s provision of net

settlement services to depository

institutions. The proposed policy

statement would eliminate the need for

such policies.

II. The Final Policy Statement

The Board is adopting a final policy

statement that retains the structure and

analytical approach of the original

proposal. The policy statement replaces

two existing components of the Board’s

Policy Statement on Payments System

Risk, namely those for ‘‘Privately

Operated Large-Dollar Multilateral

Netting Systems’’ and ‘‘Private SmallDollar Clearing and Settlement

Systems,’’ which are being repealed

concurrently with the effective date of

this policy statement. As in the

proposal, multilateral settlement

systems subject to the policy would be

required to address risk factors using a

set of basic analytical risk categories.

The final policy statement reflects

important modifications to the original

proposal designed to improve the clarity

and effectiveness of the policy and to

address concerns identified by

commenters.

Scope and Administration of the Policy

The final policy statement includes a

general threshold for application of the

policy in order to eliminate potential

administrative burden on those smaller
Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices 34889

2This total does not include comment letters from

Federal Reserve Banks.

3National Organization of Clearing Houses and

National Automated Clearing House Association,

Report of the Settlement Risk Management Task

Force: Findings and Recommendations, 1996;

General Accounting Office, Payments, Clearance,

and Settlement: A Guide to the Systems, Risks, and

Issues, June 1997, GAO/GGD–97–73.

systems that are not likely to pose

systemic risks or other significant risk

concerns. Specifically, the policy will

apply to those multilateral settlement

systems that settle payments with an

aggregate gross value of more than $5

billion on any day. The Board believes

that systems with activity below this

threshold and their members may

nonetheless find the framework and

analysis of the policy statement helpful

in evaluating and managing risks.

Risk Factors and Risk Management

Measures

The final policy statement largely

retains the discussions of credit,

liquidity, operational, and legal risk

factors and risk management measures

in the proposal. Technical modifications

have been made in a number of areas,

however, to clarify the policy and

address concerns of commenters, as

discussed further below. In conjunction

with the limitation on the scope of the

policy discussed above, the final policy

has been simplified by elimination of

the proposed separate Systemic Risk

category.

As in the proposed policy statement

and the Board’s existing Policy

Statement on Payments System Risk,

certain systems are required to meet the

Lamfalussy Minimum Standards.

However, under the final policy, the

Board will use several factors to

determine whether a system should

meet the Lamfalussy Minimum

Standards. These factors include the

settlement of predominantly large-value,

interbank or other financial market

transactions, such as foreign exchange

transactions, or the existence of credit or

liquidity exposures that have the

potential to raise significant systemic

risk concerns. These factors should

ensure that the Lamfalussy Minimum

Standards will be applied where

systemic risks exist, but allow for more

flexible risk management in other

systems. The Board may be required to

make infrequent case-by-case

determinations in this regard. In

addition, the final policy strongly

encourages systems, in meeting the

Lamfalussy Minimum Standards, to

establish real-time risk controls and

other specific risk management

measures, as currently described in the

Board’s existing Large-Dollar Policy

Statement. However, alternative risk

management measures that provide an

equivalent level of assurance that the

Lamfalussy Minimum Standards will be

met will also be considered. The final

policy also includes modified

terminology in restating the Lamfalussy

Minimum Standards to reflect the

policy’s broader application to

‘‘settlement’’ systems rather than to

‘‘netting’’ systems only.

III. Summary of Comments

The Board received 26 public

comment letters on its proposed policy

statement.2 The commenters included

nine commercial banking organizations,

seven clearing organizations and

associations, seven retail payment

networks, and three trade associations.

General Comments

Commenters generally supported the

policy’s flexible approach to addressing

risks in multilateral settlement

arrangements. Many also supported the

integration of the Board’s existing policy

statements within a unified, analytical

framework. However, a number of

commenters expressed concerns about

the inclusion of clearinghouses for

small-dollar or traditionally retailoriented payments, such as checks, ACH

payments, and automated teller

machine (ATM) and credit card

transactions, within a comprehensive

policy on settlement risk. Many of these

commenters focused on the

requirements for real-time risk controls

associated with the Lamfalussy

Minimum Standards (discussed further

below) and on the implication that

small-dollar payments settlement

arrangements may pose systemic risk.

Three commenters felt that there was no

rationale for unifying the large-and

small-dollar policies for settlement

arrangements.

A number of commenters described

risk management measures used in their

system and requested exemptions from

the policy based on those measures.

Several commenters requested that

particular types of systems or payments

be exempt from the policy altogether,

such as credit card or ATM card

settlement arrangements. Several

commenters felt that the policy was too

vague and did not provide sufficient

guidance regarding measures that would

be adequate for compliance with the

policy.

The limitation on the scope of the

policy to systems with daily payment

activity above $5 billion should address

concerns expressed by commenters

about the potential burden of the policy

statement on smaller, retail-oriented

systems. Under the policy, only the

largest systems will need to complete an

analysis of credit, liquidity, operational,

and legal risks.

