[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Notices]
[Pages 18022-18027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9665]


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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.

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SUMMARY: The Board has decided to not implement an earlier opening time 
for the Fedwire securities transfer service at this time due to the 
anticipated cost and technical hurdles identified by various industry 
participants and concerns expressed by the Treasury. These concerns may 
decline in the future as participants improve their internal operating 
environments (e.g., by implementing real-time and straight-through 
processing and better contingency availability) and gain experience 
with expanded Fedwire funds transfer operating hours. The Board will 
monitor developments associated with expanded Fedwire funds transfer 
hours as well as developments in U.S. government securities settlement 
practices and, if market demand for transferring government securities 
earlier in the day increases or the related cost or operational burden 
declines materially, the Board, in consultation with the Treasury, will 
reconsider the desirability of opening the Fedwire securities transfer 
service earlier in the day.
    The Board also has approved the introduction of an optional 
automatic reversal feature for institutions that access the National 
Book-Entry System via a Fedline connection. The Board believes that the 
availability of automated receiver control features in the National 
Book-Entry System would provide these participants with additional 
flexibility to manage the receipt of misdirected or incorrect 
securities transfers and any associated debits to their account holding 
reserve or clearing balances. This feature likely will be made 
available to Fedline participants during 2000. Once an implementation 
schedule is finalized, the Reserve Banks will notify depository 
institutions regarding the specific date that the receiver control 
feature will be available to Fedline participants.

FOR FURTHER INFORMATION CONTACT: Louise L. Roseman, Associate Director 
(202/452-2789), Jeff Stehm, Manager (202/452-2217), 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 Device for the Deaf, 
Diane Jenkins (202/452-3544).

SUPPLEMENTARY INFORMATION:

I. Background

    In February 1994, the Board announced approval of an expansion of 
the operating hours for the Fedwire on-line funds transfer service to 
18 hours a day, from 12:30 a.m. to 6:30 p.m. Eastern Time, beginning in 
1997 (59 FR 8981, February 24, 1994; 60 FR 110, January 3, 
1995).1 2 In that announcement, the Board 
concluded that expanded Fedwire funds transfer operating hours could be 
a useful component of private-sector initiatives to reduce settlement 
risk in the foreign exchange markets and would eliminate an operational 
barrier to potentially important innovation in privately provided 
payment and settlement services.
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    \1\ All times are Eastern Time unless otherwise noted.
    \2\ These operating hours became effective on December 8, 1997. 
(61 FR 5433, November 6, 1996).
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    Following its action on expanding Fedwire funds transfer operating 
hours,

[[Page 18023]]

the Board requested comment in January 1995 on: (1) the potential 
benefits, costs, and market implications of opening the on-line Fedwire 
securities transfer service earlier in the day on a voluntary basis; 
(2) new service capabilities that would allow depository institutions 
to control their use of intraday credit during expanded and/or core 
business hours; and (3) a proposal to establish a firm closing time for 
the Fedwire securities transfer service (60 FR 123, January 3, 1995). 
Effective January 2, 1996, the Board adopted a firm closing time for 
the Fedwire securities transfer service of 3:15 p.m. for transfer 
originations and 3:30 p.m. for reversals (60 FR 42410, August 15, 
1995).
    The Board received 36 responses to the request for comment. About 
60 percent of the commenters were commercial banks or bank holding 
companies, including banks that provide government securities clearing 
and settlement services to dealers and other firms. The number of 
commenters by type of organization were as follows:

Commercial Banking Organizations 3.............................       21
Credit Unions..................................................        2
Broker/Dealers.................................................        2
Clearing House Associations....................................        2
Clearing Organizations.........................................        1
Trade Associations.............................................        3
Federal Home Loan Banks........................................        2
Federal Reserve Banks..........................................        2
State Governments..............................................        1
                                                                --------
    Total public comments......................................      36 
                                                                        
