[Federal Register: December 19, 2002 (Volume 67, Number 244)]
[Notices]
[Page 77786-77789]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19de02-65]
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FEDERAL RESERVE SYSTEM
[Docket No. R-1138]
Proposal to Expand the Operating Hours for the On-Line
Fedwire[reg] Funds Service
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice; Request for comment.
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SUMMARY: The Board requests comment on a proposal to expand the
operating hours for the Fedwire Funds Service.\1\ Under this proposal,
Fedwire would open three and one-half hours earlier than the current
opening time of 12:30 a.m. eastern time, and depository institutions
would participate in the earlier operating hours on a voluntary
basis.\2\ The new opening time would be 9 p.m. for on-line funds
transfers with a business date of the following calendar day.\3\ An
earlier Fedwire opening time would further the smooth functioning and
continued development of the payments system, as well as improve
efficiency and reduce risk in making payments and settlements. The
closing time for the service would remain unchanged at 6:30 p.m.,
thereby expanding the service's operating hours from eighteen hours to
twenty-one and one-half hours each business day. The proposal would not
affect the operating hours for the origination and telephone advice of
credit for off-line funds transfers and would not affect the operating
hours for the Fedwire Securities Service.\4\
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\1\ All references to Fedwire apply to the on-line Fedwire Funds
Service unless otherwise noted. Fedwire is a registered servicemark
of the Federal Reserve Banks.
\2\ All references are to eastern time unless otherwise noted.
\3\ For example, if today were Thursday, November 14, 2002,
Fedwire would open at 9 p.m., with the business (cycle) date of
Friday, November 15, 2002.
\4\ The operating hours for off-line funds transfers and
securities transfers are outlined in the Federal Reserve Banks'
Operating Circulars 6 and 7, respectively.
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DATES: Comments must be submitted on or before March 4, 2003.
ADDRESSES: Comments should refer to Docket No. R-1138 and should be
submitted to Ms. Jennifer J. Johnson, Secretary, Board of Governors of
the Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551, or mailed electronically to
regs.comments@federalreserve.gov. Comments addressed to Ms. Johnson may
also be delivered to the Board's visitors center in the east courtyard
of the Eccles Building, located on 20th Street between Constitution
Avenue and C Street, NW., between 8 a.m. and 5:30 p.m. Members of the
public may inspect comments in room MP-500 of the Martin Building
between 9 a.m. and 5 p.m. on weekdays, pursuant to Sec. 261.12, except
as provided in Sec. 261.14 of the Board's Rules Regarding Availability
of Information, 12 CFR 261.12 and 261.14.
FOR FURTHER INFORMATION CONTACT: Jack K. Walton II, Assistant Director
(202/452-2660), or Lorna R. Prosper-Harley, Senior Financial Services
Analyst (202/452-2690), Division of Reserve Bank Operations and Payment
Systems, Board of Governors of the Federal Reserve System; for users of
Telecommunication Devices for the Deaf (TDD) only, contact (202/263-
4869).
SUPPLEMENTARY INFORMATION:
[[Page 77787]]
I. Background
In December 1997, the Federal Reserve Banks (Reserve Banks)
expanded the operating day for on-line Fedwire funds transfers from ten
hours to eighteen hours - opening weekdays at 12:30 a.m. and closing at
6:30 p.m. (61 FR 216, November 6, 1996). The Board believed that, over
the long term, expanded Fedwire hours would enable individual
depository institutions and clearing organizations to (1) reduce
foreign exchange settlement risk through innovations in payment and
settlement practices, and (2) use Fedwire to manage settlement risk
early in the day during times of financial stress. The Board also
believed that an expansion of Fedwire hours would respond to the
payment and settlement needs of both existing and emerging financial
markets, including overseas markets that depend on the U.S. dollar.
