[Federal Register Volume 60, Number 157 (Tuesday, August 15, 1995)]
[Notices]
[Pages 42417-42423]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20136]



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[[Page 42418]]


FEDERAL RESERVE SYSTEM

[Docket No. R-0890]


Federal Reserve Payment System Risk Policy

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: The Board has approved certain modifications to its Fedwire 
third-party access policy to clarify its applicability and to reduce 
the administrative burden of several provisions. Some depository 
institutions have entered into arrangements under which a third party 
provides operating facilities for their Fedwire services; under such 
arrangements, the third party's actions may result in a debit to the 
institution's reserve or clearing account at a Federal Reserve Bank. 
The policy provides important safeguards to both depository 
institutions participating in third-party access arrangements and to 
the Reserve Banks. Among other things, the policy requires depository 
institutions to impose prudent controls over Fedwire funds transfers 
and book-entry securities transfers initiated, received, or otherwise 
processed on their behalf by a third-party service provider. These 
policy modifications are interim modifications, pending the completion 
of a broader review of supervisory policies that should be applicable 
to outsourcing arrangements. The review may result in further 
modifications to the policy; however, the Board believes that any 
further modifications will be in the same general direction as those 
made today. The Federal Reserve Banks will not approve any new third-
party access arrangements involving a foreign service provider, pending 
further analysis of issues associated with such arrangements.

EFFECTIVE DATE: August 10, 1995.

FOR FURTHER INFORMATION CONTACT: Gayle Brett, Manager (202/452-2934) or 
Lisa K. Hoskins, Project Leader (202/452-3437), Fedwire Payments, 
Division of Reserve Bank Operations and Payment Systems; for the 
hearing impaired only: Telecommunications Device for the Deaf, Dorothea 
Thompson (202/452-3544).

SUPPLEMENTARY INFORMATION:

I. Background

    Fedwire is the large-value payment mechanism owned and operated by 
the Federal Reserve Banks. Fedwire provides depository institutions 
with real-time gross settlement in central bank money of funds 
transfers and book-entry securities transfers made for their own 
account or on behalf of their customers. Typically, each depository 
institution that holds an account at the Federal Reserve processes its 
own transfers and accesses Fedwire directly. In some cases, however, a 
depository institution accesses Fedwire through a third-party access 
arrangement in which a service provider, acting as agent for a 
depository institution, initiates payments that are posted to the 
institution's account at the Federal Reserve. Third-party access 
arrangements are a form of outsourcing. Depository institutions use 
service providers to perform a number of functions, including customer 
accounting, check and automated clearing house (ACH) processing, and 
the processing and/or transmission of large-value funds and securities 
transfers. Depository institutions have increasingly viewed outsourcing 
arrangements as one way to reduce operating costs.
    During the mid-1980s, the Board and Reserve Banks became concerned 
about the credit exposure faced by depository institutions that 
contracted with a third-party service provider to process Fedwire funds 
transfers on their behalf. Due to the concerns raised about the legal, 
supervisory, and payments system risk implications of such 
arrangements, a moratorium on approving additional arrangements was 
imposed in 1985 until these issues could be reviewed and guidelines 
established.
    In July 1987, the Board approved a set of conditions under which 
Fedwire third-party access arrangements could be established, as part 
of its payment system risk reduction policy (52 FR 29255, August 6, 
1987). Specifically, the Board adopted a policy placing certain 
conditions on the ability of a service provider to initiate Fedwire 
transfers from a participant's reserve or clearing account held at the 
Federal Reserve.1 The Board's original policy addressed two types 
of arrangements. Where the service provider and the participant are not 
affiliated, the participant must authorize each individual transfer 
before it is sent to a Reserve Bank. Where the service provider and the 
participant are affiliated, the participant may establish limits within 
which the service provider is authorized to act. For purposes of the 
policy, an affiliated service provider is defined as an organization 
that has at least 80 percent common ownership with the participant.