3 Banks, bank holding companies, and operating subsidiaries of banks or 
  bank holding companies.                                               

II. Earlier Opening of the Fedwire Securities Transfer Service

A. Potential Costs

    Twenty-three commenters discussed the potential costs associated 
with earlier operating hours. Seventeen commenters indicated that the 
potential costs would outweigh the potential benefits; however, three 
of these commenters indicated that costs would exceed benefits only in 
the short term. Five other commenters, including the New York Clearing 
House (NYCH), indicated that the long-term benefits to the payments 
system outweigh the expense of implementing and maintaining expanded 
hours of operation for the Fedwire securities transfer service.
    The Public Securities Association (PSA), NYCH, Chemical Bank, and 
other commenters indicated that the amount of change and associated 
expense that may be required to participate during earlier operating 
hours would be significant.\4\ In particular, a number of active 
government securities market participants argued that the efficiencies 
envisioned by the Board would not offset the substantial operating and 
systems costs (including daylight overdraft charges) that would be 
incurred by participants if the operating hours were to be expanded. 
The NYCH also indicated that some costs associated with earlier hours 
would be difficult to measure. For example, most of the transfers 
processed via the Fedwire securities transfer system are done in 
support of domestic dealer activity. The NYCH expressed concern that 
expanding the hours for these dealer operations would most likely 
either spread over 15 hours what is now done in 7 hours or allow 
trading to increase in velocity; in its opinion, neither result would 
be beneficial.
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    \4\ The comments were received prior to Chemical Bank's merger 
with Chase Manhattan Bank, N.A. and prior to PSA's formal name 
change to the Bond Market Association.
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    Chemical Bank, Chemical Securities, Inc. (CSI), First Chicago 
Corporation (First Chicago), and others indicated that, in order to 
have the capability to participate during substantially longer Fedwire 
securities transfer operating hours, they would need to make 
significant capital investments to re-engineer dealer clearance 
systems, reduce the length of overnight batch processing cycles, and/or 
redesign systems from a batch to a real-time 
environment.\5\, \6\ Commenters' cost estimates for such 
system changes ranged from $750,000 to $2 million. In addition, some 
commenters indicated that ongoing operating expenses would increase as 
a result of expanded operating hours.
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    \5\ Chemical Bank indicated that its dealer clearance system 
operates from 5:00 a.m. to 10:00 p.m. each day to handle customers' 
transaction loading before the start of the day, reconcilement, 
collateralizations (tri-party repo transactions), and report 
generation. In addition, there is an overnight processing cycle 
(five hours), which involves the creation of end-of-day database 
back-ups, generation of reports on microfiche, acquiring and loading 
security price information for next-day transactions, and preparing 
the databases to be in a start position for the next business day.
    \6\ The comments were received prior to First Chicago's merger 
with NBD Bancorp.
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    Commenters indicated that expansion of Fedwire securities transfer 
operating hours would also require changes to systems other than a 
participant's securities clearance system. Specifically, PSA indicated 
that organizations such as the Government Securities Clearing 
Corporation (GSCC) and Depository Trust Company (DTC) would have to 
upgrade their systems so that all necessary data could be received and/
or transmitted within a compressed cycle. PSA and CSI indicated that 
information important to the settlement process that is received from 
the GSCC, pricing services, and rating services, for example, typically 
is not available to market participants until after 12:30 a.m.\7\ In 
addition, PSA noted that dealers also use the current overnight batch 
processing cycle to perform risk measurement and analysis for over-the-
counter derivatives and other transactions. PSA indicated that there is 
a chance that this risk management process would be compromised by 
attempting to shorten the current batch processing cycle in order to 
participate in an earlier opening of Fedwire. Commenters also indicated 
that personnel costs would be affected by earlier hours. The NYCH, 
Chemical Bank and others indicated that additional staffing would be 
required to manage the systems, deal with credit issues, manage 
compliance, and handle exception processing during earlier hours.
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    \7\ In March 1997, GSCC announced its long-range plans for 
achieving the industry objectives of straight-through processing and 
point-of-trade guarantee. GSCC is considering important processing 
changes, including the move to real-time processing, which would 
reduce the amount of batch processing that occurs overnight.
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    Finally, potential increases in securities-related daylight 
overdraft charges were a common concern. Chemical Bank observed that 
the earlier opening time would extend the period during which Chemical 
could incur daylight overdrafts. Aubrey Lanston, a securities broker/
dealer, expressed concern that costs, particularly daylight overdraft 
charges, resulting from an earlier opening time would increase 
substantially at a time when the industry is trying to contain and 
reduce its expenses. Some commenters and Treasury officials expressed 
concern that any increased costs would be passed on to Treasury in the 
form of lower prices for Treasury securities, thus increasing borrowing 
costs.