For systems subject to the policy

statement, the Board believes that the

flexible approach set out in the policy,

while requiring more careful analysis on

the part of the clearinghouses than

would a more rigid set of requirements,

is the most likely to lead to appropriate

risk management measures

commensurate with the level and nature

of risks in different systems. The Board

emphasizes that the policy does not

necessarily imply that any particular

system needs to make changes to its

policies or procedures. In particular, for

some systems covered by the policy, the

risk factors described in the policy

statement may not be significant. For

systems that do exhibit one or more risk

factors, the types of risk management

measures described by a number of

commenters are likely to be sufficient to

meet the requirements of the policy

statement. Moreover, the new policy is

likely to be less burdensome than the

Board’s existing payment system risk

policies for small-dollar payments

arrangements because it does not

contain specific risk management

requirements for these systems. The

final policy also clarifies that, in

general, the Board does not believe that

retail-oriented systems need to meet

fully the Lamfalussy Minimum

Standards and implement real-time risk

controls.

Six commenters requested that the

Board reference and endorse other

reports on payment system risk,

including one report on settlement risk

issued by a private-sector task force (the

NACHA/NOCH Report) and a General

Accounting Office report.3 These reports

include useful background information

and insights on certain aspects of

payment system risk. Although many of

the findings of the NACHA/NOCH

Report are consistent with those in this

policy statement, the Board does not

believe that it would be appropriate to

attempt to incorporate these findings

within this policy statement.

Specific Issues on Which the Board

Sought Comment

1. Identification of Material Risks;

Threshold Criteria

Most commenters felt that the risk

categories and descriptions of risk

factors and risk management measures

reasonably captured the features of

multilateral settlement systems likely to

lead to greater settlement risk (with the

exception of the Systemic Risk category,

discussed below). Two commenters

requested that definitions of major risks
34890 Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices

be included in the policy. The final

policy includes brief definitions of

credit, liquidity, operational, and legal

risks in the context of settlement risk

management.

As noted above, the proposed policy

statement included ‘‘threshold criteria’’

for each risk category to distinguish

systems not likely to pose material risk

factors. Many commenters requested

clarification of the definition of certain

of the thresholds. A number of

commenters described certain features

of their system and requested that

systems with these features be exempt

from the policy. Others noted that

certain risk factors, such as loss-sharing

arrangements, would in many cases not

give rise to material risks for

participants given the small size of

potential losses. A number of

participants felt that the netting factor

was not a useful indication of liquidity

risk.

The original intent of the threshold

criteria was to provide simple, de

minimis exclusions for systems where

risks were not likely to be material.

Questions raised by commenters

indicate that these criteria may not

prove to be as simple to implement as

originally intended. The limitation on

the scope of the policy to systems with

daily payment activity above $5 billion

should address many of the concerns of

commenters. The final policy thus does

not include separate threshold criteria,

although it retains the closely related

discussion of risk factors.

Some commenters requested that the

Board clarify that not all risk

management measures listed under the

discussion of risk management

measures are required to address a

particular risk factor. The final policy

clarifies that this is the case.

Some commenters, such as ATM

networks, requested greater specificity

on which risk management measures

would be required for their systems in

order to be considered in compliance

with the policy statement. Others

requested that the Board confirm that

certain risk measures used by their

system would be considered sufficient

to address a particular risk factor in all

cases. For example, two commenters

requested that the Board confirm that

credit card systems do not exhibit legal

risk by virtue of their operating rules;

other commenters requested that use of

the Federal Reserve’s net settlement

service be considered adequate

protection against legal risk. Some

commenters requested clarification on

the acceptability of gross versus net

recasts of payments in a settlement

failure situation.

As noted above, the limitation on the

scope of the policy to the largest

systems should address many of the

concerns of commenters. Even for these

larger systems, the Board believes that

because different systems may

implement different risk management

measures appropriate to the scale of

risks and the nature of their operations,

additional prescriptive requirements

would not be appropriate for all systems

and would undermine the flexible

approach of the policy. Moreover, the

Board is not in a position to confirm

that particular measures adopted by

particular systems, such as specific time

frames for settlement, provisions of

system rules, or use of any particular

settlement services, would be sufficient

to address particular risk factors

independent of detailed knowledge of

the operations and other features of the

particular system on an ongoing basis.

However, the final policy clarifies that

a system that exhibits one or more risk

factors does not necessarily need to

enhance its risk management policies

and procedures if existing arrangements

are adequate to address the particular

risk factor.

2. Systemic Risk Criteria and Risk

Management Measures

The proposed policy set out dollar

thresholds for identifying systems that

have the potential to pose systemic risk.

The Board requested comment on the

thresholds used to identify those

systems with the potential to pose

systemic risk, as well as on the risk

management measures specified for

such systems. Commenters suggested a

range of different criteria that may be

indicative of systemic risk, including

gross and net settlement volumes,

settlements relative to individual

participants’ capital, and the

characteristics of underlying payments.

Some commenters noted that a uniform

threshold was inappropriate, as

systemic risk could depend on many

factors. Commenters also requested

clarification on risk management

measures, including the application of

the Lamfalussy Minimum Standards.

To simplify the analysis and

assessment of risks and address

concerns expressed by commenters, the

final policy does not include a separate

component for ‘‘Systemic Risk.’’ As

noted earlier, the overall scope of the

policy has also been limited to systems

with aggregate gross daily payment

activity above $5 billion. This threshold

is also consistent with suggestions made

by some commenters for identifying

systems that may pose systemic risk.