    \1\  The original issues surrounding third-party access 
arrangements arose in the context of funds transfer arrangements, 
and the language of the original policy reflected this orientation. 
Board staff subsequently interpreted the policy to include Fedwire 
book-entry securities transfer arrangements within its scope. Board 
staff also interpreted the policy to cover all situations where 
transfer instructions are not communicated directly to the Reserve 
Bank by the sending bank, but rather are transmitted indirectly 
through another entity.
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    Since the third-party access policy went into effect, the Federal 
Reserve Banks have approved approximately 500 third-party service 
arrangements.2 During this time a number of issues and requests 
for clarification have been raised with respect to the policy. These 
questions relate to: (1) the circumstances under which line-of-credit 
arrangements can be used; (2) the responsibility of a participant to 
monitor its reserve or clearing account in line-of-credit arrangements; 
(3) the need for a participant to have backup capabilities in the event 
the Federal Reserve Bank terminates the arrangement; and (4) the duties 
that may be assigned to personnel employed by the parties to the 
arrangement.

    \2\  The number of current arrangements is less than the number 
approved because of mergers and changes in relationships between 
participants and service providers. Because some of the approved 
arrangements involved multiple participants using the same service 
provider, however, there may be more than 500 Fedwire participants 
currently using third-party service providers for Fedwire 
processing.
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    Issues also were raised about the scope of the policy. Questions of 
scope include: (1) whether the policy applies to arrangements for book-
entry securities transfers as well as funds transfers; (2) whether the 
policy applies to arrangements in which a service provider serves as a 
communications link but does not process the transfers; (3) whether the 
policy applies when an institution contracts with a third party to 
process transfers that subsequently are routed through the participant 
to the Reserve Bank; and (4) whether the policy applies to arrangements 
in which the service provider is located outside the United States.
    In considering modifications to the Fedwire third-party access 
policy, the Board has determined that it would be useful to undertake a 
broader review of supervisory policies that should be applicable to a 
larger range of outsourcing arrangements. The staff has begun to review 
broader issues relating to outsourcing generally, including, for 
example, the extent to which termination backup requirements should 
apply to other critical functions outsourced by banks and whether 
foreign service provider arrangements should be subject to special 
conditions. It is possible that the Board will modify further the 
Fedwire third-party access policy following completion of the 

[[Page 42419]]
study. The Board believes, however, that any additional modifications 
to this policy are likely to be consistent with the changes made today 
to reduce further the costs imposed by the policy.

II. Provision-by-Provision Analysis

    The following identifies each provision of the revised Fedwire 
third-party access policy and discusses how and why it differs from the 
original policy provision.

A. Scope

Revised Provision
    The Board will allow third-party access arrangements whereby a 
sending or receiving institution (``the participant'') designates 
another depository institution or other entity (``the service 
provider'') to initiate, receive, and/or otherwise process Fedwire 
funds transfers or book-entry securities transfers that are posted to 
the participant's reserve or clearing account held at the Federal 
Reserve, provided the following conditions are met: 3

    \3\  This policy applies to third-party access arrangements in 
which an office of the participant located outside the U.S. acts as 
service provider by initiating, receiving, or otherwise processing 
Fedwire transfers on behalf of the U.S. participant.
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Original Provision
    The Board will allow, under certain conditions, arrangements by 
which a depository institution or other entity (``the service 
provider'') could initiate Fedwire transfers from the Federal Reserve 
account of another depository institution (``the participant''). Such 
arrangements will be permitted provided:
    The original policy applied to arrangements where funds transfers 
or book-entry securities transfers were charged or credited to a 
depository institution's reserve or clearing account held at the 
Federal Reserve and for which the depository institution did not 
provide its transfer instructions directly to the Federal Reserve, but 
rather transmitted its instructions indirectly through another entity. 
The revised policy applies to the arrangements described above, as well 
as arrangements where an institution contracts with a third party to 
process transfers that subsequently are routed through the participant 
to the Reserve Bank. The Board believes that, whenever a service 
provider plays a role in processing Fedwire funds transfers or book-
entry securities transfers that affect the participant's reserve or 
clearing account, the arrangement should be subject to the third-party 
access policy. The revised policy governs all arrangements in which a 
service provider has the operational ability to add or modify transfer 
instructions that will be posted to the participant's reserve or 
clearing account held at the Federal Reserve. As a result, 
communications carriers whose sole job is to transmit transfer 
instructions between entities are excluded from this policy.
    The original policy is silent on whether the service provider can 
be located outside the United States. The Reserve Banks have not 
approved any such arrangements; however, several inquiries have been 
received during the last few years. Such arrangements raise a number of 
supervisory issues. In addition, because the original third-party 
access policy applies only to arrangements where the service provider 
is a separate legal entity from the participant, a Fedwire participant 
could designate an office of its bank located outside the U.S. to 
process Fedwire transfers on its behalf without obtaining prior 
approval from the Reserve Bank. The Reserve Bank and the primary 
regulator may be unaware of such an arrangement until discovered in the 
course of an examination. The Board believes that many of the issues 
that arise with respect to foreign service providers also arise when a 
foreign office of a Fedwire participant processes that participant's 
Fedwire transfers. Consequently, the Board has broadened the scope of 
the policy to include such arrangements. Any existing arrangements 
involving a foreign service provider must be reported promptly to the 
participant's Reserve Bank. The Reserve Bank will work with the 
participant and its primary supervisor to determine the extent to which 
the arrangement complies with the policy and the appropriateness of the 
arrangement. No new arrangements involving the outsourcing of Fedwire 
processing to a foreign service provider will be approved by the 
Reserve Banks pending the completion of the Board's analysis of issues 
associated with foreign service provider arrangements.

