[Federal Register Volume 68, Number 101 (Tuesday, May 27, 2003)]
[Notices]
[Pages 28826-28828]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-13148]


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FEDERAL RESERVE SYSTEM

[Docket No. R-1138]


Expansion of the Operating Hours for the On-Line Fedwire[reg] 
Funds Service

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board has approved the expansion of the operating hours 
for the on-line Fedwire Funds Service from eighteen hours to twenty-one 
and one-half hours each business day.\1\ The new opening time will be 9 
p.m. eastern time for on-line funds transfers with a business date of 
the following calendar day.\2\ The closing time for the service will 
remain at 6:30 p.m. The Board believes that further expansion of 
Fedwire operating hours will support the smooth functioning and 
continued development of the payments system, and improve efficiency 
and reduce risk in conducting U.S. dollar payments and settlements. 
Fedwire participants will not be required to change their current hours 
of participation in the service. The expansion of hours for the on-line 
Fedwire Funds Service will not affect the operating hours for the 
origination of off-line funds transfers or telephone advice of credit, 
and will not affect the

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operating hours for the Fedwire Securities Service.
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    \1\ The current Fedwire business day begins at 12:30 am and ends 
at 6:30 pm. 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.

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DATES: IMPLEMENTATION TIMEFRAME: Second quarter 2004.

FOR FURTHER INFORMATION CONTACT:  Jack K. Walton II, Assistant Director 
(202/452-2660), James K. Owens, Manager (202/728-5848), 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: I. Background. On December 19, 2002, the 
Board published for comment a proposal to expand the operating hours 
for the Federal Reserve Banks' on-line Fedwire Funds Service (67 FR 
77786). The impetus for the proposal was industry requests 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. The Board has carefully reviewed the proposal 
and comments received, and has approved the proposal. After 
implementation of the new hours, the Fedwire operating hours will 
overlap the operating hours of major Asia-Pacific large-value payments 
systems by an additional three and one-half hours.\3\ The Federal 
Reserve Banks expect to test with participants beginning in the third 
quarter of 2003 and will implement these hours in the second quarter of 
2004. The exact testing and implementation dates will be announced by 
the Federal Reserve Banks' Wholesale Product Office at least sixty days 
in advance and published on the Federal Reserve Financial Services web 
site at www.frbservices.org.
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    \3\ Under current hours, the Fedwire operating hours overlap the 
operating hours of major Asia-Pacific large-value payments systems 
by four to five and one half hours.
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II. Summary of Comments
    The Board requested comment on whether the opening time for Fedwire 
should be changed from 12:30 a.m. to 9 p.m the previous calendar date 
or whether another opening time would be preferable. In addition, the 
Board was interested in commenters' views regarding the business, 
market, risk management, and operational issues that should be 
considered in evaluating the advantages and disadvantages of a 9 p.m. 
to 6:30 p.m. Fedwire business day.\4\
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    \4\ The Reserve Bank and Fedwire business days include all days 
except the following standard holidays that are observed by the 
Reserve Banks: all Saturdays, all Sundays, New Year's Day (January 
1), Martin Luther King's Birthday (third Monday in January), 
President's Day (third Monday in February), Memorial Day (last 
Monday in May), Independence Day (July 4), Labor Day (first Monday 
in September), Columbus Day (second Monday in October), Veterans' 
Day (November 11), Thanksgiving Day (fourth Thursday in November), 
and Christmas Day (December 25). If January 1, July 4, November 11, 
or December 25 fall on a Sunday, the next following Monday is a 
standard Reserve Bank holiday.
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    Eighteen comments were received in response to the Board's request. 
These commenters included four credit unions, four state banks, three 
national banks, two Federal Reserve Banks, one clearing house, and four 
trade associations. The majority of commenters generally supported an 
expansion of the Fedwire operating hours. Only two commenters did not 
support an expansion of operating hours. One of the two contended that 
the previous expansion of Fedwire operating hours in 1997, coupled with 
the availability of Continuous Linked Settlement (CLS) services in 
2002, has already significantly lowered settlement risk in foreign 
exchange markets. Consequently, this commenter believes that a stronger 
business case for further expansion of Fedwire hours is needed to 
justify the additional costs depository institutions could incur in 
adopting an earlier Fedwire opening time. The second commenter did not 
believe that there was any need to expand the operating hours of 
Fedwire at this time. After considering these concerns, the Board has 
concluded that they are outweighed by the expected benefits from the 
expansion of Fedwire operating hours. This conclusion, in part, is 
based on the fact that participation during the early hours is 
voluntary and that a large majority of commenters support the expansion 
of operating hours.
    Two additional commenters supported the Board's proposal, but also 
noted that the Board's stated goal of assisting institutions operating 
in multiple time zones would better serve their needs if the Fedwire 
closing time were expanded to 9 p.m. and the opening time for the next 
business day remained at 12:30 a.m. The vast majority of commenters, 
however, supported an earlier Fedwire opening. Thus, the Board 
concluded that there is significantly greater demand at this time for 
an earlier opening of Fedwire than for a later close.
    Commenters expressed technical concerns with the Board's proposal 
in three primary areas - end-of-day procedures, extensions, and account 
balance information.
    A. End-of-day Procedures
    Two commenters indicated that the period of two and one-half hours 
between the scheduled close of Fedwire and the proposed open of Fedwire 
for the next business day might not be sufficient to complete necessary 
end-of-day processing and procedures. Because participation in the 
expanded hours is voluntary, the Board believes that depository 
institutions will be able to adjust their participation in Fedwire to 
allow sufficient time for their end-of-day activities.
    B. Extensions
    Five commenters expressed concern that the decreased interim period 
between the close and open of Fedwire would restrict the Federal 
Reserve Banks' flexibility in granting extensions to the Fedwire 
business day. These commenters want the Federal Reserve Banks to retain 
the flexibility to grant extensions on a case-by-case basis to help 
mitigate substantial market disruptions, if they occur. Further, these 
commenters believe that the Federal Reserve Banks should encourage key 
Fedwire participants to minimize or eliminate the need for extensions 
of processing deadlines, except in extreme circumstances. The Federal 
Reserve Banks intend to continue to grant extensions according to 
published criteria.\5\ In general, the Federal Reserve Banks will work 
to maintain a two-hour interim period between the close and open of 
Fedwire each business day.\6\
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    \5\ The criteria for granting extensions can be found in Federal 
Reserve Operating Circular 6. Operating Circulars are available at 
www.frbservices.org.
    \6\ This two-hour period is based upon discussions between the 
Wholesale Product Office and industry participants regarding 
participants' current end-of-day processing limitations and is 
subject to future change. In some cases involving a delayed close of 
Fedwire, in order to maintain a two-hour interim period, the 
Wholesale Product Office may need to delay the opening of Fedwire 
for the next business day. In extreme circumstances, however, the 
Federal Reserve Banks may need the flexibility to shorten the 
interim time period. Further, in the long term, the Federal Reserve 
Banks may have to reevaluate their extension policy to sustain the 
ability to open Fedwire timely.
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    C. Account Balance Information
    Three commenters expressed concern that depository institutions' 
Federal Reserve account balances may not reflect all of the previous 
day's payment activity at the proposed 9 p.m. open of Fedwire. These 
commenters note that the use of provisional, rather than final, account 
balances could adversely affect the risk management practices of those 
institutions participating in the earlier hours. One commenter 
suggested further that transactions that cannot be posted by the close 
of Fedwire should be posted to accounts the following business day. The 
Federal Reserve Banks are analyzing the sources of late

