[Federal Register Volume 60, Number 1 (Tuesday, January 3, 1995)]
[Notices]
[Pages 123-128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31981]



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FEDERAL RESERVE SYSTEM
[Docket No. R-0866]


Federal Reserve Bank Services

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; request for comment.

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SUMMARY: The Board requests comment on the potential benefits and costs 
of opening the Fedwire on-line book-entry securities transfer service 
earlier in the day sometime after the implementation of expanded 
Fedwire funds transfer operating hours, which is scheduled for 1997. 
The Board also requests comment on new service capabilities that would 
give banks the option of participating in earlier Fedwire securities 
transfer hours and new service capabilities that would allow banks to 
control their use of securities-related Federal Reserve intraday credit 
during expanded hours and/or core operating hours. Finally, the Board 
requests comment on the establishment of a firm closing time of 3:00 
p.m. Eastern Time (ET) for transfers and 3:30 p.m. ET for reversals, 
beginning in January 1996. The Board is seeking input at this time in 
order to formulate a strategic direction for the Fedwire book-entry 
securities transfer service. The Board will consult with the Department 
of the Treasury before arriving at a decision regarding operating hours 
and service capabilities.

DATES: Comments must be submitted on or before April 28, 1995.

ADDRESSES: Comments, which should refer to Docket No. R-0866, may be 
mailed to Mr. William Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-2222 of 
the Eccles building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street N.W. 
(between Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding availability of information.

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, Board of Governors of the Federal Reserve System. For 
the hearing impaired only: Telecommunications [[Page 124]] Device for 
the Deaf, Dorothea Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION: 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), five days a week, beginning in early 1997 (59 FR 8981, 
February 24, 1994).1 More recently, the Board has delayed the 
implementation of the 12:30 a.m. ET opening until fourth quarter 1997. 
(See notice elsewhere in today's Federal Register.)

    \1\This decision was the result of staff study conducted in 
response to a request for public comment in October 1992 regarding a 
change in Fedwire operating hours. Currently, the Fedwire funds 
transfer service operates 10 hours a day from 8:30 a.m. to 6:30 p.m. 
ET.
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    In its announcement on expanded Fedwire funds transfer hours, the 
Board stated that the operating hours for the Fedwire book-entry 
securities transfer service would not be expanded until public comment 
was sought on new service capabilities that would give banks the 
ability to choose whether to participate in expanded hours and to 
control the receipt of securities that are delivered to them during 
expanded and core operating hours.2

    \2\As used in this notice, the term ``bank'' includes all 
depository institutions including savings institutions and credit 
unions.
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     By deciding initially to expand only Fedwire funds transfer hours, 
the Board recognized that an earlier opening of the Fedwire book-entry 
securities transfer service would be inadvisable without providing 
banks with the capability of controlling the timing of deliveries of 
securities and associated debits to their funds accounts. The inability 
to control the receipt of securities could lead to increased use of 
intraday credit, with accompanying charges, during the earlier 
operating hours.
     In addition, the Board recognizes that the settlement of U.S. 
government securities involves complex automated systems not only at 
the Federal Reserve Banks but also at banks that provide clearance 
services to the major dealers and brokers in U.S. government 
securities, at the dealers and brokers themselves, and at the banks 
that provide custodial services for large investors in U.S. government 
securities. The changes that might be required at these entities to 
support expanded book-entry securities transfer operations may be 
significant. The operations of clearing corporations, securities 
depositories, and other clearing organizations also may be affected. 
Furthermore, earlier operating hours may require changes in market 
practices, such as good delivery guidelines and time-of-day processing 
of settlement instructions. Expanded operating hours also would 
compress the time frame that market participants have to complete end-
of-day processing, as well as the time frame in which to assess and 
react to any operational problems.
     Since the announcement on expanded Fedwire funds transfer 
operating hours, Board, Reserve Bank, and Treasury staff have met with 
a number of market participants, including banks and brokers and 
dealers, to discuss the potential expansion of on-line Fedwire book-
entry securities transfer operating hours. While these participants 
identified limited potential benefits from having the Fedwire 
securities transfer service available in the early morning hours, they 
emphasized the complexity of changes in market practices and processing 
operations that would be required for an early opening of the Fedwire 
book-entry securities transfer service.
     The Board believes that earlier operating hours for the Fedwire 
book-entry securities transfer service may have long-run efficiency and 
risk management benefits for the market. For example, earlier operating 
hours could provide a means to move collateral during the operating 
hours of various payments systems around the world, obtain liquidity to 
support other market activities during expanded hours, reduce 
replacement cost risk in offshore trading activity, and reduce risk 
during times of market stress. In addition, expanded operating hours 
could be responsive to both existing and emerging needs of financial 
markets, including overseas markets, which depend on the U.S. 
government securities market as an investment, hedging, funding, and 
balance sheet adjustment mechanism.
     The Board recognizes that the financial markets served by the 
Fedwire securities transfer system are increasingly reliant on state-
of-the-art technology in order to adapt quickly and flexibly to change 
in the securities clearance and settlement process. For instance, 
dealers and clearing banks are more and more dependent on systems that 
can process significant amounts of time-critical information related to 
trading and settlement activities. Such systems are a prerequisite for 
dealers and banks that expect to compete in global securities markets. 
In fact, some major market participants are rapidly adapting their 
services to support global securities processing services across 
multiple time zones and during expanded operating hours.
     The Federal Reserve Banks currently are redesigning the Fedwire 
book-entry securities transfer service to provide banks and their 
customers with flexibility to adapt to changing markets. The new system 
will enhance availability, strengthen contingency processing, and 
expand the custody account structure.3 The new application also is 
being designed to run on an expanded processing cycle. Although the 
first release of the new application will be able to accommodate a 
modest expansion of processing hours, the ability to expand operating 
hours significantly would not be available until sometime after the 
first release.