The Board considered other thresholds,

such as those based on settlement

exposures relative to the capital of

participants, but concluded that such

thresholds would be overly complex

and burdensome as a means of

identifying systems that are subject to

the policy statement (as well as those

that are not).

The Board continues to believe that

the Lamfalussy Minimum Standards

provide important guidance for

addressing settlement risk in

multilateral settlement systems where

failure to settle net obligations as and

when expected could have systemic

consequences. However, the

requirement that a system be capable of

settling all positions in the event of the

default of the largest single participant

may not be necessary for certain

systems. Although large check, ACH,

and credit card settlement

arrangements, for example, should

demonstrate sound risk management

measures, the Board does not believe

that all of the requirements of the

Lamfalussy Minimum Standards are

generally necessary for these systems.

Settlement obligations for individual

participants are not of the same

magnitude as in traditional large-value

payment systems, and credit and

liquidity exposures are typically

diversified over large numbers of

participants. In many cases, there are

reliable and timely alternatives to

settlement through the clearinghouse,

particularly for check and ACH clearing

and settlement arrangements.

The Board will, therefore, apply

additional factors to determine whether

systems must meet the Lamfalussy

Minimum Standards. These factors

include settlement of high volumes of

large-value, interbank or other financial

market transactions, such as foreign

exchange transactions, or significant

systemic credit or liquidity risks.

The proposed policy enumerated the

five implementation measures,

including real-time controls and net

debit caps, required of systems currently

subject to the Lamfalussy Minimum

Standards. Many commenters felt that

real-time interbank risk controls and

bilateral credit limits were generally not

feasible or desirable for retail payment

systems.

The modifications to the proposal

discussed above should obviate these

concerns. In addition, to provide

additional flexibility, the final policy

has been modified to permit alternative

risk management controls that provide

an equivalent level of certainty that the

Lamfalussy Minimum Standards can be

met. The final policy also clarifies that,

as in the Board’s existing policy for

large-dollar multilateral netting systems,

centrally managed limits between the
Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices 34891

4These procedures are described in the Board’s

policy statement ‘‘The Federal Reserve in the

Payments System,’’ as revised in March 1990. (55

FR 11648, March 29, 1990).

system and each participant would be

considered equivalent to bilateral limits

when the system itself acts as a central

counterparty or otherwise guarantees

settlement. This is also consistent with

the Board’s approach under Regulation

F, where institutions are required to set

bilateral limits on credit and liquidity

exposures to correspondents and other

counterparties.

3. Usefulness of an Appendix

Most commenters felt that the

Appendix to the proposed policy

containing examples of application of

the policy was useful, although several

commenters disagreed. Given the

limitation on the scope of the final

policy, the Board does not believe that

such examples are necessary. Thus, the

final policy does not include an

Appendix.

Other Comments

1. Administration and Enforcement of

the Policy Statement

A number of commenters raised

questions about the administration and

enforcement of the policy statement.

Two commenters stated that the Board

should not apply or enforce the policy

through provision of Federal Reserve

net settlement services. Several

commenters encouraged the

development of interagency supervisory

examination procedures to provide a

consistent, objective approach to

enforcement of the policy statement. A

few commenters requested that the legal

status of the policy statement be

clarified, and that an appeals process be

specified for actions taken under the

policy statement.

Like other components of the Board’s

Policy Statement on Payments System

Risk, this policy statement is not a

regulation, but rather provides the

framework that the Board expects to use

when taking action on matters within its

jurisdiction. The Board expects to

administer the policy statement through

its existing authority, including its

supervisory jurisdiction over

institutions such as state member banks

and bank holding companies, as well as

Federal Reserve service relationships,

where appropriate. The assessment of

compliance with the policy statement

will not be based on the use of any

particular type of Federal Reserve net

settlement service, but rather on

systems’ risk factors and risk

management policies. The avenues for

appealing actions under the policy

would be the same as in the Board’s

existing supervisory or service

relationships. Given the limited scope of

the final policy, the Board does not

believe that interagency examination

procedures are needed at this time.

Two commenters asked that the Board

clearly specify any reporting

requirements for gross and net

settlement data and position data. The

final policy includes a clarification as to

the type of data that may be requested.

2. Repeal of Existing Small-Dollar

Policies

Five commenters objected to the

perceived withdrawal of the Board’s

approval under the Board’s existing

payment system risk policies for smalldollar systems. Some of these

commenters requested that a program of

certification of compliance with the

policy statement be developed in lieu of

these ‘‘approvals.’’

The ‘‘approvals’’ referred to by

commenters represent previous

determinations by the Board that

particular systems may use the Fedwirebased net settlement services across

multiple Federal Reserve Districts. In

1990, the Board established a set of

conditions, embodied in the current

Payments System Risk policy for

‘‘small-dollar’’ systems, for the use of

this service. Subsequent applications for

cross-District net settlement services

have been reviewed under this policy.

The conditions in the policy were

designed in large part to address

specific concerns about risk to the

Federal Reserve in providing crossDistrict net settlement services.

Although the Board is repealing its

existing small-dollar policies

concurrently with the issuance of this

policy statement, the Board is not

repealing the prior approval of any

system to use the Fedwire-based, crossDistrict net settlement service in

conjunction with issuance of this

policy. In general, such cross-District

systems may continue to use the

Fedwire-based net settlement service.