In 2001, the members of the Wholesale Customer Advisory Group
(WCAG) of the Reserve Banks' Wholesale Product Office (WPO) approached
the WPO about further expanding the hours for Fedwire.\5\ The WCAG
believes that, given the continuing globalization of business and
payment activity, current Fedwire hours may constrain the ability of
U.S. depository institutions that operate in multiple markets and time
zones to meet the payment and settlement needs of some current and
potential customers. The WCAG also believes that the current Fedwire
operating hours may constrain the ability of U.S. depository
institutions to manage settlement and operational risks cost
effectively. In particular, the WCAG highlighted the need to achieve
greater overlap of U.S. wholesale payments system operating hours with
those of the Asia-Pacific markets, including Australia, Hong Kong,
Japan, and New Zealand. Finally, the WCAG noted that the recent
movement of some U.S. dollar clearing and settlement activity offshore
has underscored the need for expanded Fedwire operating hours.
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\5\ The WCAG was established by the WPO to provide a mechanism
for ongoing communication and collaboration between the WPO and a
representative sample of U.S. depository institutions that are major
users of wholesale payment services. The WPO and WCAG work together
on a variety of initiatives, which include identifying trends in
domestic and international banking and financial services that will
affect wholesale payment services, and emerging regulatory and
policy issues that may affect delivery or use of such services.
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The Clearing House Inter-Bank Payments System (CHIPS) also has
asked the WPO to consider expanding the on-line Fedwire hours to
support longer CHIPS operating hours because of a growing demand in
Asia for real-time, final U.S. dollar payments processed during the
Asian business day. CHIPS and its participants rely on Fedwire to
conduct certain daily funding and settlement activities. Both the CHIPS
and WCAG requests are consistent with long-term business and
technological developments in wholesale payments markets.
The Board believes that further expansion of Fedwire funds transfer
operating hours would support the smooth functioning and continued
development of the payments system, and improve efficiency and reduce
risk in conducting existing U.S. dollar payments and settlements.
Furthermore, an earlier opening of Fedwire may facilitate innovations
in payment and settlement services provided by individual institutions
and clearing organizations, thereby making a broader and more robust
array of payment options generally available in the financial markets.
II. Issues Associated With the Proposed Expanded Fedwire Operating
Hours
International Markets. Generally, the Fedwire operating hours fully
overlap the operating hours of large-value payment systems in the
Americas and Europe.\6\ In contrast, the Fedwire operating hours
overlap the operating hours of major Asia-Pacific large-value payments
systems by only two and one-half to five hours. Some depository
institutions believe that substantially expanding the amount of overlap
in the operating hours of Fedwire and the Asia-Pacific markets will
help to support the development of enhanced and more competitive
dollar-based payment and settlement services in the international
marketplace. Also, some depository institutions that are active in
international markets maintain local money-desk and money-transfer
operations in the regions in which they operate. Expanding Fedwire
operating hours may provide opportunities for these institutions to
consolidate some of their local activities, which could improve their
ability to manage globally their dollar funding and related liquidity
risks, as well as to reduce costs and increase operational
efficiencies.
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\6\ The Fedwire operating hours do not overlap the operating
hours of the large-value payment system in Switzerland, Swiss
Interbank Clearing (SIC) for five and one-half hours.
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Domestic Markets. Neither the Board nor the organizations that
advocated further expansion of Fedwire operating hours anticipate that
an earlier opening of Fedwire would adversely affect domestic markets.
Indeed, there may be beneficial effects from enhancements to payment
and settlement services offered by financial institutions to the extent
that current Fedwire hours act as a barrier to developing these
enhancements.
Costs of and Participation in the Expanded Fedwire Hours. The
estimated costs for Reserve Banks to open Fedwire three and one-half
hours earlier are expected to be negligible and should not affect funds
transfer fees paid by depository institutions. While the operational
costs incurred by depository institutions that participate in the
earlier hours are difficult to estimate, such costs would be incurred
voluntarily. In particular, if a depository institution believed that
the potential costs of participating in the expanded operating period
outweighed the potential benefits, it could choose to remain closed
during this period and would therefore not incur additional operating
costs.\7\ Similarly, potential costs and benefits stemming from
streamlining operational, funding, and risk management functions are
difficult to estimate. Again, however, depository institutions would
only incur costs during the expanded operating period if they
voluntarily chose to do so. While depository institutions would not be
required to participate in the earlier operating hours, they would
still receive funds transfers sent from participating institutions
during these hours.