    \3\The Federal Reserve Banks are in the process of centralizing 
all of their critical payment applications. The securities transfer 
application currently under development, called the National Book-
Entry System (NBES), will replace the two existing book-entry 
applications, BESS and SHARE. BESS is operated in the New York and 
Philadelphia Reserve Banks; the other ten Federal Reserve Banks 
operate SHARE. The NBES will be phased in beginning in 1996 and will 
be fully operational at a centralized site in 1997.
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The Federal Reserve's Book-Entry Securities Transfer System

    The Federal Reserve Banks operate a book-entry system to support 
the issuance, safekeeping, and transfer of U.S. Treasury and certain 
federal, federally sponsored, and international agency securities. 
Approximately 70 percent of securities transferred are U.S. Treasuries; 
the remaining 30 percent are agency securities. The Fedwire book-entry 
system supports both the primary and secondary markets in U.S. 
government securities.
    Banks that are eligible to access Federal Reserve services may 
maintain book-entry securities accounts at a Federal Reserve 
Bank.4 Dealers, brokers, and their customers and other investors 
hold their securities in accounts at these banks. The book-entry system 
provides an account structure that permits banks to segregate 
securities held for their own account from securities held for third 
parties.

    \4\Under a policy adopted in 1986, the Federal Reserve Banks 
also may maintain book-entry securities safekeeping accounts for 
state treasurers. In addition, certain collateral facilities are 
provided to a limited number of entities under the terms of Treasury 
Department Circular 154 (31 CFR Part 225).
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    On a daily basis, more than 47,000 Fedwire securities transfers are 
originated with a value exceeding $600 billion. Approximately 8,500 
banks have access to the Fedwire book-entry service. While fewer than 
20 percent of these banks have on-line or electronic access, they 
account for more than 99 percent of Fedwire securities transfers. More 
than 60 percent of all transfers are [[Page 125]] originated by the two 
major New York clearing banks.
    The Fedwire book-entry securities transfer system is a delivery-
versus-payment (DVP) transfer mechanism, whereby the sender of a 
security initiates a transfer resulting in the real-time simultaneous 
debit and credit to the sender's securities and funds accounts and a 
credit and debit to the receiver's securities and funds accounts. The 
debits and credits associated with each securities transfer are final 
and irrevocable at the time of the transfer. Securities transfers also 
may be sent free of payment.5

    \5\Under the current posting rules, principal and interest (P&I) 
payments for Treasury and agency securities are to be posted to 
Federal Reserve accounts by 9:15 a.m. ET; the Reserve Banks 
currently make these payments at approximately 8:30 a.m. ET. 
Original issue payments for Treasury securities are posted beginning 
at 9:15 a.m. Original issuances of agency securities are controlled 
by the issuing agencies and typically are made during the mid-to-
late morning hours. These posting times were designed to permit a 
short operational and funding ``window'' between the timing of P&I 
and original issue payments. The Board expects that these posting 
times would not change materially if the Fedwire book-entry 
securities system were to be opened earlier.
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Potential Benefits of an Earlier Fedwire Book-Entry Securities Transfer 
Opening Time

