[Federal Register Volume 67, Number 244 (Thursday, December 19, 2002)]
[Notices]
[Pages 77786-77789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31930]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1138]


Proposal to Expand the Operating Hours for the On-Line 
Fedwire[reg] Funds Service

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; Request for comment.

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SUMMARY: The Board requests comment on a proposal to expand the 
operating hours for the Fedwire Funds Service.\1\ Under this proposal, 
Fedwire would open three and one-half hours earlier than the current 
opening time of 12:30 a.m. eastern time, and depository institutions 
would participate in the earlier operating hours on a voluntary 
basis.\2\ The new opening time would be 9 p.m. for on-line funds 
transfers with a business date of the following calendar day.\3\ An 
earlier Fedwire opening time would further the smooth functioning and 
continued development of the payments system, as well as improve 
efficiency and reduce risk in making payments and settlements. The 
closing time for the service would remain unchanged at 6:30 p.m., 
thereby expanding the service's operating hours from eighteen hours to 
twenty-one and one-half hours each business day. The proposal would not 
affect the operating hours for the origination and telephone advice of 
credit for off-line funds transfers and would not affect the operating 
hours for the Fedwire Securities Service.\4\
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    \1\ All references to Fedwire apply to the on-line Fedwire Funds 
Service unless otherwise noted. Fedwire is a registered servicemark 
of the Federal Reserve Banks.
    \2\ All references are to eastern time unless otherwise noted.
    \3\ For example, if today were Thursday, November 14, 2002, 
Fedwire would open at 9 p.m., with the business (cycle) date of 
Friday, November 15, 2002.
    \4\ The operating hours for off-line funds transfers and 
securities transfers are outlined in the Federal Reserve Banks' 
Operating Circulars 6 and 7, respectively.

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DATES: Comments must be submitted on or before March 4, 2003.

ADDRESSES: Comments should refer to Docket No. R-1138 and should be 
submitted to Ms. Jennifer J. Johnson, Secretary, Board of Governors of 
the Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC 20551, or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson may 
also be delivered to the Board's visitors center in the east courtyard 
of the Eccles Building, located on 20th Street between Constitution 
Avenue and C Street, NW., between 8 a.m. and 5:30 p.m. Members of the 
public may inspect comments in room MP-500 of the Martin Building 
between 9 a.m. and 5 p.m. on weekdays, pursuant to Sec. 261.12, except 
as provided in Sec. 261.14 of the Board's Rules Regarding Availability 
of Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Jack K. Walton II, Assistant Director 
(202/452-2660), or Lorna R. Prosper-Harley, Senior Financial Services 
Analyst (202/452-2690), Division of Reserve Bank Operations and Payment 
Systems, Board of Governors of the Federal Reserve System; for users of 
Telecommunication Devices for the Deaf (TDD) only, contact (202/263-
4869).

SUPPLEMENTARY INFORMATION:

[[Page 77787]]