As with any system subject to this

policy, regardless of whether it uses the

Fedwire-based net settlement service,

another Federal Reserve net settlement

service, or another settlement method,

appropriate enforcement actions will be

considered if the system is found to be

not in compliance with the policy. The

Board also notes that approval to use the

cross-District net settlement service or

any other Federal Reserve service does

not imply Federal Reserve endorsement

of a particular system or of its risk

management arrangements, and should

not be used to communicate any such

endorsement to participants or potential

participants. Moreover, the Board does

not anticipate formally certifying

compliance of systems under the policy,

as this would be likely to reduce the

normal incentives for participants to

monitor and manage the risk in systems

in which they participate.

Effective Date

The policy statement will be effective

January 4, 1999 to permit systems

subject to the policy a six-month period

to assess and ensure their compliance.

Although the Board does not expect that

compliance with the policy statement

will necessitate operational changes for

the few systems that will fall within its

scope, the Board recognizes that systems

may currently have other critical efforts

underway, such as preparation for the

century date change. As a result, the

Board will consider extending the

effective date on a case-by-case basis for

systems that can demonstrate significant

resource demands due to other critical

efforts.

Competitive Impact Analysis

The Board has established procedures

for assessing the competitive impact of

rule or policy changes that have a

substantial impact on payments system

participants.4 Under these procedures,

the Board will assess whether a change

would have a direct and material

adverse effect on the ability of other

service providers to compete effectively

with the Federal Reserve in providing

similar services due to differing legal

powers or constraints, or due to a

dominant market position of the Federal

Reserve deriving from such differences.

If no reasonable modifications would

mitigate the adverse competitive effects,

the Board will determine whether the

anticipated benefits are significant

enough to proceed with the change

despite the adverse effects.

The Board does not believe that the

adoption of this policy statement will

have a direct and material adverse

impact on the ability of other service

providers to compete effectively with

the Reserve Banks’ payments services.

The repeal of the Board’s existing

policies for small-dollar payments

clearing arrangements, together with the

Board’s proposal for an enhanced net

settlement service, should reduce costs

and other potential barriers for private

check and ACH clearing and settlement

arrangements that compete with the

Federal Reserve. While the Reserve

Banks are not subject to this policy

statement, the Board notes that

settlement risk exposures arising from

services provided by central banking

organizations are inherently different

than for private-sector organizations. In
34892 Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices

18See 12 CFR 206.

19The gross value of payments settled refers to

the total dollar value of individual payments or

transactions that are settled in the system, which

represents the sum of total debits or total credits to

all participants prior to any netting of settlement

obligations. ‘‘On-us’’ transactions that do not

require interbank settlement, but may in some cases

be processed by the system, may be excluded for

purposes of these calculations. Where a system

conducts multiple settlements per day, these

settlements should be aggregated for purposes of

this calculation if they are conducted among the

same group of participants subject to the same rules

and procedures.

addition, the Reserve Banks are subject

to Part I of the Policy Statement on

Payments System Risk, which requires

them to implement an extensive

program of risk controls, including

ongoing monitoring of all depository

institution customers, net debit caps,

and fees that are charged to depository

institutions for the use of intraday

credit.

Federal Reserve System Policy

Statement on Payments System Risk

The Board is amending its ‘‘Federal

Reserve System Policy Statement on

Payments System Risk’’ (57 FR 40455,

September 3, 1992) under the heading

‘‘II. Policies for Private-Sector Systems’’

by removing ‘‘A. Privately Operated

Large-Dollar Multilateral Netting

Systems’’ in its entirety and adding in

its place ‘‘A. Privately Operated

Multilateral Settlement Systems’’ and

removing ‘‘C. Private Small-Dollar

Clearing and Settlement Systems’’ in its

entirety.

II. Policies for Private-Sector Systems

A. Privately Operated Multilateral

Settlement Systems

Introduction

Multilateral settlement systems, such

as clearinghouses and similar

arrangements, may produce important

efficiencies in the clearance and

settlement of payments and financial

contracts. Participants in such systems,

typically depository institutions,

exchange payments for their own

account or the accounts of their

customers in a coordinated fashion and

settle the resulting obligations on a

multilateral, often net, basis.

A variety of credit, liquidity, and

other risks can arise in the clearing and

settlement process that institutions must

manage in the normal course of

business, regardless of the method of

clearing and settlement. Existing

supervisory standards are generally

directed at ensuring that institutions

establish appropriate policies and

procedures to manage such risks. For

example, Federal Reserve Regulation F

directs insured depository institutions

to establish policies and procedures to

avoid excessive exposures to any other

depository institutions, including

exposures that may be generated

through the clearing and settlement of

payments.18

However, the use of multilateral

settlement systems introduces the risk

that a failure of one participant in the

system to settle its obligations when due

could have credit or liquidity effects on

participants that have not dealt with the

defaulting participant. Multilateral

settlement may, in some cases, also have

the effect of altering the underlying

bilateral relationships that arise between

institutions during the clearing and

settlement process. As a result, the

incentives for, or ability of, institutions

to manage and limit the risk exposures

to other institutions, as required under

Regulation F, may be reduced. In

addition, in some cases, there may be no

timely or feasible alternative to

settlement through the multilateral

system in the event that the system fails

to complete settlement, due, for

example, to a participant default. These

factors may create added risks to

participants in certain multilateral

settlement systems relative to other

settlement methods. As a result, a

number of multilateral settlement

systems and their participants have

implemented a variety of risk

management measures to control these

risks.