    The Board believes that, in the longer term, an earlier opening of 
the Fedwire book-entry securities transfer system may be beneficial to 
the financial markets. First, financial markets might benefit from the 
ability to move collateral related to a variety of secured transactions 
in domestic and international markets. Some commenters to the 1992 
proposal on early Fedwire funds transfer hours indicated that the 
ability to transfer collateral to cover early morning margin positions 
in the futures and options markets would be useful. In addition, many 
large U.S. banks participate in various national payment and securities 
settlement systems around the world. These systems are increasingly 
moving towards the use of collateral, including cross-currency 
collateral, to secure intraday and overnight credit.6 As such, 
U.S. banks may need the ability to move U.S. government securities 
during the operating hours of these national payment systems.

    \6\Cross-currency collateral refers to securities denominated in 
one currency used to collateralize obligations denominated in a 
different currency.
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    Second, an earlier opening of the Fedwire securities transfer 
system may provide market participants with access to funding liquidity 
to support other market activities during expanded hours. For example, 
repurchase agreements using U.S. government securities can be very 
effective liquid instruments for obtaining funding. The ability to 
settle repurchase agreements in early morning hours may provide market 
participants with an additional vehicle to obtain funding liquidity. 
The need for such liquidity in early hours may arise from settlement of 
foreign exchange transactions through multi lateral clearinghouses, 
settlement of positions in the futures and options markets, or 
interbank funds transfer activity.7

    \7\On most days, participants in the futures and options markets 
may not need access to the financial markets to cover their 
settlement positions because such positions generally are small 
enough to be covered by cash or lines of credit extended to 
participants by their settlement banks. On peak settlement days, 
however, settlement positions can be quite substantial, requiring 
other sources of funding.
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    Third, earlier book-entry securities transfer operating hours may 
facilitate a reduction in replacement cost risk, that is, the time 
between trade and settlement, for offshore trading activity in U.S. 
government securities. Currently, U.S. Treasury securities are traded 
on a 24-hour basis around the globe.8 A next-day trade executed in 
Tokyo and settled in New York currently would not be settled until 30 
to 37 hours after the close of the Tokyo trading day. Earlier Fedwire 
securities transfer hours could facilitate a reduction in this lag.

    \8\Although approximately 95 percent of the turnover of U.S. 
Treasury securities occurs in the United States, active markets 
exist in London and Tokyo as well.
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    Finally, the routine availability of final, DVP securities 
transfers on an expanded hours schedule could provide an important risk 
management tool to the financial markets during periods of stress.
    The Board requests comment on the potential benefits of expanded 
book-entry securities transfer hours outlined above and any other 
potential benefits.

Potential Receiver Control Features

    If the Board were to adopt an earlier opening time for the Fedwire 
book-entry securities transfer service, participation in earlier hours 
would be voluntary. Unlike the Fedwire funds transfer service, however, 
voluntary participation in expanded Fedwire securities transfer hours 
would be more complex. Under current DVP design, banks do not have the 
capability to control the timing of incoming securities deliveries and 
associated debits to their funds accounts. Accordingly, banks have 
limited control over the effect of securities-related debits on their 
reserve account position and their use of Federal Reserve securities-
related intraday credit. Because of the inability to review transfers 
prior to receipt, these control limitations may be compounded if the 
securities delivery is not known or if the delivery amounts are 
incorrect. Although receivers of securities can reverse transfers 
received in error virtually immediately after delivery and payment 
occur, they must actively monitor and manage their securities activity 
in order to do so.

Opt-in Feature

    If the Board decides that expanded Fedwire securities transfer 
hours are desirable, the Board proposes that the NBES would provide an 
``opt-in'' feature for securities transfer customers to ensure that 
earlier hours could be provided without imposing significant, unwanted 
operating costs on banks that did not have reason to participate in 
earlier hours. Banks would be able to choose whether to participate 
during expanded hours, and only transfers among banks that had elected 
to participate would be allowed. No entries would be made against the 
accounts of banks that had decided not to participate in earlier hours; 
transfers sent by or to these banks would be rejected. Further, any 
transfer rejected during expanded hours would have to be re-submitted 
after 8:30 a.m. ET when all active accounts would be eligible to 
receive and send securities transfers.
    Banks that choose to participate during earlier hours would be 
required to accept incoming transfers from the opening of the Fedwire 
securities transfer service until the close of the securities transfer 
service. In order to minimize rejected transfers during expanded hours, 
the Federal Reserve Banks would provide banks with information 
regarding the banks that had elected to participate. At least 
initially, participation during earlier hours would likely consist of a 
small group of banks; however, should the need arise, banks that 
normally did not participate in expanded hours would have the option of 
notifying the Reserve Bank late in the prior day that they wish to 
participate in expanded hours the next day. This feature may be 
particularly helpful during times of market stress.

