[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 110-111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31979]



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FEDERAL RESERVE SYSTEM

[Docket No. R-0778]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: In February 1994, the Board approved the expansion of the 
Fedwire on-line funds transfer service operating hours to 18 hours a 
day, from 12:30 a.m. to 6:30 p.m. Eastern Time (ET), beginning in early 
1997. Currently, the Fedwire funds transfer service operates 10 hours a 
day, from 8:30 a.m. ET to 6:30 p.m. ET. The Board has delayed the 
implementation of the expanded Fedwire on-line funds transfer operating 
hours until fourth quarter 1997 to provide banks that intend to 
participate during the expanded hours an opportunity to first complete 
their conversion to the new Fedwire format. The Board believes a modest 
delay in the implementation of the earlier Fedwire opening time will be 
sufficient to address industry concerns regarding the interdependencies 
between the two Fedwire initiatives, while not deferring for a 
significant period of time the potential changes in payments and 
settlement practices that can contribute to reductions in Herstatt 
risk. A specific implementation date will be announced one year in 
advance of the effective date.

FOR FURTHER INFORMATION CONTACT: Louise L. Roseman, Associate Director 
(202/452-2789), Gayle Brett, Manager (202/452-2934), or Lisa Hoskins, 
Project Leader (202/452-3437), Division of Reserve Bank Operations and 
Payment Systems. For the hearing impaired only, Telecommunication 
Device for the Deaf (TDD), Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATON: In February 1994, the Board announced 
approval of the expansion of the Fedwire on-line funds transfer service 
operating hours to 18 hours a day, from 12:30 a.m. to 6:30 p.m. Eastern 
Time (ET), beginning in early 1997.<SUP>1 (59 FR 8981, February 24, 
1994) In its announcement, the Board identified two public policy 
objectives for the Fedwire funds transfer service. Fedwire should:

    \1\Currently, the Fedwire funds transfer service operates 10 
hours a day, from 8:30 a.m. ET to 6:30 p.m. ET.
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    (1) Provide a means that can be used to enhance the safety and 
efficiency of the U.S. dollar settlement arrangements, including 
arrangements that rely on interbank settlement of netted positions, 
particularly during periods of financial stress, and
    (2) Respond to the needs of both existing and emerging financial 
markets, including overseas markets, which depend on the U.S. dollar 
and are increasingly reliant on state-of-the-art technology.
    With these public policy objectives in mind and after extensive 
contact with representatives of commercial banks, brokers and dealers, 
clearing organizations, and corporate treasurers, the Board concluded 
that expanded Fedwire funds transfer operating hours could be a useful 
component of private-sector initiatives to reduce settlement risk in 
the foreign exchange markets. In addition, the Board concluded that 
expanded Fedwire funds transfer operating hours will eliminate an 
operational barrier to potentially important innovation in privately-
provided payment and settlement services.
    At the same time, the Board recognized the need stressed by the 
industry representatives that a long lead-time would be necessary for 
banks to make the necessary investments in new technology and the 
modifications to operating procedures in preparation for participating 
in expanded funds transfer operating hours. In particular, many banks 
would need to make significant automation and procedural changes in 
their end-of-day processing, which includes many batch operations, in 
order to obtain opening-of-business customer account balances earlier 
than they do today. Thus, when announcing [[Page 111]] the earlier 
Fedwire opening time, the Board indicated that the expansion would not 
take place until early 1997 and that a specific implementation date 
would be announced one year prior to the expansion.
    Subsequent to the Board's February announcement, the Board received 
comments on a proposal to expand the Fedwire funds transfer format. (58 
FR 33366, December 1, 1993) The Board had proposed completing the 
implementation of the new format by year-end 1996; many commenters 
requested a longer period of time to complete this conversion. In 
addition, commenters expressed the desire to complete the conversion to 
the expanded format prior to the expansion of Fedwire funds transfer 
operating hours. These commenters indicated that it would be burdensome 
for them to pursue both initiatives simultaneously as many of the same 
automation and human resources would be necessary to accomplish both 
initiatives.
    Board and Reserve Bank staff recently discussed with 
representatives of money center and regional banks the 
interdependencies between these two Fedwire initiatives. In these 
discussions, bankers indicated that, despite the Board's statement that 
participation in expanded Fedwire funds transfer operating hours will 
be voluntary, they believe that competitive pressures will mandate 
their participation. Some of these bankers also indicated that they 
needed to modify their systems to provide a means to send during the 
early hours only those funds transfers destined for banks that are open 
during the early hours. In addition, some bankers indicated that they 
intend to provide a mechanism by which their customers can designate 
which of their funds transfers should be sent during the early hours. 
Some of the bankers indicated that they did not want to make changes to 
the customer interface to their current Fedwire software, when soon 
thereafter they would have to change that software (and the customer 
interface) to accommodate the new Fedwire format. These bankers 
indicated that the implementation of expanded operating hours should 
follow the new format after a lag; suggested time frames were as short 
as three months and as long as twelve months.
    Separately, bankers and representatives from clearing organizations 
have indicated in a variety of forums that steps should be taken to 
reduce Herstatt risk and that such steps can take advantage of expanded 
Fedwire funds transfer operating hours. For example, the New York 
Clearing House recently announced that it is evaluating a possible 
earlier opening time and multiple settlements for the Clearing House 
Interbank Payments Systems (CHIPS). In addition, Multinet International 
has indicated that it plans to take advantage of earlier Fedwire 
operating hours to settle dollar obligations arising from its proposed 
netting service.
    The Board has considered whether to delay somewhat the 
implementation of expanded funds transfer operating hours. Such a delay 
could reduce the operational burden on banks in complying with this 
initiative in light of the new funds transfer format, but also would 
withhold the potential benefits from banks and clearing organizations 
that intend to use the expanded funds transfer operating hours in 
developing solutions to reduce Herstatt risk.
    The Board believes that the majority of banks that may intend to 
participate in the early funds transfer operating hours will be the 
same banks that are likely to complete their conversions to the new 
Fedwire funds transfer format early in the implementation schedule. The 
Board has approved an expanded Fedwire format and an implementation 
schedule for conversion to the new format. (See notice elsewhere in 
today's Federal Register.) Based on the approved implementation 
schedule for the new format, the earliest that banks can complete their 
format conversion is June 23, 1997.<SUP>2 It is possible that some 
banks wanting to participate in expanded operating hours likely would 
not be converted totally to the new format until later in 1997.

    \2\The implementation plan for the new Fedwire format consists 
of a two-phased implementation wherein participants begin receiving 
Fedwire transfers in the new format before they begin sending new-
format transfers. The implementation plan also will allow a subset 
of institutions to implement both the receive and send capabilities 
on a same-day basis on the first day of the second phase.
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    The Board believes that a modest delay in the implementation of the 
earlier Fedwire opening time would be sufficient to address concerns 
raised by the larger banks regarding the potential operational burden 
of implementing these two initiatives concurrently, while not deferring 
for a significant period of time the potential changes in payments and 
settlement practices that can contribute to reductions in Herstatt 
risk. Therefore, the implementation of the expanded Fedwire funds 
transfer operating hours will be delayed until fourth quarter 1997. A 
specific implementation date will be announced approximately one year 
in advance of the effective date. A late 1997 implementation of 
expanded Fedwire funds transfer operating hours will provide an 
approximate four-month lag for those banks that choose to complete 
their Fedwire format implementation early in the conversion schedule.

    By order of the Board of Governors of the Federal Reserve 
System, December 21, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31979 Filed 12-30-94; 8:45 am]
BILLING CODE 6210-01-P