B. Attempts To Reduce Potential Burden of a Substantially Earlier 
Opening Time

    To mitigate the potential burden of earlier operating hours for 
participants, the Board requested comment on the feasibility of making 
participation voluntary during the early hours. Commenters indicated 
that participation in expanded Fedwire securities transfer hours must 
be voluntary because of (1)

[[Page 18024]]

the significant costs many market participants would have to incur to 
develop the capability to participate during substantially longer 
operating hours, and (2) the risk that receipt of Fedwire delivery-
versus-payment (DVP) securities transfers may trigger overdrafts in 
receiving banks' accounts, which would require all participants to 
monitor their accounts during the off-hours even if they do not have a 
business need to participate in the securities transfer service during 
these hours. Commenters, however, had differing views regarding the 
design of a mechanism to ensure voluntary participation. Some 
commenters also believed that competitive pressures would compel firms 
to participate in expanded hours despite the lack of demonstrated 
business demand.
    One approach the Board considered to mitigate the potential burden 
of earlier operating hours for participants was to make participation 
voluntary during the early hours by requiring institutions to 
affirmatively ``opt-in'' to send and receive DVP transfers during this 
period. Twenty-seven commenters agreed that participants should have 
the ability to ``opt-in'' to the earlier operating hours if they are 
adopted. The commenters, however, had differing views on the design of 
an ``opt-in'' capability. Nineteen commenters believed that this 
ability should be available at the securities account level, rather 
than at the participant (depository institution) level.\8\ Many 
commenters, including Northern Trust Company and Trust Company Bank, 
observed that banks have dramatically different levels of securities 
transfer activity among their various Fedwire securities accounts. For 
example, while there may be a need to transfer securities against 
payment for investment purposes during earlier operating hours, there 
may be no similar need with respect to customer securities held for 
safekeeping.
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    \8\ 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 (e.g., trust, 
investment, and dealer) to segregate securities held for different 
purposes.
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    While most commenters preferred establishing the opt-in feature at 
the securities account level, several active market participants 
suggested that opt-in should be permitted at the clearance customer 
level (e.g., individual dealer level). Chemical Bank indicated that it 
would otherwise have to enhance its dealer clearance system to exclude 
selectively those customers that choose not to send/receive DVP 
transfers during earlier hours, which would result in additional 
expense for the bank.
    In response to industry concerns about technical complexity and 
increased cost associated with expanded operating hours, the Board 
considered expanding the operating hours in the near term to permit 
free deliveries only beginning at 12:30 a.m., with a longer lead time 
to enable participants to make necessary changes for DVP transfers. The 
receipt of ``free'' Fedwire securities transfers (e.g., non-DVP 
transfers) does not raise the same concerns as receipt of DVP transfers 
because free transfers do not involve a debit to the receiver's funds 
account at the Reserve Bank and, therefore, cannot trigger or increase 
an overdraft in the receiving bank's account. While many participants 
may not have a business need to engage in DVP transfers before the 
current 8:30 a.m. opening of business, the Boston Clearing House and 
others indicated that some participants may have a business need prior 
to 8:30 a.m. to reposition securities collateral among their own 
securities accounts or to deliver securities as collateral to another 
participant without engaging in a DVP transfer. Some major market 
participants, however, expressed concern about the technical 
complexities of segregating free versus DVP transfers within their 
securities clearance systems. That is, they indicated it would be at 
least as difficult to program systems to permit processing of free 
transfers only during earlier hours as it would to make the necessary 
changes to enable full participation (e.g., free and DVP transfers) 
beginning at 12:30 a.m. Therefore, the Board concluded that it would 
not be useful to expand the securities transfer operating hours for 
free transfers only.
    Some commenters also indicated that they would require substantial 
lead time (e.g., at least eighteen months) to streamline their back-
office processing systems to enable them to participate in a 
significantly longer Fedwire securities transfer operating day. Several 
commenters suggested that the expansion of operating hours should be 
phased in over time, but recommended different implementation periods.