I. Background

    In December 1997, the Federal Reserve Banks (Reserve Banks) 
expanded the operating day for on-line Fedwire funds transfers from ten 
hours to eighteen hours - opening weekdays at 12:30 a.m. and closing at 
6:30 p.m. (61 FR 216, November 6, 1996). The Board believed that, over 
the long term, expanded Fedwire hours would enable individual 
depository institutions and clearing organizations to (1) reduce 
foreign exchange settlement risk through innovations in payment and 
settlement practices, and (2) use Fedwire to manage settlement risk 
early in the day during times of financial stress. The Board also 
believed that an expansion of Fedwire hours would respond to the 
payment and settlement needs of both existing and emerging financial 
markets, including overseas markets that depend on the U.S. dollar.
    In 2001, the members of the Wholesale Customer Advisory Group 
(WCAG) of the Reserve Banks' Wholesale Product Office (WPO) approached 
the WPO about further expanding the hours for Fedwire.\5\ The WCAG 
believes that, given the continuing globalization of business and 
payment activity, current Fedwire hours may constrain the ability of 
U.S. depository institutions that operate in multiple markets and time 
zones to meet the payment and settlement needs of some current and 
potential customers. The WCAG also believes that the current Fedwire 
operating hours may constrain the ability of U.S. depository 
institutions to manage settlement and operational risks cost 
effectively. In particular, the WCAG highlighted the need to achieve 
greater overlap of U.S. wholesale payments system operating hours with 
those of the Asia-Pacific markets, including Australia, Hong Kong, 
Japan, and New Zealand. Finally, the WCAG noted that the recent 
movement of some U.S. dollar clearing and settlement activity offshore 
has underscored the need for expanded Fedwire operating hours.
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    \5\ The WCAG was established by the WPO to provide a mechanism 
for ongoing communication and collaboration between the WPO and a 
representative sample of U.S. depository institutions that are major 
users of wholesale payment services. The WPO and WCAG work together 
on a variety of initiatives, which include identifying trends in 
domestic and international banking and financial services that will 
affect wholesale payment services, and emerging regulatory and 
policy issues that may affect delivery or use of such services.
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    The Clearing House Inter-Bank Payments System (CHIPS) also has 
asked the WPO to consider expanding the on-line Fedwire hours to 
support longer CHIPS operating hours because of a growing demand in 
Asia for real-time, final U.S. dollar payments processed during the 
Asian business day. CHIPS and its participants rely on Fedwire to 
conduct certain daily funding and settlement activities. Both the CHIPS 
and WCAG requests are consistent with long-term business and 
technological developments in wholesale payments markets.
    The Board believes that further expansion of Fedwire funds transfer 
operating hours would support the smooth functioning and continued 
development of the payments system, and improve efficiency and reduce 
risk in conducting existing U.S. dollar payments and settlements. 
Furthermore, an earlier opening of Fedwire may facilitate innovations 
in payment and settlement services provided by individual institutions 
and clearing organizations, thereby making a broader and more robust 
array of payment options generally available in the financial markets.

II. Issues Associated With the Proposed Expanded Fedwire Operating 
Hours

    International Markets. Generally, the Fedwire operating hours fully 
overlap the operating hours of large-value payment systems in the 
Americas and Europe.\6\ In contrast, the Fedwire operating hours 
overlap the operating hours of major Asia-Pacific large-value payments 
systems by only two and one-half to five hours. Some depository 
institutions believe that substantially expanding the amount of overlap 
in the operating hours of Fedwire and the Asia-Pacific markets will 
help to support the development of enhanced and more competitive 
dollar-based payment and settlement services in the international 
marketplace. Also, some depository institutions that are active in 
international markets maintain local money-desk and money-transfer 
operations in the regions in which they operate. Expanding Fedwire 
operating hours may provide opportunities for these institutions to 
consolidate some of their local activities, which could improve their 
ability to manage globally their dollar funding and related liquidity 
risks, as well as to reduce costs and increase operational 
efficiencies.
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    \6\ The Fedwire operating hours do not overlap the operating 
hours of the large-value payment system in Switzerland, Swiss 
Interbank Clearing (SIC) for five and one-half hours.
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    Domestic Markets. Neither the Board nor the organizations that 
advocated further expansion of Fedwire operating hours anticipate that 
an earlier opening of Fedwire would adversely affect domestic markets. 
Indeed, there may be beneficial effects from enhancements to payment 
and settlement services offered by financial institutions to the extent 
that current Fedwire hours act as a barrier to developing these 
enhancements.
    Costs of and Participation in the Expanded Fedwire Hours. The 
estimated costs for Reserve Banks to open Fedwire three and one-half 
hours earlier are expected to be negligible and should not affect funds 
transfer fees paid by depository institutions. While the operational 
costs incurred by depository institutions that participate in the 
earlier hours are difficult to estimate, such costs would be incurred 
voluntarily. In particular, if a depository institution believed that 
the potential costs of participating in the expanded operating period 
outweighed the potential benefits, it could choose to remain closed 
during this period and would therefore not incur additional operating 
costs.\7\ Similarly, potential costs and benefits stemming from 
streamlining operational, funding, and risk management functions are 
difficult to estimate. Again, however, depository institutions would 
only incur costs during the expanded operating period if they 
voluntarily chose to do so. While depository institutions would not be 
required to participate in the earlier operating hours, they would 
still receive funds transfers sent from participating institutions 
during these hours.
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    \7\ Nonparticipating institutions may need to review their 
internal systems and procedures, however, to ensure that they 
accurately recognize payments sent to them during the early Fedwire 
operating hours. Fedwire funds transfers contain two dates: (1) a 
cycle date that represents the date of a specific operational 
business day within the Fedwire application, and (2) a system date 
that represents the day the transfer is processed by the Fedwire 
application. With early Fedwire operating hours, between 9 p.m. and 
11:59 p.m., the cycle date will differ from the system date. This 
situation already exists for depository institutions outside the 
eastern time zone in today's eighteen-hour Fedwire business day.
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    Extensions to the Scheduled Fedwire Closing Time. Today, the 
Reserve Banks extend the scheduled Fedwire closing time primarily to 
prevent major market disruptions. If the Board approved an earlier 
Fedwire opening time, extensions of the scheduled Fedwire closing time 
could result in greater operating difficulties for some depository 
institutions, such as the need to compress end-of-day account posting 
activities. Furthermore, extensions of the closing time beyond a 
certain point might adversely affect the ability of the Reserve Banks 
or depository institutions to open Fedwire services for the next 
business day as scheduled. Such extensions could have significant 
effects on business during

