[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19165-19166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9124]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1100]


Policy Statement on Payments System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: The Board is eliminating the requirements for establishing 
Fedwire third-party access arrangements from its Policy Statement on 
Payments System Risk.

EFFECTIVE DATE: April 9, 2001.

FOR FURTHER INFORMATION CONTACT: Paul Bettge, Associate Director (202-
452-3174), or Sue Harris, Senior Financial Services Analyst (202-452-
3490), Division of Reserve Bank Operations and Payment Systems.

SUPPLEMENTARY INFORMATION:

[[Page 19166]]

I. Background

    Fedwire is the large-value payment and securities settlement 
mechanism operated by the Federal Reserve Banks. Fedwire provides 
depository institutions with real-time gross settlement of funds 
transfers and book-entry securities transfers made for their own 
account or on behalf of their customers. Typically, depository 
institutions with Federal Reserve accounts originate their own funds 
and book-entry transfers by accessing Fedwire directly. In some cases, 
however, a depository institution enters into an agreement in which a 
service provider, acting as agent for the depository institution, 
initiates transfers that are posted to the institution's account at the 
Federal Reserve.
    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). The Board allows institutions meeting the conditions to 
establish third-party access arrangements whereby a sending or 
receiving institution (``the participant'') designates another 
depository institution or other service provider to initiate, receive, 
or otherwise process Fedwire funds transfers or book-entry securities 
transfers that are posted to the participant's account at the Federal 
Reserve. The Board modified the policy in August 1995 to clarify its 
applicability and to reduce the administrative burden of some of its 
provisions (60 FR 42418, August 15, 1995).
    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. The participant must retain control 
over the credit granting process, must monitor its own Federal Reserve 
account position, and must maintain adequate audit and contingency 
backup capabilities. As a part of obtaining prior approval from the 
Federal Reserve, the institution must also obtain a written ``no 
objection'' letter from its primary supervisor.
    In January 1996, the Board modified the policy to address 
explicitly third-party access arrangements involving service providers 
located outside the United States. (61 FR 3035, January 30, 1996). 
Foreign service providers are subject to additional requirements, such 
as making audit reports available in English and submitting to on-site 
reviews by the depository institution's primary U.S. supervisor.

II. Discussion

    The Federal Reserve's experience with the Fedwire third-party 
access policy indicates that such access, when properly managed by 
depository institutions, poses little additional risk to the Federal 
Reserve. Third-party access arrangements have neither adversely 
affected the ability of depository institutions to manage their 
daylight overdrafts nor increased risk to the Federal Reserve. The 
Board has found no evidence to suggest that outsourcing Fedwire 
transactions leads to a higher incidence of Federal Reserve account-
management problems. As a result, the Board has determined that a 
specific policy addressing Fedwire third-party access is no longer 
necessary, and that the administrative burden imposed on institutions 
associated with the procedural requirements of the policy warrant its 
revocation at this time.
    As part of the ongoing supervisory process, banking organizations 
are expected to address and manage risks that may arise out of Fedwire 
operations, including its outsourcing. The Board's supervisory guidance 
on outsourcing, which addresses both domestic and foreign arrangements, 
lays out basic supervisory expectations for outsourcing of Fedwire and 
other information- and transaction-processing activities by banking 
organizations supervised by the Federal Reserve. Fedwire outsourcing 
arrangements will continue to be reviewed as appropriate during the 
normal supervisory process.\1\ Risk management controls for Fedwire 
outsourcing arrangements contained in interagency examination 
procedures, which will be revised as necessary to reflect elimination 
of the pre-approval requirements of the third-party access policy, will 
continue to be addressed to the extent necessary during risk-focused 
examinations.\2\
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    \1\ See ``Outsourcing of Information and Transaction 
Processing,'' SR Letter 00-4, February 29, 2000.
    \2\ See FFIEC Information Systems Examination Handbook, 1996, 
Chapter 18.
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    Upon rescission of the third-party access policy, depository 
institutions will no longer be required to obtain formal approval from 
the Federal Reserve to engage in Fedwire third-party service provider 
arrangements, but they will continue to communicate requests for any 
related operating changes to the Reserve Bank. The depository 
institution and the service provider will be required to submit to the 
Federal Reserve a written authorization for the service provider to 
access the depository institution's account. The authorization also 
acknowledges the depository institution's responsibility for the 
management of its Federal Reserve account and requires the service 
provider to indicate the location from which it will provide the 
services.\3\ The current approval process for establishing Fedwire 
third-party access arrangements will be eliminated upon rescission of 
the policy:
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    \3\ Appendix C of Operating Circular 6, Funds Transfer Through 
Fedwire, will be replaced by an authorization for third-party access 
arrangements.
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     Participants will no longer be required by the Federal 
Reserve to obtain a ``no objection'' letter from their primary 
supervisor before outsourcing Fedwire operations.
     The Federal Reserve will no longer require the existing 
warranties, certifications, and authorizations as a condition of 
approval of Fedwire outsourcing arrangements. For example, the 
participant no longer must certify that the arrangement is consistent 
with corporate separateness and does not violate branching 
restrictions. The existing letter of authorization will be replaced by 
the authorization described above.
     Participants will no longer be required to certify to the 
Federal Reserve that they have established certain operating 
procedures, audit plans, and contingency plans in advance of 
establishing a Fedwire third-party access arrangement.
     The Federal Reserve will no longer require certain 
additional controls and reviews prior to the establishment of 
arrangements involving foreign service providers and service providers 
that are not affiliated with the participant.
    The Board is therefore rescinding the Fedwire third-party access 
policy, part I, section G of the Federal Reserve Policy Statement on 
Payments System Risk.\4\ The Federal Reserve continues to expect that 
institutions implement prudent controls over outsourced Fedwire 
operations. In addition, the Board or the Reserve Banks may provide 
federal and state banking agencies with information regarding 
outsourcing of Fedwire activities of supervised institutions to 
facilitate ongoing supervisory review.
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    \4\ The current part I, section H of the policy, Monitoring, 
will be designated as section G.

    By order of the Board of Governors of the Federal Reserve 
System, April 9, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-9124 Filed 4-12-01; 8:45 am]
BILLING CODE 6210-01-P