C. Potential Benefits of Earlier Operating Hours

    In its January 1995 notice, the Board described several potential 
benefits or market responses to earlier Fedwire securities transfer 
operating hours: (1) Access to funding and collateral to support other 
market activities during earlier hours; (2) shorter times between trade 
and settlement for cross-border transactions involving U.S. government 
securities; and (3) availability of an important risk management tool 
to the financial markets during periods of financial stress. Eighteen 
of twenty-six commenters that discussed the potential benefits agreed 
that an earlier Fedwire securities transfer opening time would yield 
these benefits. Several commenters, however, argued that such benefits 
may only be realized in the long term or would only accrue to a limited 
number of participants. Eight commenters did not believe earlier 
Fedwire securities transfer operating hours would result in the 
benefits noted by the Board.
    The NYCH observed that earlier book-entry hours may enable banks 
and other financial firms to move securities during non-traditional 
hours to obtain the liquidity necessary to support the settlement of 
financial transactions, especially those related to foreign exchange 
transactions. For example, efforts are currently underway by a private-
sector group of U.S. and foreign banks to establish a continuous link 
settlement system that will reduce foreign exchange settlement risk for 
banks. Such a mechanism may require significant amounts of dollar 
liquidity in ``off-hours.'' Bank of America noted that given such 
initiatives, it is inevitable that payment systems, including the 
Fedwire securities transfer service, will be required to open earlier. 
In addition, to the extent that a complementary interrelationship 
exists between funds transfers that are made over the Fedwire funds 
transfer service and repo transactions that settle over the Fedwire 
securities transfer service, some banks (including those represented by 
the NYCH) believe that the ability to move both funds and securities 
during the same time period would result in more efficient overall 
liquidity management and more efficient markets. Therefore, increasing 
the overlap in operating hours for the Fedwire securities transfer 
service and the Fedwire funds transfer service may create a more 
efficient overall mechanism for those market participants that use 
Fedwire-eligible securities as a liquidity vehicle. Some commenters, 
however, indicated they were skeptical about the ability to obtain 
liquidity during off-hours from securities transfers. These commenters 
stressed the fact that most U.S. government securities are already 
pledged under a repurchase agreement for the purpose of overnight 
funding, and unwinding these overnight transactions to obtain early-
hours liquidity would require changes in current market practices and 
impose

[[Page 18025]]