Clearinghouses also may generate

systemic risks that could threaten the

financial markets or the economy more

broadly. The failure of a system to

complete settlement as and when

expected could generate unexpected

credit losses or liquidity shortfalls that

participants in the system are not able

to absorb. Thus, the inability of one

participant to meet its obligations

within the system when due could lead

to the illiquidity or failure of other

institutions. Further, the disruption of a

large number of payments and the

resulting uncertainty could lead to

broader effects on economic activity. In

addition, as the Federal Reserve has

established net debit caps and fees for

daylight overdrafts, along with other

risk management measures for Federal

Reserve payment services, the potential

exists for intraday credit risks to be

shifted from the Federal Reserve to

private, multilateral settlement

arrangements, either domestically or in

other countries, that have inadequate

risk controls.

The Board believes that these

concerns warrant the application of a

risk management policy to those

multilateral settlement systems that

have the potential to raise systemic

risks, particularly in cases where risks

may not be adequately addressed by

existing supervisory guidance on

management of exposures to other

depository institutions. The Board

recognizes that multilateral settlement

systems differ widely in terms of form,

function, scale, and scope of activities.

Thus, risk management measures may

be designed differently for different

systems. This policy statement,

therefore, is designed to permit market

participants to determine the best means

of addressing risks, within the

guidelines provided. As a general rule,

risk management measures should be

commensurate with the nature and

magnitude of risks involved.

The Board’s adoption of this policy in

no way diminishes the primary

responsibilities of participants in, and

operators of, multilateral settlement

systems to address settlement and other

risks that may arise in these systems. In

addition, the Board encourages all

multilateral settlement systems to

consider periodically cost-effective risk

management improvements, even if not

specifically required under this policy.

Insured depository institutions

participating in multilateral settlement

systems are also expected to limit any

significant bilateral credit and liquidity

exposures to other institutions as

required under Federal Reserve

Regulation F.

Scope and Administration of the Policy

This policy statement applies to

privately operated multilateral

settlement systems or arrangements

with three or more participants that

settle U.S. dollar payments, including

but not limited to systems for the

settlement of checks, automated

clearinghouse (ACH) transfers, credit,

debit, and other card transactions, largevalue interbank transfers, or foreign

exchange contracts involving the U.S.

dollar where the aggregate gross value of

payments is expected to exceed $5

billion on any day during the next 12

months. 19 Further, the policy does not

apply to clearing and settlement systems

for securities or exchange-traded futures

and options, and is not intended to

apply to bilateral relationships between

financial institutions, such as those

involved in traditional correspondent

banking. The Board may also apply this

policy to any non-U.S. dollar system

based, or operated, in the United States

that engages in the multilateral

settlement of non-dollar payments

among financial institutions and that

would otherwise be subject to this

policy.
Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices 34893

20 12 U.S.C. 1861–67.

21Such simulations may include, if appropriate,

the effects of changes in market prices, volatilities,

or other factors.

22For example, in a ‘‘recast’’ of settlements, some

or all transactions involving the defaulting

participant would be removed from the system’s

settlement process, to be settled or otherwise

resolved outside the system. A revised multilateral

settlement with recalculated settlement obligations

would then be conducted among the remaining

participants. In an ‘‘unwind,’’ transactions or

settlement obligations to be settled on the day of the

default for all participants would be removed from

the system.

The Board expects to be guided by

this policy statement in taking action in

its supervisory and operational

relationships with state member banks,

bank holding companies, and

clearinghouse arrangements, including,

for example, the provision of net

settlement services and the

implementation of the Bank Service

Company Act. 20 Systems subject to this

policy may be asked to provide to the

Federal Reserve peak and daily average

aggregate gross and net settlement data

for the most recent 12-month period or

calendar year, as well as peak and daily

average settlement position data for

individual participants.

Risk Factors and Risk Management

Measures

An analysis of settlement risks in any

multilateral settlement system should

begin with the identification of key risks

and exposures. For purposes of this

policy, the general categories of

settlement risk include credit risk—the

risk to participants or to the system that

a participant will be unable to meet

fully its settlement obligation; liquidity

risk—the risk that participants or the

system will have insufficient funds

available to meet settlement obligations

as and when expected; operational

risk—the risk that operational factors in

the settlement process may cause or

exacerbate these credit or liquidity risks

or disrupt the settlement of payments;

and legal risk—the risk that legal

uncertainties in the settlement process

may cause or exacerbate these credit

and liquidity risks.

Systems subject to the policy that

exhibit one or more risk factors should

assess whether their policies and

procedures adequately address those

specific risks, including consideration

of the risk management measures listed

below. In general, risk management

controls should be proportional to the

nature and magnitude of risks in the

particular system. The Board does not

expect that all of the specific risk

management measures listed below will

be necessary or appropriate for all

systems; moreover, there may be other

risk management measures that will

address a particular risk factor. Systems

that exhibit one or more risk factors may

not need to implement any additional

risk controls as a result of this

assessment if existing risk controls

adequately address the particular risk.