B. Control of Credit-Granting Process

Revised Condition (#1)

    The participant retains operational control of the credit-
granting process by (1) individually authorizing each funds or 
securities transfer, or (2) establishing individual customer 
transfer limits and a transfer limit for the participant's own 
activity, within which the service provider can act. The transfer 
limit could be a combination of the account balance and established 
credit limits. For the purposes of this policy, these arrangements 
are called ``line-of-credit arrangements.''

Original Condition (#1)

    The institution whose account is being charged (the 
``institution'') retains control of the credit-granting process by 
individually approving each transfer or establishing credit limits 
within which the service provider can act.

Original Condition (#12)

    No individual with decision-making responsibilities relating to 
the funds-transfer area may hold such a position in more than one 
affiliated institution participating in an approved arrangement.

    The Board believes that it is important for the participant to 
retain operational control of the credit-granting process under a 
third-party access arrangement. The revised language (1) clarifies that 
this condition applies to both funds transfer and book-entry securities 
transfer arrangements; (2) removes the restriction that line-of-credit 
arrangements are permissible only where the service provider and 
participant are affiliated organizations; 4 and (3) deletes the 
condition in the original policy that no individual with decision-
making responsibilities related to Fedwire may hold such a position in 
multiple institutions participating in the arrangement.

    \4\ In original condition 2, line-of-credit arrangements were 
limited to participants that used affiliated service providers.
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    The Board believes that the participant can retain operational 
control of the credit-granting process either by individually 
authorizing each transfer based on specific parameters (e.g., customer 
account balance and/or available credit line) or by permitting the 
service provider to make the same decisions the participant would have 
made based on the specific parameters established by the participant. 
Therefore, the Board does not believe it is necessary to limit the 
circumstances in which line-of-credit arrangements can be used. The 
revised policy clarifies further that the transfer limits in line-of-
credit arrangements must be established by the participant for 
individual customer activity and for the participant's own activity. 
Some participants may prefer to establish lines of credit for certain 
categories of transfers (e.g., customer activity), but to authorize 
individual transfers for other categories (e.g., the participant's own 
activity).
    The original provision prohibiting an individual with Fedwire-
related responsibilities from holding such a position in multiple 
institutions participating in the arrangement was intended to ensure 
that a participant retains control of its reserve account and of its 
credit-granting function and does 

[[Page 42420]]
not effectively relinquish control of these functions to the service 
provider. The Board believes that this condition has posed problems in 
cases where an individual with Fedwire-related responsibilities is an 
officer of multiple holding company affiliates that wished to establish 
Fedwire third-party access arrangements. The Board has deleted this 
specific provision from the revised policy, but continues to believe 
that it is important that the participant retain operational control of 
the establishment of criteria for approving Fedwire transfers handled 
by the service provider.

C. Transfers That Would Exceed the Established Transfer Limit

Revised Condition (#2)

    In funds transfer line-of-credit arrangements, the service 
provider must have procedures in place and the operational ability 
to ensure that a funds transfer that would exceed the established 
transfer limit is not permitted without first obtaining the 
participant's approval. In book-entry securities transfer line-of-
credit arrangements, the service provider must have procedures in 
place and the operational ability to provide the participant with 
timely notification of an incoming transfer that exceeds the 
applicable limit and must act upon the participant's instructions to 
accept or reverse the transfer accordingly.
Original Condition (#3)

    The service provider must not permit or initiate transfers that 
would exceed individual credit limits without first obtaining the 
institution's permission.