significant costs on overnight borrowers, primarily dealers.
    The Board of Trade Clearing Corporation (BOTCC) observed that in 
order to secure, reduce, or hedge various financial risks adequately, 
banks and other firms increasingly require the support of systems that 
move collateral on a final basis as close as possible to the time that 
an exposure is created. Bank of America, First Chicago, and the NYCH 
each indicated that earlier Fedwire securities transfer hours would 
give market participants the ability to move on a more timely basis 
U.S. government securities as collateral for a variety of secured 
transactions in domestic and international markets, thus permitting a 
more efficient use of collateral. Early opening of the Fedwire 
securities transfer service along with the Fedwire funds transfer 
service, therefore, may provide the opportunity for members to obtain 
funds or credit from their banks and for the clearinghouses' settlement 
banks to obtain those funds from their members at an earlier hour.
    U.S. government securities also serve as a source of collateral in 
an international or global payment operations context. For example, 
Bank of America indicated that for U.S. banks participating in foreign 
payment and settlement systems, earlier book-entry hours would allow 
the pledging of U.S. government securities within the foreign country's 
working day and would not limit U.S. banks to pledging only foreign 
securities. This may become particularly important if U.S. Treasury 
securities become eligible to secure intraday credit extensions on 
European payment systems. The NYCH added that parties would be able to 
shift collateral to cover settlements in several systems or provide 
collateral to secure foreign borrowings, thus avoiding the excessive 
cost of maintaining separate or ``sterile'' pools of collateral for 
each local market or clearing arrangement. U.S. government securities 
are also a growing aspect of the international securities 
depositories--Euroclear and Cedel. Both of these systems operate during 
the European business day, and the ability to move U.S. government 
securities into and out of these systems throughout their business day 
may allow participants to use their collateral resources more 
efficiently. In addition, evolving multilateral netting arrangements 
for foreign exchange transactions are designed to operate on a 24-hour 
basis and rely on collateral (including U.S. Treasury securities) as a 
critical component of the risk management process.
    An earlier opening of the Fedwire securities transfer service also 
may provide opportunities for internationally active market 
participants to better control settlement risks associated with U.S. 
government securities transactions executed off-shore by shortening the 
settlement window. \9\ In particular, by opening the Fedwire securities 
transfer service at 12:30 a.m., market participants in London and Tokyo 
would have greater opportunities to settle transactions during their 
local business day. The PSA, however, expressed concern that while an 
earlier opening would trim a few hours off of the settlement cycle, 
banks and dealers would incur substantial costs for daylight overdrafts 
and system upgrades in order to participate during the earlier hours.
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    \9\ For a fuller description of off-shore trading in U.S. 
Treasury securities, see Michael J. Fleming, ``The Round-the-Clock 
Market for U.S. Treasury Securities,'' Federal Reserve Bank of New 
York Economic Policy Review, July 1997.
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    The liquidity and risk management benefits of earlier book-entry 
hours may be particularly important in times of market stress, when 
obtaining liquidity, hedging exposures, and moving collateral may be 
critical to containing counterparty and systemic risks. In this regard, 
the BOTCC commented that the routine availability of the Fedwire 
securities transfer system during earlier hours would encourage 
participants to establish operational procedures and systems to support 
the earlier operating hours; in turn, this would help ensure the 
reliability of the service during times of market stress.

D. Outlook for Earlier Operating Hours

    Although the Board believes that an earlier opening time for the 
Fedwire securities transfer service could result in long-term benefits, 
it recognizes that many Fedwire participants are faced with other 
important technological initiatives, including year-2000 compliance and 
preparations for straight-through processing. The Board also recognizes 
that many market participants would require considerable lead time and 
could incur substantial costs to upgrade their systems and clearing 
processes to accommodate a significantly earlier opening time.\10\ 
These changes are likely to be substantially more complex than the 
changes required to participate in earlier Fedwire funds transfer 
operating hours. In particular, these changes would likely involve 
adjustments in market funding and trading practices as well as the 
operations of GSCC and the clearing banks. The Board will monitor 
developments associated with expanded Fedwire funds transfer hours as 
well as developments in U.S. government securities settlement 
practices, and, if market demand for transferring government securities 
earlier in the day increases or the related cost or operational burden 
declines materially, the Board will seek additional public comment and 
reconsider the desirability of opening the securities transfer service 
significantly earlier in the day. Even if strong market demand 
develops, however, it is unlikely that the Federal Reserve, in 
consultation with the Treasury, would open the securities transfer 
service significantly earlier before the year 2002 due to the lead time 
identified by market participants that would be required and the 
resources currently being devoted to year-2000 compliance efforts. In 
the meantime, the Board encourages market participants to focus on 
streamlining their end-of-day processing to position their 
organizations for potential expanded hours in the future as well as to 
obtain other operational benefits, including enhanced contingency 
capabilities.
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    \10\ The Board believes that, at least initially, only a small 
number of Fedwire securities transfer service participants, which 
may represent a large proportion of total volume, would likely have 
a business need to participate during these expanded hours. First 
Chicago and the NYCH suggested that the overall population of 
potential users of DVP transfers during earlier hours is likely to 
be less than 25 banks nationwide.
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III. Receiver Control Features