If necessary, the Board and its staff

will work with systems to determine

whether changes in their policies or

operations are required and, if so,

whether steps proposed by the system

would adequately address the risk

factor. In some cases, an operational

change may mitigate a particular risk

factor. In other cases, systems may need

to develop or modify written rules,

policies, and procedures that specify the

rights and obligations of participants, as

well as other relevant parties, such as

settlement agents for the system, in the

event that a settlement cannot be

completed as and when expected. Such

rules and procedures should be

disclosed to all participants and their

primary regulatory authorities.

To facilitate the analysis under this

policy, systems may need to develop the

capability to simulate credit and

liquidity effects on participants and on

the system resulting from one or more

participant defaults, or other possible

sources of settlement disruption.21

Systems may also need to test the

operational capability to execute

settlement failure procedures, where

these differ from normal settlement

procedures. Documentation of any

significant legal analysis or agreements

relevant to risk management may also be

appropriate.

(1) Credit risk. Risk factors: A

multilateral settlement system would

give rise to credit risk if its rules or

practices significantly increase or shift

the bilateral obligations or credit

exposures between participants in the

clearing and settlement process. For

example, a clearinghouse operator or

agent that provides an implicit or

explicit guarantee of settlement could

shift bilateral exposures. Such a

guarantee might be implemented

through the establishment of a central

counterparty for all transactions, or

through other provisions in the system’s

rules, such as a guarantee of members’

settlement obligations, third-party credit

arrangements, or the system’s ability to

recover settlement-related losses from

participants. Additionally, a system may

expose participants to credit risk to one

another, due for example, to agreements

to mutualize any settlement losses.

Risk management measures:

Measures that are commonly used to

mitigate credit risk in a multilateral

settlement system and provide support

for settlement guarantees include

monitoring of participants’ financial

condition, caps or limits on some or all

participants’ positions in the system,

and requirements for collateral, margin,

or other security from some or all

participants. Systems in which

participants have significant bilateral

exposures to one another or to the

system, such as through loss-sharing

agreements, may need to implement

mechanisms for participants to control

these exposures if they are significant.

Use of settlement methods with sameday finality may also shorten the

duration of credit risk exposure in a

system.

(2) Liquidity risk. Risk factors: A

multilateral settlement system would

give rise to liquidity risk for its

participants if a delay, failure, or

reversal of settlement would be likely to

cause a significant change in settlement

amounts to be paid or received by

participants on the settlement date. The

degree of liquidity risk in a particular

system is likely to be greater (1) the

larger are gross payment flows relative

to netted amounts to be settled; (2) the

larger are participants’ settlement

positions relative to their available

funding resources; (3) the later that

participants would be notified of a

settlement disruption relative to the

timing of activity in the money markets

and other funding channels, and (4) the

greater the likelihood that a settlement

failure of the particular system would be

accompanied by abnormal market

conditions.

Risk management measures: One

approach to mitigating liquidity risk is

to implement measures to reduce

significantly both the probability and

the effect of a settlement disruption. For

example, many of the measures

described above that are commonly

used to mitigate credit risk may reduce

the probability and effect of a

participant’s inability to meet its

settlement obligations when due.

External liquidity resources available to

the system and adequate operational

contingency arrangements may also

mitigate liquidity risk.

Some systems anticipate performing a

recast of settlements in the event of a

participant default, by recalculating

multilateral net settlement obligations

among participants. These systems are

expected to assess, and where necessary

address, the liquidity impact on

participants of such a procedure.22 For

example, timely notification of

settlement failure before or during the

period of active money market trading

should permit participants readily to

borrow funds to cover any shortfalls due
34894 Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices

23The Report of the Committee on Interbank

Netting Schemes of the Central Banks of the Group

of Ten Countries (Bank for International

Settlements, November 1990), known as the

Lamfalussy Report, recognized that netting

arrangements for interbank payment orders and

forward-value contractual commitments, such as

foreign exchange contracts, have the potential to

improve the efficiency and the stability of interbank

settlements through the reduction of costs along

with credit and liquidity risks, provided certain

conditions are met. That Report developed and

discussed ‘‘Minimum Standards for Netting

Schemes’’ (Lamfalussy Minimum Standards) and

‘‘Principles for Co-operative Central Bank

Oversight’’ of such arrangements. These standards

have been adopted by the central banks of the G–

10 and European Union countries. The text

included in this policy statement includes editorial

modifications to the original standards.

to the recast. Individual participants

may also take steps to limit their own

liquidity exposures in the system or

increase available liquidity resources.

(3) Operational risk. Risk factors:

Operational risks, such as those relating

to the reliability and integrity of

electronic data processing facilities used

in the clearing and settlement process,

are addressed in standard supervisory

guidance for depository institutions and

their service providers. Operational risk

factors for purposes of this policy

statement include those that could

hinder the timely completion of

settlement or the timely resolution of a

settlement disruption in a multilateral

settlement system. For example, for a

system that anticipates recasting

settlement obligations in the event of a

participant default, operational

obstacles could make it difficult or

impossible for participants to arrange

settlement outside the system on a

timely basis in the event of a settlement

failure. As a result, those participants

expecting to receive funds could face

significant liquidity risk. In addition, in

some cases, failure to complete

settlement on a timely basis could

change the rights of participants with

respect to the underlying payments,

creating potential credit or liquidity

risks. For example, institutions that are

unable either to return or to settle for

checks presented to them on the same

day may lose the right to return the

checks for insufficient funds.