    The Board believes that it is important to retain the condition 
that customer credit limits are operationally binding on the service 
provider and that the service provider may not exceed those limits 
without the participant's permission. The language of this condition 
has been revised to distinguish between arrangements involving Fedwire 
funds transfers and book-entry securities transfers. In a funds 
transfer, the participant's reserve or clearing account held at the 
Reserve Bank is debited when the transfer is processed; therefore, 
transfer limits or controls must be in place before the transfer is 
made. In a book-entry securities transfer, however, the participant's 
reserve/clearing account is debited for each incoming transfer; 
therefore, transfer limits can only be monitored in an ex post fashion. 
As a result, the service provider must be able to notify the 
participant in a timely manner about incoming transfers that exceed the 
applicable limit so that the participant can instruct the service 
provider to accept or reverse the transfer accordingly.

D. Posting Transfers and Responsibility for Account Management

Revised Condition (#3)

    Transfers will be posted to the participant's reserve or 
clearing account held at the Federal Reserve, and the participant 
will remain responsible for managing its Federal Reserve account, 
with respect to both its intraday and overnight positions. The 
participant must be able to monitor transfer activity conducted on 
its behalf.

Original Condition (#5)

    All funds-transfer activity must be posted to the institution's 
account, and the institution will remain responsible for its 
account.

Original Condition (#9)

    The institution must have the ability to monitor transfers being 
made on its behalf.

    The revised condition (1) eliminates the language that limits the 
condition to funds-transfer activity; (2) clarifies that responsibility 
for management of the participant's reserve or clearing account, 
including control over daylight overdrafts, remains with the 
participant; and (3) incorporates the requirement that the participant 
be able to monitor its transfer activity.

E. Board of Directors' Approval

Revised Condition (#4)

    The participant's board of directors must approve the role and 
responsibilities of a service provider(s) that is not affiliated 
with the participant through at least 80 percent common ownership. 
In line-of-credit arrangements, the participant's board of directors 
must approve the intraday overdraft limit for the activity to be 
processed by the service provider and the credit limits for any 
inter-affiliate funds transfers.5

    \5\ In cases where a U.S. branch of a foreign bank wishes to be 
a participant in an arrangement subject to this policy, and its 
board of directors has a more limited role in the bank's management 
than a U.S. board, the role and responsibilities of the service 
provider should be reviewed by senior management at the foreign 
bank's head office that exercises authority over the foreign bank 
equivalent to the authority exercised by a board of directors over a 
U.S. depository institution.
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Original Condition (#4)

    The service provider must have the operational ability to ensure 
that the aggregate funds-transfer activity of the institution does 
not result in daylight overdrafts in excess of the institution's 
cap.

Original Condition (#6)

    The institution's board of directors must approve the specifics 
of the arrangement, including (a) the operational transfer of its 
funds-transfer activity to the service provider, (b) the net debit 
cap for the activity to be processed by the service provider, and 
(c) the credit limits for any inter-affiliate funds transfers.

    The Board has modified this condition to: (1) Limit the 
participant's board of directors' review of the roles and 
responsibilities of the service provider to arrangements where the 
service provider is not affiliated with the participant; (2) eliminate 
the language that limits the condition to funds-transfer arrangements; 
(3) clarify that certain issues to be considered by the board of 
directors are pertinent only to line-of-credit arrangements; and (4) 
encompass arrangements where more than one service provider handles a 
participant's transfer activity. The Board also acknowledges that the 
board of directors of a foreign bank might have more limited 
responsibilities than those typical of a U.S. board and has indicated 
that whatever body exercises similar authority in these situations 
would be the appropriate decision-maker with respect to the provisions 
of this policy that fall within the purview of a participant's board of 
directors.

F. Backup

Revised Condition (#5)

    The Board expects all participants to ensure that their Fedwire 
operations could be resumed in a reasonable period of time in the 
event of an operating outage, consistent with the requirement to 
maintain adequate contingency backup capabilities as set forth in 
the interagency policy (FFIEC SP-5, July 1989). A participant is not 
relieved of such responsibility because it contracts with a service 
provider.