    In its January 1995 notice, the Board discussed and requested 
comment on several possible new receiver control features for low to 
medium volume on-line participants that could be incorporated into the 
Federal Reserve's centralized securities transfer application known as 
the National Book-Entry System (NBES).\11\ In general, receiver 
controls would involve the comparison of incoming securities transfers 
against receipt instructions that are input by the receiving bank into 
the NBES. Based on this comparison, the NBES could be designed to take 
one of the following actions: (1) notify the receiving bank that an 
incoming transfer does not match its receipt instructions; (2) 
automatically reverse the unmatched transfer from the receiving bank's 
account to the sending bank's account;

[[Page 18026]]

or (3) automatically reject the unmatched transfer prior to receipt by 
the receiving bank. Comments were requested on each of these potential 
receiver control features.
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    \11\  Currently, the NBES provides a limited matching feature 
that compares incoming transfers with pre-entered receipt 
instructions. When activated, this feature identifies incoming 
transfers as ``matched'' or ``not matched,'' notifies the receiving 
participant accordingly, and, if so instructed by the participant, 
re-delivers (or turns around) ``matched'' securities automatically 
to another participant. Fedline participants can activate this 
feature as needed.
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    Eighteen comments were received on the receiver control feature. In 
general, smaller banks supported receiver controls as a means to 
prevent the delivery of misdirected and/or incorrect DVP transfers, 
and, thus, control better their use of securities-related intraday 
credit. Larger banks expressed concern that if the receiving 
participant failed to input receipt instructions in a timely or correct 
manner, transfers would be inappropriately returned to the sender, 
delaying the settlement of legitimate transfers or leading to the 
potential abuse of receiver control tools.
    The Board believes that receiver controls limited to participants 
that have Fedline connections to Fedwire would be a desirable feature 
for the Fedwire securities transfer service and would be unlikely to 
result in the difficulties expressed by some 
commenters.\12\,\13\ Fedline participants send and receive 
relatively small numbers of Fedwire securities transfers and use very 
limited amounts of Federal Reserve intraday credit, thus the likelihood 
of any systemic or gridlock effects from the use of the feature would 
be low.\14\ In addition, restricting its use to Fedline participants 
would address the concerns of certain commenters that the use of an 
automatic reversal feature by large-volume computer-interface 
participants could result in the delay of transfers and potential 
gridlock. The use of the automatic reversal feature also may be limited 
by the Federal Reserve, at any time, in the unlikely event that any 
adverse market consequences result from its use.
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    \12\ Fedline is the Federal Reserve's proprietary communications 
software used by depository institutions with a PC-based electronic 
connection to the Federal Reserve. Depository institutions may also 
connect electronically to Fedwire through a computer-interface 
connection, which links the depository institution's mainframe 
computer to the Federal Reserve's mainframe computer.
    13 Small volume, off-line Fedwire participants are 
required to provide receipt instructions for any anticipated 
incoming securities transfers. (A participant is considered ``off-
line'' if it does not have an electronic connection to the NBES; 
instead, such participants provide instructions to the Reserve Banks 
via telephone or in writing.) If such instructions are not provided 
or the instructions do not match the incoming securities transfer, 
the NBES will automatically reverse the transfer to the sender. 
Large-volume computer-interface Fedwire participants generally have 
the capability in their internal securities transfer systems to flag 
unmatched transfers or to automatically reverse unmatched transfers; 
therefore, they do not need to rely on similar features built into 
the NBES application.
    \14\ The use of similar receiver control features by the 
Depository Trust Company (DTC) and many banks with computer-
interface Fedwire connections, for instance, has not resulted in 
significant operating problems or settlement delays.
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    Because the feature is intended to enable low to medium volume on-
line participants to manage better their receipt of unanticipated, 
misdirected, or incorrect DVP securities transfers and the related 
debits to their reserve or clearing balances, the Board acknowledges 
that the timing of some securities transfers for certain participants 
may be affected by the use of an automated reversal feature. The Board, 
however, believes that instances of such delays will be limited, 
isolated, and have no systemic effects on securities settlements.
    To the extent that any isolated abuses of the receiver control 
feature occur, the Board believes that such abuses can and should be 
resolved between the parties to the transfer. If necessary, this 
bilateral resolution process might be facilitated by the development of 
industry guidelines or standards regarding the use of receiver controls 
by the receiver and the ``good delivery'' of securities by the sender. 
The Board encourages the development of such industry guidelines. 
Participants may also wish to establish an industry-sanctioned process 
to mediate and resolve any perceived abuses. To the extent any abusive 
practices with regard to receiver controls might be widespread or, at 
an individual Fedwire participant level, long standing, and a Reserve 
Bank is made aware of the pattern of abuse or mismanagement of the 
receiver control feature, the Reserve Bank may counsel the 
participant(s). If identified abuses continue following counseling by 
the Reserve Bank, it may in its sole discretion limit or prohibit 
continued use of the receiver control feature by that participant(s).
    The Board, therefore, has authorized the Reserve Banks to proceed 
with the design and implementation of an automated receiver control 
feature for institutions that access NBES via Fedline. Consistent with 
the Federal Reserve's long-term strategy to expand the use of 
electronic connections in the Fedwire services, the Board believes that 
the availability of automated receiver control tools in the NBES will 
encourage institutions that currently communicate transfer instructions 
to the Reserve Banks via telephone or in writing to migrate toward an 
electronic connection.
    The Reserve Banks plan to make the receiver control feature for 
Fedline participants available for use in 2000. Once an implementation 
schedule is finalized, the Reserve Banks will notify depository 
institutions regarding the specific date that the receiver control 
feature will be available to Fedline participants.