Opt-in at Securities Account Level

    The Board requests comment on the benefits and other implications 
of providing banks the flexibility to participate during earlier 
operating [[Page 126]] hours at the securities account level.9 If 
this flexibility were provided, banks could elect to participate during 
earlier hours with respect to specified securities accounts and not 
participate with respect to other securities accounts. For example, a 
bank could choose to opt-in for its securities account containing 
dealer securities but not for its securities account containing 
investment securities.

    \9\A securities account is an account at a Reserve Bank 
containing book-entry securities held for a participant. A 
participant may use different securities accounts to segregate 
securities held for different purposes.
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Other Receiver Control Features

    The Board requests comment on the desirability and market 
implications of incorporating certain receiver control features into 
the NBES that would address difficulties banks have managing their 
reserve account positions due to the receipt of unanticipated 
securities transfers. Currently, the receipt of unanticipated 
securities may trigger or increase a daylight overdraft in the 
receiving bank's account. The Board requests comment on the potential 
use of these features during expanded as well as core operating hours. 
If implemented, the use of receiver control features would be optional.
    The proposed receiver control features would rely on receipt 
instructions submitted by the receiving bank. These instructions would 
include CUSIP, sending and receiving bank, third-party information, and 
par and payment amount of the transfer, as well as the day the 
securities are expected to be received. Banks would enter these 
instructions and transmit them to the NBES prior to or on the day of 
anticipated receipt, and would have the ability to add and delete 
instructions as necessary throughout the day.
    The receiver control features differ in the action that would be 
taken by the Reserve Bank based on its comparison of an incoming 
securities transfer to the receipt instructions provided by the 
receiving bank. The Reserve Bank simply could flag transfers that did 
not match the receipt instructions; it could automatically reverse an 
unmatched transfer; or it could reject an unmatched transfer. As 
described below, the Board is particularly concerned with the potential 
adverse market effects, including gridlock, of a receiver control 
feature that would automatically reverse or reject a transfer to the 
extent that such a feature is used with respect to a significant 
proportion of Fedwire book-entry securities transfers.
1. Notification of Unmatched Transfers
    Under the first possible receiver control feature, any securities 
sent to the receiver could be processed with the associated accounting 
entries to the bank's securities and funds accounts. If no receipt 
instructions were found by the NBES, a message indicating or 
``flagging'' the receipt of an unmatched transfer could be provided to 
the receiver. The receiver could then review the transfer and determine 
whether or not to reverse it. If a notification feature were provided, 
it could be available for implementation during core business hours 
soon after the conversion of all twelve Reserve Banks to the 
NBES.10

    \10\SHARE currently provides a simple matching capability that 
allows receivers to enter receipt and deliver instructions to 
facilitate the turnaround of securities. A similar feature will be 
available during the implementation phase of the NBES to banks that 
access the book-entry system via a Fedline connection.
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 2. Automatic Reversal of Unmatched Transfers
    Under the second possible receiver control feature, if no receipt 
instructions were found, the NBES could automatically reverse the 
transfer and associated accounting entries. This reversal would be 
completed within a few minutes of the initial transfer and accounting 
entries. If an automatic reversal feature were provided, it also could 
be available for implementation during core business hours soon after 
the conversion of all twelve Reserve Banks to the NBES.
 3. Automatic Rejection of Unmatched Transfers
    The Board also has considered a third possible receiver control 
feature whereby transfers for which there were no matching instructions 
found could be automatically rejected with no accounting entries made 
to the sender's or receiver's funds or securities accounts. If an 
automatic rejection feature were provided, it could not be made 
available until a later release of the NBES.
    In considering these potential features, the Board understands that 
most Fedwire book-entry securities transfer participants using 
computer-interface connections already are able to provide features for 
their customers that permit comparison of incoming securities against 
pre-loaded instructions. Therefore, the Board proposes that, if a 
notification of unmatched transfers and/or an automatic reversal of 
unmatched transfers was implemented in the NBES, its availability be 
limited to customers with a Fedline or equivalent connection.11 
Because an automatic rejection of unmatched transfers cannot be 
replicated by book-entry participants, the Board believes that, if 
implemented in the NBES, this feature would have to be made available 
to all Fedwire securities transfer customers.