[[Page 28828]]

postings to Federal Reserve accounts and will take appropriate steps to 
reduce the number and value of these postings, particularly debits to 
accounts, where possible.
III. Implementation
    A. Fedwire Funds Service Business Day and Operating Hours
    As a result of expanded Fedwire hours, the Federal Reserve Banks' 
funds transfer business day will begin with the opening of Fedwire at 9 
p.m. on the previous calendar day. For example, Fedwire will open at 9 
p.m. on Sunday night for transactions dated the following Monday. The 
closing time for the Fedwire will remain at 6:30 p.m. The service will 
be available for business days Monday through Friday, except for 
specified holidays observed by the Federal Reserve Banks.
    B. Notification of Participation
    One Fedwire participant indicated that it would find a listing of 
depository institutions that plan to participate during the early hours 
useful. This participant stated that this information would be helpful 
in assessing whether it would be beneficial to use its intraday 
liquidity to initiate certain Fedwire funds transfers during the early 
hours. The Federal Reserve Banks' Wholesale Product Office will 
consider providing a list of early hour participants on the Federal 
Reserve Financial Services web site at www.frbservices.org.
    C. Fees for Transfers Made During Early Hours
    During the new 9 p.m. to 6:30 p.m. business hours, transaction fees 
for Fedwire funds transfers will be charged at the same level and in 
the same manner as transfers made during the current 12:30 a.m. to 6:30 
p.m. business hours.
    D. Intraday Credit
    Under expanded hours, Federal Reserve intraday credit will be 
provided to Fedwire participants in the same manner and on the same 
terms that such credit is currently provided. While the calculation of 
the daylight overdraft fee will be adjusted 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.\7\
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    \7\; 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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    E. 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, 
the earlier opening time will not pose monetary measurement and control 
issues for the Federal Reserve.
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.''\8\ 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.
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    \8\ Federal Reserve Regulatory Service 7-145.2.
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    The Board has concluded that the expansion of Fedwire operating 
hours would not have a direct and material adverse effect on the 
ability of competitors to compete effectively with the Reserve Banks. 
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 large-value funds transfer services, and a 
number of depository institutions, have provided comments noting the 
advantages to them of expanding Fedwire operating hours. In particular, 
these organizations believe that the expansion of the Fedwire operating 
hours will allow them to enhance the finality of the U.S. dollar 
payment and settlement services they are able to provide 
internationally.
    By order of the Board of Governors of the Federal Reserve System, 
May 21, 2003.

Jennifer J. Johnson,
Secretary of the Board
[FR Doc. 03-13148 Filed 5-23-03; 8:45 am]
BILLING CODE 6210-01-S