Further, certain risk control

procedures implemented by a particular

system may themselves entail

operational risks. The ability of a system

to execute a recast of settlements,

implement guarantee provisions, or

access lines of credit may depend on the

operational reliability of the system’s

facilities.

Risk management measures:

Multilateral settlement systems and

their participants typically mitigate the

risk of operational failure in their daily

processing activities through standard

techniques, such as contingency plans,

redundant systems, and backup

facilities. For purposes of this policy

statement, systems should ensure the

reliable operational capability to

execute procedures used to resolve a

participant default or other settlement

disruption as well as to implement other

risk management measures.

For example, if a system anticipates

recasting settlements by excluding

transactions of a defaulting participant,

it should ensure that the system can

perform any required processing,

generate the necessary information, and

provide the information to participants

in a timely manner. To the extent that

payments would be expected to be

settled outside the system, procedures

should be established to notify

participants such that they have

adequate time, settlement information,

and operational capabilities to complete

such settlements before the close of

critical funds transfer systems. A system

that does not anticipate recasting

settlements but plans to settle all

positions as and when expected should

ensure that operational procedures to

implement risk management measures

are in place, such as means of access to

lines of credit in a timely manner.

(4) Legal risk. Risk factors: Legal risk

may exist in a multilateral settlement

system if there is significant uncertainty

regarding the legal status of settlement

obligations or of the underlying

transactions in the event of a settlement

failure. Significant legal uncertainty

could exacerbate efforts to achieve an

orderly and timely resolution and could

expose participants to significant credit

and liquidity risks. For example, if the

obligations of participants with respect

to underlying transactions exchanged in

the system have no enforceable legal

status in the event of a system

settlement failure, the ability of the

participants to revert to other methods

of settlement on a timely basis may be

in doubt. Legal risk would also arise if

the legal enforceability of any

significant risk management measures,

netting agreements, or related

arrangements, is not well supported.

Risk management measures: Systems

should address legal risk factors, where

significant exposures may arise, by

ensuring that operating rules or other

agreements between participants will be

enforceable in the event of a settlement

failure. As part of this process, systems

may wish to obtain legal opinions as to

the enforceability of its rules and

agreements under applicable legal

regimes. Additionally, when the

transactions settled through the system

are not otherwise covered by an

established body of law, the system

should ensure that the rights and

obligations of the participants are

adequately addressed through the

system’s rules or participant

agreements.

Application of the Lamfalussy

Minimum Standards

Certain multilateral settlement

systems are also required to meet the

Lamfalussy Minimum Standards.23

These standards were designed to

address the main risk factors that may

be present in multilateral settlement

systems and to provide confidence that

such systems can settle all positions as

and when expected in the event that a

participant cannot meet its settlement

obligations, thereby reducing

substantially the risk that a default by

one participant will cause defaults by

others. To determine whether a system

is also required to meet the Lamfalussy

Minimum Standards, the Board will

consider additional factors that include

the following: settlement of a high

proportion of large-value, interbank or

other financial market transactions,

such as foreign exchange transactions;

very large liquidity exposures that have

potentially systemic consequences, such

as by virtue of a high ratio of gross

payments to net settlement obligations;

or systemic credit exposures relative to

participants’ financial capacity.

Lamfalussy Minimum Standards for

the Design and Operation of Privately

Operated Large-Dollar Multilateral

Settlement Systems: 1. Multilateral

settlement systems should have a wellfounded legal basis under all relevant

jurisdictions.

2. Multilateral settlement system

participants should have a clear

understanding of the impact of the

particular system on each of the

financial risks affected by the netting

process.

3. Multilateral settlement systems

should have clearly-defined procedures

for the management of credit risks and

liquidity risks which specify the

respective responsibilities of the netting

provider and the participants. These

procedures should also ensure that all

parties have both the incentives and the

capabilities to manage and contain each

of the risks they bear and that limits are

placed on the maximum level of credit

exposure that can be produced by each

participant.

4. Multilateral settlement systems

should, at a minimum, be capable of

ensuring the timely completion of daily

settlements in the event of an inability

to settle by the participant with the

largest single net debit position.
Federal Register / Vol. 63, No. 123 / Friday, June 26, 1998 / Notices 34895

24The term ‘‘largest single net debit position’’

means the largest intraday net debit position of any

individual participant at any time during the daily

operating hours of the netting system.

5. Multilateral settlement systems

should have objective and publiclydisclosed criteria for admission which

permit fair and open access.

6. Multilateral settlement systems

should ensure the operational reliability

of technical systems and the availability

of backup facilities capable of

completing daily processing

requirements.

Risk management measures: For

systems that the Board has determined

are required to meet the Lamfalussy

Minimum Standards, systems and their

participants should consider the

following risk management measures:

(1) to the extent that participants have

significant credit and liquidity

exposures to other participants,

establish bilateral net credit limits visaˇ-vis each other participant in the

system; (2) establish and monitor in

real-time system-specific net debit

limits for each participant; (3) establish

real-time controls to reject or hold any

payment or foreign exchange contract

that would cause a participant’s

position to exceed the relevant bilateral

and net debit limits; (4) establish

liquidity resources, such as cash,

committed lines of credit secured by

collateral, or a combination thereof, at

least equal to the largest single net debit

position; and (5) establish rules and

procedures for the sharing of credit

losses among the participants in the

netting system.24

Alternative risk management

measures may provide an equivalent

level of assurance that the Lamfalussy

Minimum Standards are met, depending

on the nature and scope of the system.