Revised Condition (#6)

    In cases where the service provider is not affiliated with the 
participant through at least 80 percent common ownership, the 
participant must be able to continue Fedwire operations if the 
participant is unable to continue its service provider arrangement 
(e.g., in the event the Reserve Bank or the participant's primary 
supervisor terminates the service provider arrangement).

Original Condition (#8)

    The institution must have adequate backup procedures and 
facilities to cover equipment failure or other developments 
affecting the adequacy of the service being provided. This backup 
must provide the Reserve Bank with the ability to terminate a 
service-provider arrangement.

    The original backup requirement had two facets: (1) contingency 
backup to enable recovery in the event of an operating outage and (2) 
the ability of the participant to continue transfer activity in the 
event the arrangement with the service provider is terminated. The 
Board expects all Fedwire participants to maintain adequate contingency 
backup capabilities in accordance with the policy adopted by the 
federal banking regulatory agencies; a participant is not relieved of 
such responsibility because it contracts with a service provider. 
Revised condition #5 references explicitly the interagency policy that 
requires a depository 

[[Page 42421]]
institution to have contingency backup capabilities more broadly than 
for Fedwire processing.
    The original ``termination backup'' requirement provided the 
participant's Reserve Bank with the flexibility to terminate an 
arrangement if it determined that the service provider was in a 
precarious financial condition, was performing its responsibilities in 
an unsafe and unsound manner, or was otherwise jeopardizing the 
condition of the participant. The termination backup requirement can be 
satisfied either by (1) retaining the capability to perform the 
functions internally that have been delegated to the service provider; 
or (2) making arrangements with an alternate service provider to take 
over these functions in the event that the arrangement must be 
terminated.
    The Board recognizes that the termination backup requirement may 
have made third-party access arrangements impractical for some large 
institutions, due to the expense required either to have the internal 
capability to take over the functions of the service provider or to 
arrange with a backup service provider that has the capability and 
necessary software to assume these functions on short notice. This 
condition could prevent some institutions from benefiting from the cost 
savings that could be derived from a third-party access arrangement.
    The Board has limited the termination backup requirement to 
arrangements in which the service provider is not affiliated with the 
participant. Most of the arrangements that have been approved to date 
involve affiliated parties. In arrangements where the service provider 
is affiliated with the participant, the participant is likely to have 
information about the service provider that would enable the 
participant to take actions to foster improvements in the financial 
condition and/or operating controls of the service provider before the 
situation deteriorates to the point that the Reserve Bank or the 
participant's primary supervisor would be likely to terminate the 
arrangement. The Board believes it is necessary at this time to retain 
the termination backup requirement for unaffiliated service provider 
arrangements in order to provide the Reserve Bank or the participant's 
primary supervisor with a higher level of supervisory control over such 
arrangements.
    The Board notes that federal banking regulators currently do not 
require depository institutions to provide equivalent termination 
backup capabilities for other critical functions, such as customer 
deposit accounting (e.g., demand deposit accounting, or DDA) and loan 
processing, which provide management with information that may be 
necessary to approve Fedwire funds transfers and securities transfers. 
The Board plans to evaluate, as part of its broader review of 
outsourcing generally, the extent to which the ``termination backup'' 
requirement should apply to other business applications/functions that 
are outsourced to a third-party service provider, especially where 
there are dependencies between such functions and the Fedwire funds 
transfer and securities transfer services.
G. Consistency With Corporate Separateness and Branching Restrictions

Revised Condition (#7)

    The participant must certify that the arrangement is consistent 
with corporate separateness and does not violate branching 
restrictions.

Original Condition (#10)

    The institution must provide an opinion of counsel that the 
arrangement is consistent with corporate separateness and does not 
violate branching restrictions.

    The third-party access policy raises potential concerns regarding 
maintenance of separate corporate identities between the service 
provider and the participant. Moreover, given the definition of 
``branch'' as a location at which deposits are received, checks paid, 
or money lent, certain third-party access arrangements may raise 
questions regarding whether the location of the service provider is 
deemed a branch of the participant. The Board believes that the 
participant should carefully review the arrangement for consistency 
with corporate separateness and state branching restrictions. Although 
the participant may desire an opinion of counsel to make this 
certification, the Board believes that the participant's certification 
that the arrangement is consistent with corporate separateness and 
branching restrictions is sufficient and that the Reserve Bank need not 
require a copy of an opinion of counsel addressing these issues.