    \11\Off-line customers must provide receipt instructions to the 
Federal Reserve Bank regarding anticipated incoming transfers prior 
to the delivery of the securities. By no later than March 1, 1995, 
any securities received for an off-line customer for which receipt 
instructions have not been provided will be immediately reversed. As 
such, off-line customers already are provided with a means to 
control the delivery of unanticipated securities.
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    The Board believes that an automatic reversal or automatic 
rejection feature, if used by the larger book-entry securities 
participants, could adversely affect the smooth functioning of the 
government securities market. If a bank used the automatic reversal or 
automatic rejection feature, it would have the responsibility to submit 
receipt instructions to the NBES prior to the origination of the 
securities transfer by the sender. The Board believes that significant 
changes in how dealers and clearing banks exchange information to 
facilitate securities settlement would be required if an automatic 
reversal or automatic rejection feature were to be used by the clearing 
banks. Under Public Securities Association good delivery guidelines for 
dealers and clearing banks, dealers are required to submit delivery 
instructions to clearing banks by 12:00 noon ET on the settlement date 
for next-day trades and as soon as is practicable for same-day trades. 
With an automatic reversal or automatic rejection feature, clearing 
banks would be unable to ``hold'' transfers received in the morning for 
the dealers to review, thus increasing the likelihood that a large 
number of good trades would be reversed or rejected back to the sender.
    The Board expects that banks would use an automatic reversal or 
automatic rejection feature to control the effects of daylight 
overdrafts in their accounts as a result of securities sent in error. 
It is possible, however, that some banks would use these features to 
control the time of day that anticipated securities deliveries are 
received. For example, if a bank was expecting a large securities 
delivery on a certain day but would not have funds available to cover 
the receipt until the afternoon, it could delay loading receipt 
instructions or load incomplete receipt instructions to ensure that 
securities delivered in the morning would be reversed or rejected. 
Public Securities Association good delivery guidelines stipulate that 
counterparties must accept delivery of [[Page 127]] securities for 
which they have executed a trade; thus any improper use of ``DKs,'' or 
reversals, would be regulated by the market. These guidelines, however, 
do not appear to address the treatment of rejected transfers. The use 
of these features potentially could cause gridlock in the market if 
banks manipulated the use of receipt instructions to control the time 
of delivery of incoming securities. The Board requests comment on the 
potential effects on the efficiency of the government securities market 
if an automatic reversal or automatic rejection capability were to be 
used by the major clearing and custody banks.

Operational and Procedural Changes Associated with Expanded Fedwire 
Book-Entry Securities Transfer Hours

     The Board anticipates that, at least initially, most banks would 
elect not to participate in expanded book-entry transfer hours. The 
Board believes that no costs would be imposed on banks that chose not 
to participate.
     Banks that have a need to participate in expanded hours would 
incur increased costs that would likely fall into two categories: (1) 
one-time costs to modify automated systems, and (2) ongoing costs to 
maintain and staff securities processing operations during the expanded 
hours.
     Software and hardware modifications necessary for banks to operate 
during expanded hours may include enhanced end-of-day processing, 
capacity upgrades, enhanced contingency operations, and design features 
that would permit certain customers the ability to transfer securities 
while others would remain closed and possibly the ability to 
accommodate the use of receipt instructions. These changes could 
involve significant lead time and resources for development and 
testing, particularly at clearing banks, custody banks, and dealers.
     In addition to system changes, earlier Fedwire securities transfer 
hours would affect the processing schedules of private clearing 
organizations, dealers, and the clearing banks. For example, end-of-day 
processing operations at clearing banks and trade comparison and 
netting operations of the Government Securities Clearing Corporation 
extend well beyond the close of the Fedwire securities transfer system 
into early morning hours of the next day. These schedules may have to 
be significantly condensed to accommodate an earlier Fedwire securities 
transfer opening time.
     The Board requests comment on system modifications that would be 
required for banks to participate during earlier operating hours as 
well as the costs associated with implementing these modifications. The 
Board also requests comment on the incremental ongoing costs associated 
with operating during expanded hours. Further, the Board requests 
comment on the changes that would be required in the operations of 
private clearing organizations, dealers, and clearing banks in order to 
accommodate earlier Fedwire securities transfer hours, and associated 
costs.
     The increase in Federal Reserve Bank ongoing operating costs to 
support a potential expansion of Fedwire securities transfer hours is 
expected to be small relative to the total cost of providing the 
Fedwire securities transfer service. Changes in the Fedwire securities 
transfer system to accommodate expanded hours processing would require 
significant lead time.