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\7\ Nonparticipating institutions may need to review their
internal systems and procedures, however, to ensure that they
accurately recognize payments sent to them during the early Fedwire
operating hours. Fedwire funds transfers contain two dates: (1) a
cycle date that represents the date of a specific operational
business day within the Fedwire application, and (2) a system date
that represents the day the transfer is processed by the Fedwire
application. With early Fedwire operating hours, between 9 p.m. and
11:59 p.m., the cycle date will differ from the system date. This
situation already exists for depository institutions outside the
eastern time zone in today's eighteen-hour Fedwire business day.
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Extensions to the Scheduled Fedwire Closing Time. Today, the
Reserve Banks extend the scheduled Fedwire closing time primarily to
prevent major market disruptions. If the Board approved an earlier
Fedwire opening time, extensions of the scheduled Fedwire closing time
could result in greater operating difficulties for some depository
institutions, such as the need to compress end-of-day account posting
activities. Furthermore, extensions of the closing time beyond a
certain point might adversely affect the ability of the Reserve Banks
or depository institutions to open Fedwire services for the next
business day as scheduled. Such extensions could have significant
effects on business during
[[Page 77788]]
the earlier operating hours, particularly if the use of the earlier
operating hours were to become significant.\8\ In the near term, the
Reserve Banks could continue to allow infrequent extensions of the
scheduled closing times to preserve orderly market closings. In the
long term, the Reserve Banks may have to reevaluate the extension
policy to sustain the ability to open Fedwire timely.
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\8\ An extension beyond a certain point to the Fedwire
Securities Service operating hours could also result in an extension
to the Fedwire Funds Service and, consequently, affect the timely
opening of Fedwire for the next business day.
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Access to Depository Institutions' Account Balances. Under the
expanded Fedwire operating hours, depository institutions' Federal
Reserve account balances may not reflect all of the previous day's
payment activity because certain activity that is processed and posted
later in the day may not be posted to accounts by 9 p.m., the start of
the next Fedwire operating day.\9\ Generally, account balances would
reflect all of a business day's activity by about 11 p.m. The Reserve
Banks would also notify depository institutions when the day's payment
activity has been processed and is reflected fully in their account
balances.
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\9\ The transactions that are processed late in the day include
discount window loans and a small percentage of payments associated
with check activity, currency and coin shipments, and other
activity, such as food coupon deposits. Generally, the dollar
amounts and volumes associated with these transactions are not
significant.
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Currently, depository institutions can access their account balance
information through the Reserve Banks' Account Balance Monitoring
System (ABMS) until 10 p.m. on each business day. Under the expanded
Fedwire operating hours, ABMS would be available until 7:15 p.m. to
access information for the current business day. ABMS would reopen at 8
p.m. for the next business day, and account balances would be
considered provisional until all of the previous day's payment activity
is processed and posted.
The Reserve Banks also monitor depository institutions' accounts
for daylight overdraft purposes on an ex post basis. Under the expanded
Fedwire operating hours, depository institutions' reported ex post
opening account balances would reflect all of the previous day's
payment activity. As a consequence, the reported ex post opening
account balance may differ from the ABMS opening account balance
because of transactions that are processed late in the day. While
account balance differences may exist between ABMS and ex post reports,
the Federal Reserve continues to expect depository institutions to
manage their accounts according to the daylight overdraft posting rules
set forth in the Board's payments system risk policy.\10\
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\10\ Depository institutions may also obtain account information
using Fedline's web-based Account Management Information (AMI)
application or by accessing the Federal Reserve's Integrated
Accounting System (IAS). Fedline is a registered trademark of the
Federal Reserve Banks.