H. Compliance With Applicable Laws and Regulations

Revised Condition (#8)

    The participant must certify that the specifics of the 
arrangement will allow the participant to comply with all applicable 
state and federal laws and regulations governing the participant, 
including, for example, retaining and making accessible records in 
accordance with the regulations adopted under the Bank Secrecy Act.

Original Condition

    None.

    In clarifying the scope of the policy, the Board believes it is 
important that the participant in a third-party access arrangement 
certify that the arrangement will be established in such a way to allow 
the participant to comply with all applicable state and federal laws 
and regulations, particularly those associated with record retention 
and availability of records, as required under the Bank Secrecy Act 
regulations (31 CFR Part 103). If, subsequent to establishing an 
arrangement, the Reserve Bank receives information that the operations 
or activities of the participant or its service provider do not comply 
with applicable state and federal laws and regulations, the Reserve 
Bank may terminate the third-party access arrangement.

I. Primary Supervisor

Revised Condition (#9)

    The participant's primary supervisor(s) must affirmatively state 
in writing that it does not object to the arrangement.

Original Condition (#11)

    The primary supervisor must not object to the arrangement.

    The Board believes that it is important for the participant's 
primary supervisor(s) to review, and affirmatively not object to, each 
proposed third-party access arrangement. The provision has been 
modified further to recognize that some state-chartered institutions 
must inform both state and federal supervisors.

J. Audit Program

Revised Condition (#10)

    The participant must have in place an adequate audit program to 
review the arrangement at least annually to confirm that these 
requirements are being met.

Original Condition (#13)

    The institution must have in place an adequate audit program to 
review the arrangements at least annually to confirm that these 
requirements are being met.

    The Board continues to believe that, because an agent is effecting 
transfers to and from the participant's reserve or clearing account 
held at the Federal Reserve and because the arrangement originally 
approved may change over time, it is in the interest of the participant 
to have its auditors confirm compliance with proper procedures. 

[[Page 42422]]


K. Service Provider Examination
Revised Condition (#11)

    The service provider must be subject to examination by the 
appropriate federal depository institution regulatory 
agency(ies).6

    \6\ The U.S. federal depository institution regulatory 
agency(ies) must be able to examine any aspects of the service 
provider as may be necessary to assess the adequacy of the 
operations and financial condition of the service provider.
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Original Condition (#2) 7

    \7\ The ``affiliation'' requirement for line-of-credit 
arrangements is discussed in the context of revised condition 1.
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    The service provider must be an affiliate of the institution, 
or, if the institution approves each individual transaction, an 
unaffiliated company. All service providers must be subject to 
examination.

    Depository institution service providers are subject to examination 
by the institution's primary supervisor. Service providers that are 
nonbank subsidiaries of a bank holding company are subject to 
examination by the Federal Reserve. Service providers that are not 
depository institutions or affiliates of bank holding companies may be 
subject to examination pursuant to the Bank Services Corporation 
Act.8 Service providers that are subsidiaries of banks are subject 
to examination by the parent bank's primary supervisor(s). The Board 
believes that the service provider must acknowledge that it is subject 
to examination by the appropriate federal depository institution 
regulatory agency(ies). The requirement that the service provider be 
subject to examination also applies to arrangements where the 
participant's service provider arranges for a separate service provider 
to handle the participant's Fedwire transfers.

    \8\ Section 7(c) of the Bank Services Corporation Act provides 
that `` * * * whenever a bank that is regularly examined by an 
appropriate Federal banking agency * * * causes to be performed for 
itself, by contract or otherwise, any services authorized under this 
Act, whether on or off its premises * * * such performance shall be 
subject to regulation and examination by such agency to the same 
extent as if such services were being performed by the bank itself 
on its own premises.''
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L. Agreements

Revised Condition (#12)

    The participant and the service provider(s) must execute an 
agreement with the relevant Reserve Bank(s) incorporating these 
conditions.

Original Condition (#7)

    The institution and the service provider must execute an 
agreement with the relevant Reserve Banks delineating the terms of 
the agreement.