Fedwire Book-Entry Securities Transfer System Closing Time

     The Board also requests comment on a proposal to close the Fedwire 
securities transfer service at 3:00 p.m. ET for transfers and 3:30 p.m. 
ET for reversals, beginning in January 1996. The current published 
closing time is 2:30 p.m. ET for transfers and 3:00 p.m. ET for 
reversals; however, until recently these times were extended routinely 
to accommodate transaction processing volumes at large market 
participants.12 By establishing a firm closing time, extensions 
would be granted only in response to significant operating problems at 
a bank or major dealer or to prevent market disruption.

    \12\Since 1985 the average actual closing time has moved from 
5:30 p.m. ET to 3:30 p.m. ET.
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     The present closing time was established with the creation of the 
Fedwire book-entry system in the late 1960s. The closing time has 
remained unchanged even though the size of the government securities 
market has grown tremendously in terms of volume and number of issues 
in the past two decades.
     Prior to April 1994, about 20 percent of the value of securities 
transfers on Fedwire were processed by 10:00 a.m. ET, 40 percent by 
noon, and 75 percent by 2:00 p.m. The Fedwire securities transfer 
system typically closed at 4:00 p.m., one hour past its designated 
closing time. Since the implementation of daylight overdraft pricing on 
April 14, 1994, efficiencies gained in the trading and processing 
operations of dealers and clearing banks have altered the securities 
transfer processing cycle. Currently, almost 40 percent of the value of 
securities transfers are processed by 10:00 a.m., more than 60 percent 
by noon, and 90 percent by 2:00 p.m. The Fedwire securities transfer 
system has been closing on average by 3:30 p.m., including the reversal 
period.
    The Board believes that a firm closing time for the Fedwire 
securities transfer service would benefit market participants by 
reducing uncertainty. Both the Federal Reserve and market participants 
would be better able to plan staffing and other resource needs and 
thereby control costs with greater certainty than today.
     In addition, the Board believes a firm closing time would be 
desirable in an expanded Fedwire funds transfer operating hours 
environment. Because the end-of-day processing time at banks that 
participate in expanded funds transfer hours will be compressed by a 
12:30 a.m. ET opening, routine securities extensions that in turn 
affect the closing of the funds wire at 6:30 p.m. ET would further 
compress the time available for back-office processing.

Competitive Impact Analysis

     In considering an operational or legal change that would affect a 
Federal Reserve Bank priced service, the Board determines whether the 
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 legal differences.
     Other providers of securities transfer services do not provide 
services that are directly comparable to the Fedwire book-entry 
securities transfer service, because only the Federal Reserve Banks can 
provide final delivery-versus-payment of securities settled in central 
bank money. There are other private-sector systems, however, such as 
the Government Securities Clearing Corporation and the Participants 
Trust Company, that facilitate primary and secondary market trades of 
U.S. Treasury and agency securities. Other transactions involving U.S. 
government securities may be cleared and settled on the books of banks 
to the extent that the counterparties are customers of the same bank.
     The Board does not believe that expansion of Fedwire book-entry 
securities transfer operating hours, the implementation of receiver 
control features on the Fedwire book-entry securities transfer system, 
or the establishment of a firm closing time for the Fedwire securities 
transfer system would have a direct and material [[Page 128]] adverse 
effect on the ability of other service providers to offer similar 
services. These private-sector service providers could expand their 
operating hours to coincide with Fedwire operating hours, and could 
provide receiver control features to their participants. The Federal 
Reserve Banks, however, would maintain their unique position of 
providing risk-free central bank settlement.