[[Page 77788]]

the earlier operating hours, particularly if the use of the earlier 
operating hours were to become significant.\8\ In the near term, the 
Reserve Banks could continue to allow infrequent extensions of the 
scheduled closing times to preserve orderly market closings. In the 
long term, the Reserve Banks may have to reevaluate the extension 
policy to sustain the ability to open Fedwire timely.
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    \8\ An extension beyond a certain point to the Fedwire 
Securities Service operating hours could also result in an extension 
to the Fedwire Funds Service and, consequently, affect the timely 
opening of Fedwire for the next business day.
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    Access to Depository Institutions' Account Balances. Under the 
expanded Fedwire operating hours, depository institutions' Federal 
Reserve account balances may not reflect all of the previous day's 
payment activity because certain activity that is processed and posted 
later in the day may not be posted to accounts by 9 p.m., the start of 
the next Fedwire operating day.\9\ Generally, account balances would 
reflect all of a business day's activity by about 11 p.m. The Reserve 
Banks would also notify depository institutions when the day's payment 
activity has been processed and is reflected fully in their account 
balances.
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    \9\ The transactions that are processed late in the day include 
discount window loans and a small percentage of payments associated 
with check activity, currency and coin shipments, and other 
activity, such as food coupon deposits. Generally, the dollar 
amounts and volumes associated with these transactions are not 
significant.
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    Currently, depository institutions can access their account balance 
information through the Reserve Banks' Account Balance Monitoring 
System (ABMS) until 10 p.m. on each business day. Under the expanded 
Fedwire operating hours, ABMS would be available until 7:15 p.m. to 
access information for the current business day. ABMS would reopen at 8 
p.m. for the next business day, and account balances would be 
considered provisional until all of the previous day's payment activity 
is processed and posted.
    The Reserve Banks also monitor depository institutions' accounts 
for daylight overdraft purposes on an ex post basis. Under the expanded 
Fedwire operating hours, depository institutions' reported ex post 
opening account balances would reflect all of the previous day's 
payment activity. As a consequence, the reported ex post opening 
account balance may differ from the ABMS opening account balance 
because of transactions that are processed late in the day. While 
account balance differences may exist between ABMS and ex post reports, 
the Federal Reserve continues to expect depository institutions to 
manage their accounts according to the daylight overdraft posting rules 
set forth in the Board's payments system risk policy.\10\
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    \10\ Depository institutions may also obtain account information 
using Fedline's web-based Account Management Information (AMI) 
application or by accessing the Federal Reserve's Integrated 
Accounting System (IAS). Fedline is a registered trademark of the 
Federal Reserve Banks.
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    Federal Reserve Intraday Credit and Fees. Under the expanded 
Fedwire operating hours, the Reserve Banks will continue to provide 
intraday credit to eligible depository institutions on the same basis 
as they do today according to the provisions of the Board's payments 
system risk policy. While the calculation of the daylight overdraft fee 
will be adjusted under the proposal to reflect the expanded Fedwire 
operating hours, the fee assessed for the use of intraday credit will 
not change for an overdraft of a given size and duration.\11\
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    \11\ While the effective annual rate charged on daylight 
overdrafts would change from 27 basis points under an 18-hour 
Fedwire operating day to 32.25 basis points under a 21.5-hour 
Fedwire operating day, the annual rate charged on daylight 
overdrafts would remain at 36 basis points. This increase in the 
effective annual rate will not lead to an increase in fees for 
daylight overdrafts of a given size and duration because there will 
be an offsetting increase in the number of minutes used to calculate 
average daylight overdrafts. An example of the daylight overdraft 
fee calculation is available at http://www.federalreserve.gov/paymentsystems/psr/overview.pdf.
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    Monetary Control and Reserve Management. The Board believes that an 
expansion of Fedwire operating hours will not affect the current 
process of reserve management for depository institutions. Because 
there is a sufficient break in time between Fedwire operating days to 
allow for measuring reserve holdings, monetary measurement and control 
issues do not arise for the Federal Reserve.
    Proposed Expanded Fedwire Hours Implementation Timeframe. If the 
Board were to adopt a 9 p.m. Fedwire opening time, depository 
institutions would be given the opportunity to test their systems for 
the expanded Fedwire hours with the Reserve Banks beginning in the 
third quarter 2003. Full implementation of the expanded Fedwire 
operating day from 9 p.m. to 6:30 p.m. would begin in the second 
quarter of 2004.