    This condition was revised to reflect the possibility that a 
participant's transfer activity may be handled operationally by more 
than one service provider in a given third-party access arrangement. 
The Reserve Banks have indicated that the conditions under which these 
arrangements could be established will be set forth in uniform 
appendices to the Fedwire funds transfer and book-entry securities 
transfer operating circulars. The uniform operating circular appendices 
would replace the individual comprehensive legal agreements that are 
currently used in most districts; would be easier to modify; and would 
govern arrangements of which the Reserve Bank otherwise may not be 
aware (for example, arrangements where transfers are processed by a 
service provider but transmitted to the Reserve Bank by the 
participant). The appendices to the operating circulars will include a 
model letter certifying compliance with circular requirements that 
would be signed by the participant and the service provider(s). Such a 
letter could be useful in the event that a service provider, especially 
a non-depository institution, may not have agreed to abide by the terms 
of the Reserve Bank operating circular through the general agreement. 
The Board believes that it is not necessary for Reserve Banks to obtain 
new agreements for existing arrangements because the revised policy is 
less restrictive than the original policy.

M. Review and Approval of Proposed Arrangements

Revised Condition (Closing Paragraph)

    The Federal Reserve Bank is responsible for approving each 
proposed Fedwire third-party access arrangement. In a proposed 
arrangement in which the participant is not affiliated through at 
least 80 percent common ownership with the service provider and 
where the participant is owned by one of the 50 largest bank holding 
companies (based on consolidated assets), the Directors of the 
Division of Reserve Bank Operations and Payment Systems and the 
Division of Banking Supervision and Regulation must concur with the 
arrangement.

Original Condition (Closing paragraph)

    In order to ensure consistency with the Board's policy, each new 
arrangement should be reviewed by the Director of the Division of 
Federal Reserve Bank Operations prior to approval by the Reserve 
Bank.

    The Reserve Banks are responsible for approving proposed Fedwire 
third-party access arrangements before they become operational. Under 
the original policy, approval of all proposed arrangements was subject 
to review by Board staff. The Board believes that, given the number of 
existing third-party access arrangements, establishment of such 
arrangements has become more routine. Therefore, the Board has 
eliminated the requirement for Board staff review of most third-party 
access arrangements. The Board has retained, however, the requirement 
that Board staff review arrangements where the service provider is 
unaffiliated with the participant, and the participant is owned by one 
of the 50 largest bank holding companies (based on consolidated assets) 
before Reserve Bank approval. The Board believes that greater scrutiny 
of this subset of arrangements is warranted due to the significant 
value of the Fedwire transfers that would be handled by a service 
provider that is not affiliated with the participant.

III. Effective Date

    The revised Fedwire third-party access policy becomes effective 
immediately. Existing Fedwire arrangements must comply by March 1, 
1996. All arrangements established after the effective date must comply 
with the policy when established.

IV. Competitive Impact Analysis

    The Board assesses the competitive impact of changes that may have 
a substantial effect on payment system participants. In particular, the 
Board assesses whether a proposed change would have a direct and 
material adverse effect on the ability of other service providers to 
compete effectively with the Federal Reserve Banks in providing similar 
services and whether such effects are due to legal differences or due 
to a dominant market position deriving from such legal differences.
    The Federal Reserve Banks' Fedwire funds transfer and book-entry 
securities transfer services provide real-time gross settlement in 
central bank money. While these services cannot be duplicated by 
private-sector service providers, banks can make large-dollar funds 
transfers through other systems, such as CHIPS, or through 
correspondent book transfers, although these transactions have 
attributes that differ from Fedwire transfers. Similarly, there are 
private-sector securities clearing and/or settlement systems, 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's third-party access policy places conditions on 
arrangements in which a Fedwire participant may contract with another 
organization to 

[[Page 42423]]
initiate, receive, or otherwise process Fedwire transfers. The Board 
has revised the policy to clarify its scope and reduce its 
administrative and operational burden. Neither the original nor the 
revised policy adversely affects the ability of other service providers 
to compete with the Federal Reserve Banks to provide funds transfer or 
securities transfer services.
V. Policy Statement

    The Board has amended its ``Federal Reserve System Policy Statement 
on Payments System Risk'' under the heading ``I. Federal Reserve 
Policy'' by replacing ``G. Third-party access arrangements'' with the 
following:

G. Fedwire Third-Party Access Policy

    The Board will allow third-party access arrangements whereby a 
sending or receiving institution (``the participant'') designates 
another depository institution or other entity (``the service 
provider'') to initiate, receive, and/or otherwise process Fedwire 
funds transfers or book-entry securities transfers that are posted to 
the participant's reserve or clearing account held at the Federal 
Reserve, provided the following conditions are met: 1