IV. Competitive Impact Analysis

    The Board has established procedures for assessing the competitive 
impact of rule or policy changes that have a substantial impact on 
payment system participants.\15\ Under these procedures, the Board will 
assess whether a change would have a direct and material adverse effect 
on the ability of other service providers to compete effectively with 
the Federal Reserve in providing similar services due to differing 
legal powers or constraints, or due to a dominant market position of 
the Federal Reserve deriving from such differences. If no reasonable 
modifications would mitigate the adverse competitive effects, the Board 
will determine whether the anticipated benefits are significant enough 
to proceed with the change despite the adverse effects.
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    \15\ These procedures are described in the Board's policy 
statement ``The Federal Reserve in the Payments System,'' as revised 
in March 1990 (55 FR 11648, March 29, 1990).
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    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, the Depository Trust 
Company, and the Participants Trust Company, that facilitate the 
clearance and settlement of market trades of U.S. Treasury and/or 
agency securities. Other U.S. government securities transactions may be 
cleared and settled on the books of depository institutions to the 
extent that counterparties are customers of the same depository 
institution.
    The Board does not believe that the implementation of receiver 
control features on the Fedwire securities

[[Page 18027]]

transfer system would have a direct and material adverse effect on the 
ability of other service providers to offer similar services. First, 
these private-sector service providers could provide (and some do 
provide) receiver control features to their participants. Second, the 
Fedwire securities transfer service does not compete directly with 
these service providers, since it either transfers securities not 
eligible for these other service providers or provides a complementary 
settlement service. Finally, given the Federal Reserve Banks' provision 
of intraday credit as a part of the securities settlement process, an 
automated reversal feature would likely provide some added flexibility 
and benefit to certain Fedwire participants in managing their receipt 
of securities transfers.
    By order of the Board of Governors of the Federal Reserve 
System, April 8, 1998.
William W. Wiles,
Secretary of the Board.
[FR Doc. 98-9665 Filed 4-10-98; 8:45 am]
BILLING CODE 6210-01-P