III. Request for Comment

    The Board requests comments on its proposal to expand the on-line 
Fedwire operating hours. Specifically, the Board requests comments on 
whether the opening time for Fedwire should be moved to 9 p.m. or 
whether a different opening time would be preferable. In addition, the 
Board is interested in commenters' views regarding the business, 
market, risk management, and operational issues that should be 
considered in evaluating the benefits and drawbacks of a 9 p.m. to 6:30 
p.m. Fedwire business day. For example, what are the business needs 
that would warrant an earlier Fedwire opening time? Would the 
availability of provisional rather than final account balance 
information in ABMS for the first two hours of the expanded Fedwire day 
adversely affect the risk management of depository institutions that 
choose to participate during the early hours? Should the Reserve Banks 
continue to grant significant extensions to the Fedwire closing time to 
help mitigate substantial market disruptions (such as those granted 
during the week of September 11, 2001) even if they result in a 
significant delay in the Fedwire opening for the next business day?

IV. Competitive Impact Analysis

    All operational and legal changes considered by the Board that have 
a substantial effect on payments system participants are subject to the 
competitive impact analysis described in the March 1990 policy 
statement ``The Federal Reserve in the Payments System.''\12\ Under 
this policy, the Board assesses whether the proposed change would have 
a direct and material adverse effect on the ability of other service 
providers to compete effectively with the Reserve Banks in providing 
similar services, due to differing legal powers or constraints or due 
to a dominant market position of the Federal Reserve deriving from such 
legal differences. If the expansion of the on-line Fedwire operating 
hours creates such an effect, the Board must further evaluate the 
proposed expansion of hours to assess whether its benefits can be 
retained while reducing the restrictions on competition.
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    \12\ Federal Reserve Regulatory Service 7-145.2.
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    The Reserve Banks are the only providers of real-time gross 
settlement of funds transfers in central bank money in the United 
States. The main alternative provider of funds transfer services and a 
number of depository institutions have indicated that the expansion of 
the Fedwire operating hours would make it possible for them to enhance 
the finality of their U.S. dollar payment and settlement services. As a 
result, the expansion of Fedwire operating hours would not have a 
direct and material adverse effect on their ability to compete 
effectively with the Reserve Banks.

[[Page 77789]]

    By order of the Board of Governors of the Federal Reserve System, 
December 16, 2002.

Jennifer J. Johnson,
Secretary of the Board
[FR Doc. 02-31930 Filed 12-18-02; 8:45 am]
BILLING CODE 6210-01-S