    \1\ This policy applies to third-party access arrangements in 
which an office of the participant located outside the United States 
acts as service provider by initiating, receiving, or otherwise 
processing Fedwire transfers on behalf of the U.S. participant.
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    1. The participant retains operational control of the credit-
granting process by (1) individually authorizing each funds or 
securities transfer, or (2) establishing individual customer transfer 
limits and a transfer limit for the participant's own activity, within 
which the service provider can act. The transfer limit could be a 
combination of the account balance and established credit limits. For 
the purposes of this policy, these arrangements are called ``line-of-
credit arrangements.''
    2. In funds transfer line-of-credit arrangements, the service 
provider must have procedures in place and the operational ability to 
ensure that a funds transfer that would exceed the established transfer 
limit is not permitted without first obtaining the participant's 
approval. In book-entry securities transfer line-of-credit 
arrangements, the service provider must have procedures in place and 
the operational ability to provide the participant with timely 
notification of an incoming transfer that exceeds the applicable limit 
and must act upon the participant's instructions to accept or reverse 
the transfer accordingly.
    3. Transfers will be posted to the participant's reserve or 
clearing account held at the Federal Reserve, and the participant will 
remain responsible for managing its Federal Reserve account, with 
respect to both its intraday and overnight positions. The participant 
must be able to monitor transfer activity conducted on its behalf.
    4. The participant's board of directors must approve the role and 
responsibilities of a service provider(s) that is not affiliated with 
the participant through at least 80 percent common ownership. In line-
of-credit arrangements, the participant's board of directors must 
approve the intraday overdraft limit for the activity to be processed 
by the service provider and the credit limits for any inter-affiliate 
funds transfers.2

    \2\ In cases where a U.S. branch of a foreign bank wishes to be 
a participant in an arrangement subject to this policy, and its 
board of directors has a more limited role in the bank's management 
than a U.S. board, the role and responsibilities of the service 
provider should be reviewed by senior management at the foreign 
bank's head office that exercises authority over the foreign bank 
equivalent to the authority exercised by a board of directors over a 
U.S. depository institution.
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    5. The Board expects all participants to ensure that their Fedwire 
operations could be resumed in a reasonable period of time in the event 
of an operating outage, consistent with the requirement to maintain 
adequate contingency backup capabilities as set forth in the 
interagency policy (FFIEC SP-5, July 1989). A participant is not 
relieved of such responsibility because it contracts with a service 
provider.
    6. In cases where the service provider is not affiliated with the 
participant through at least 80 percent common ownership, the 
participant must be able to continue Fedwire operations if the 
participant is unable to continue its service provider arrangement 
(e.g., in the event the Reserve Bank or the participant's primary 
supervisor terminates the service provider arrangement).
    7. The participant must certify that the arrangement is consistent 
with corporate separateness and does not violate branching 
restrictions.
    8. The participant must certify that the specifics of the 
arrangement will allow the participant to comply with all applicable 
state and federal laws and regulations governing the participant, 
including, for example, retaining and making accessible records in 
accordance with the regulations adopted under the Bank Secrecy Act.
    9. The participant's primary supervisor(s) must affirmatively state 
in writing that it does not object to the arrangement.
    10. The participant must have in place an adequate audit program to 
review the arrangement at least annually to confirm that these 
requirements are being met.
    11. The service provider must be subject to examination by the 
appropriate federal depository institution regulatory 
agency(ies).3

    \3\  The U.S. federal depository institution regulatory 
agency(ies) must be able to examine any aspects of the service 
provider as may be necessary to assess the adequacy of the 
operations and financial condition of the service provider.
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    12. The participant and the service provider(s) must execute an 
agreement with the relevant Reserve Bank(s) incorporating these 
conditions.
    The Federal Reserve Bank is responsible for approving each proposed 
Fedwire third-party access arrangement. In a proposed arrangement in 
which the participant is not affiliated through at least 80 percent 
common ownership with the service provider and where the participant is 
owned by one of the 50 largest bank holding companies (based on 
consolidated assets), the Directors of the Division of Reserve Bank 
Operations and Payment Systems and the Division of Banking Supervision 
and Regulation must concur with the arrangement.

    By order of the Board of Governors of the Federal Reserve 
System, August 9, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-20136 Filed 8-14-95; 8:45 am]
BILLING CODE 6210-01-P