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Federal Reserve Intraday Credit and Fees. Under the expanded
Fedwire operating hours, the Reserve Banks will continue to provide
intraday credit to eligible depository institutions on the same basis
as they do today according to the provisions of the Board's payments
system risk policy. While the calculation of the daylight overdraft fee
will be adjusted under the proposal to reflect the expanded Fedwire
operating hours, the fee assessed for the use of intraday credit will
not change for an overdraft of a given size and duration.\11\
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\11\ While the effective annual rate charged on daylight
overdrafts would change from 27 basis points under an 18-hour
Fedwire operating day to 32.25 basis points under a 21.5-hour
Fedwire operating day, the annual rate charged on daylight
overdrafts would remain at 36 basis points. This increase in the
effective annual rate will not lead to an increase in fees for
daylight overdrafts of a given size and duration because there will
be an offsetting increase in the number of minutes used to calculate
average daylight overdrafts. An example of the daylight overdraft
fee calculation is available at http://www.federalreserve.gov/paymentsystems/psr/overview.pdf
.
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Monetary Control and Reserve Management. The Board believes that an
expansion of Fedwire operating hours will not affect the current
process of reserve management for depository institutions. Because
there is a sufficient break in time between Fedwire operating days to
allow for measuring reserve holdings, monetary measurement and control
issues do not arise for the Federal Reserve.
Proposed Expanded Fedwire Hours Implementation Timeframe. If the
Board were to adopt a 9 p.m. Fedwire opening time, depository
institutions would be given the opportunity to test their systems for
the expanded Fedwire hours with the Reserve Banks beginning in the
third quarter 2003. Full implementation of the expanded Fedwire
operating day from 9 p.m. to 6:30 p.m. would begin in the second
quarter of 2004.
III. Request for Comment
The Board requests comments on its proposal to expand the on-line
Fedwire operating hours. Specifically, the Board requests comments on
whether the opening time for Fedwire should be moved to 9 p.m. or
whether a different opening time would be preferable. In addition, the
Board is interested in commenters' views regarding the business,
market, risk management, and operational issues that should be
considered in evaluating the benefits and drawbacks of a 9 p.m. to 6:30
p.m. Fedwire business day. For example, what are the business needs
that would warrant an earlier Fedwire opening time? Would the
availability of provisional rather than final account balance
information in ABMS for the first two hours of the expanded Fedwire day
adversely affect the risk management of depository institutions that
choose to participate during the early hours? Should the Reserve Banks
continue to grant significant extensions to the Fedwire closing time to
help mitigate substantial market disruptions (such as those granted
during the week of September 11, 2001) even if they result in a
significant delay in the Fedwire opening for the next business day?
IV. Competitive Impact Analysis
All operational and legal changes considered by the Board that have
a substantial effect on payments system participants are subject to the
competitive impact analysis described in the March 1990 policy
statement ``The Federal Reserve in the Payments System.''\12\ Under
this policy, the Board assesses whether the proposed change would have
a direct and material adverse effect on the ability of other service
providers to compete effectively with the Reserve Banks 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
legal differences. If the expansion of the on-line Fedwire operating
hours creates such an effect, the Board must further evaluate the
proposed expansion of hours to assess whether its benefits can be
retained while reducing the restrictions on competition.
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\12\ Federal Reserve Regulatory Service 7-145.2.
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The Reserve Banks are the only providers of real-time gross
settlement of funds transfers in central bank money in the United
States. The main alternative provider of funds transfer services and a
number of depository institutions have indicated that the expansion of
the Fedwire operating hours would make it possible for them to enhance
the finality of their U.S. dollar payment and settlement services. As a
result, the expansion of Fedwire operating hours would not have a
direct and material adverse effect on their ability to compete
effectively with the Reserve Banks.
[[Page 77789]]
By order of the Board of Governors of the Federal Reserve System,
December 16, 2002.
Jennifer J. Johnson,
Secretary of the Board
[FR Doc. 02-31930 Filed 12-18-02; 8:45 am]
BILLING CODE 6210-01-S