However, the Board strongly encourages

systems to develop real-time risk

management controls where necessary

to provide an appropriate level of risk

control. The Board may also encourage

or require higher risk management

standards, such as the ability to ensure

timely multilateral settlement in the

event of multiple defaults, of individual

systems that present a potentially high

degree of systemic risk, by virtue of

their high volume of large-value

transactions or central role in the

operation of the financial markets.

Offshore Systems

The Board has a long-standing

concern that steps taken to reduce

systemic risk in U.S. large-dollar

payments systems may induce the

further development of multilateral

systems for settling U.S. dollar

payments that are operated outside the

United States. Such systems, if

implemented with inadequate attention

to risk management, may increase risks

to the international banking and

financial system. In addition, offshore

arrangements have the potential to

operate without sufficient official

oversight.

As a result, the Board has determined

that offshore, large-dollar multilateral

settlement systems and multicurrency

clearing and settlement systems should

at a minimum be subject to oversight or

supervision, as a system, by the Federal

Reserve, or by another relevant central

bank or supervisory authority. The

Board recognizes that central banks

have common policy objectives with

respect to large-value clearing and

settlement arrangements. Accordingly,

the Board expects that it will cooperate,

as necessary, with other central banks

and foreign banking supervisors in the

application of the Lamfalussy Minimum

Standards to offshore and multicurrency

systems. In this regard, the Principles

for Co-operative Central Bank Oversight

outlined in the Lamfalussy Report

provide an important international

framework for cooperation.

By order of the Board of Governors of the

Federal Reserve System, June 18, 1998.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 98–16694 Filed 6–25–98; 8:45 am]

BILLING CODE 6210–01–P

GENERAL SERVICES

ADMINISTRATION

Environmental Considerations in

Decisionmaking and Compliance With

the National Environmental Policy Act

SUMMARY: The General Services

Administration (GSA) has rewritten its

Orders establishing policy and assigning

responsibilities for implementing the

National Environmental Policy Act

(NEPA), its implementing regulations,

related laws, executive orders, and

regulations in the decisionmaking

process of the GSA GSA. Order ADM

1095.1E, ‘‘Environmental Preparation of

Environmental Assessments and

Environmental Impact Statements,’’ July

24, 1985, have been revised and are to

be reissued as GSA Order ADM 1095.1F

and GSA PBS 1095.4C. Few changes

were made to GSA Order ADM 1095.1E.

Revisions to this document are mainly

in the Responsibility section.

Substantial changes were made to PBS

P 1095.4B. The revision, PBS 1095.4C,

was reduced to an overview of GSA’s

NEPA procedural requirements. The

instructional step-by-step portion of the

document has been removed and

expanded into a new comprehensive

PBS NEPA Desk Guide. The PBS NEPA

Desk Guide, used in conjunction with

PBS 1095.4C, is intended to provide an

increased level of NEPA guidance to

GSA.

WRITTEN COMMENTS/FURTHER

INFORMATION: As part of the public

review process required prior to the

implementation of new orders by Title

40 CFR 1507.3, ‘‘Agency Procedures’’,

GSA solicits your written comments on

the revised orders at the following

address: Colin Wagner, NEPA Liaison,

GSA, PBS, PXSC, room 2312, 1800 F

Street, Washington, DC 20007. Written

comments should be received no later

than July 27, 1998. Requests for the PBS

NEPA Desk Guide and/or further

information may also be forwarded to

this address. Both the Orders and the

accompanying PBS NEPA Desk Guide

can be found and downloaded from the

GSA NEPA CALL-IN web site at

www.gsa.gov/pbs/pt/call-in/nepa.htm.

MAILING LIST: If you wish to be placed on

the project mailing list to receive the

final Orders and Desk Guide, contact

Colin Wagner at the address noted

above.

Dated: June 11, 1998.

Wm. Colin Wagner,

GSA NEPA Liaison.

ADM 1095.1F

GSA ORDER

SUBJECT: Environmental considerations in

decisionmaking

1. Purpose. This order establishes policy

and assigns responsibility for implementing

the National Environmental Policy Act

(NEPA), its implementing regulations, and

related laws, executive orders, and

regulations in the decisionmaking processes

of the General Services Administration

(GSA).

2. Cancellation. ADM 1095.1E, dated

December 8, 1995, is canceled.

3. Background. The National

Environmental Policy Act (NEPA) and the

Government wide implementing regulations

of the Council on Environmental Quality (40

CFR 1500–1508, hereinafter, the CEQ

regulations) require that each Federal agency

consider the impact of its actions on the

human environment, and prescribes

procedures to be followed in doing so. Other

laws, executive orders, and regulations

provide related direction. Each Federal

agency is required to implement internal

procedures to ensure that the requirements of

NEPA are met. Existing orders are out of date

and do not provide for current requirements.

4. Nature of revision. This revision reflects

a thorough internal review of GSA’s systems

for implementing NEPA. It replaces an

interim order, ADM 1095.1E, which was

adopted to govern GSA’s compliance with

NEPA while this review took place. This

revised order is issued in coordination with