Request for Comment

     The Board requests comment on the potential benefits, costs, and 
market effects associated with expanding its on-line book-entry 
securities service operating hours and the receiver control features 
that should be incorporated in NBES if operating hours are 
significantly expanded or that should be available during core business 
hours. The Board also requests comment on establishing a firm closing 
time of 3:00/3:30 p.m. ET for the Fedwire book-entry securities 
transfer service. Specifically, the Board requests comment on the 
following:

Potential Benefits of an Earlier Fedwire Book-Entry Securities Transfer 
Opening Time

    1. Do the commenters concur with the benefits described in this 
notice for opening the Fedwire book-entry on-line securities transfer 
service earlier in the day? Are there benefits beyond those identified 
in this notice to expanded Fedwire securities operating hours?
    2. Should the Board open the Fedwire securities transfer service 
earlier in the day? If so, would sometime shortly after the 
implementation of expanded Fedwire funds transfer hours be a reasonable 
effective date (i.e. 1998-1999)? What is the optimal opening time in 
the short-term (i.e. 1998-1999)? The long-term?
    3. If the Board were to implement an earlier (12:30 a.m. ET or 
other) opening time for the Fedwire securities transfer service in the 
1998-1999 time frame, do commenters believe that they would participate 
during the expanded hours?

Potential Receiver Control Features

    4. Should the ability to opt-in to expanded Fedwire securities 
transfer hours be provided at the securities account level? Why or why 
not?
    5. Would the first two receiver control features, i.e. (1) 
notification of unmatched transfers, (2) automatic reversal of 
unmatched transfers, provide an adequate means for Fedline customers to 
control the use of securities-related intraday credit during earlier 
operating hours? If so, which feature(s) would be useful and why? Would 
either of these features be useful for Fedline customers during core 
operating hours? If so, which feature(s) would be useful and why?
    6. Are receiver control features incorporated in the systems of 
computer-interface banks today? Please describe these features. To what 
extent are these features used by customers of computer-interface 
banks? Should notification of unmatched transfers or automatic reversal 
of unmatched transfers be provided to computer-interface banks? If yes, 
which feature(s) should be provided to computer-interface banks?
    7. What would be the effects on the efficiency of the government 
securities market if an automatic reversal or automatic rejection 
feature were to be used during core or earlier operating hours by 
clearing banks? If either of these features were provided, what is the 
likelihood that the feature(s) would be used to control the time-of-day 
of the receipt of incoming securities? Would the market effects of 
automatic rejection differ from those of automatic reversal? If yes, in 
what ways?
    8. Are there other features that should be considered for the 
National Book-Entry System for use during expanded hours only (e.g. 
free deliveries only, separate type codes)? Please describe.
    9. Should any of the possible receiver control features described 
in this notice and any other receiver control feature described by the 
commenter be offered at the securities account level?
    10. Would the implementation of expanded securities transfer 
operating hours or receiver control features require revisions to PSA 
good delivery guidelines or accounting practices? If yes, what changes 
would be required?

Operational and Procedural Changes Associated with Expanded Fedwire 
Book-Entry Securities Transfer Hours

    11. What changes would need to be made to the automated systems, 
operating procedures and/or policies of banks and their customers in 
order to participate in the Fedwire book-entry securities transfer 
system during expanded hours if an earlier opening time were adopted? 
What costs (e.g. systems, staff, operational, contingency) would be 
incurred as a result of earlier Fedwire securities transfer hours? 
Please explain and differentiate between short- and long-term costs and 
between capital investments and operating costs.
    12. How would an expansion of book-entry operating hours affect the 
operations of other securities depositories or clearing organizations 
and the entities that use the services of these organizations (e.g. 
Participants Trust Company, Government Securities Clearing 
Corporation)? Please describe. What costs would be incurred as a result 
of any operational changes at these institutions?
    13. Do the potential benefits of expanded hours outweigh the 
potential costs in the short-term? The long-term?

Fedwire Book-Entry Securities Transfer System Closing Time

    14. Should the Board implement a firm closing time for the Fedwire 
securities transfer service? If so, would a 3:00/3:30 p.m. ET firm 
closing time be appropriate? Would January 1, 1996 be an appropriate 
effective date for implementing a firm closing time?
    15. Should a later closing time be considered for the securities 
transfer service instead of or in addition to an earlier opening time?
    16. How much time is necessary between the close of the Fedwire 
book-entry service and the opening of the Fedwire funds transfer 
service in the short-term? The long-term?

    By order of the Board of Governors of the Federal Reserve 
System, December 21, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-31981 Filed 12-30-94; 8:45am]
BILLING CODE 6210-01-P