[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Notices]
[Pages 22123-22129]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09949]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1664]


Potential Modifications to the Federal Reserve Banks' National 
Settlement Service and Fedwire[supreg] Funds Service To Support 
Enhancements to the Same-Day ACH Service and Corresponding Changes to 
the Federal Reserve Policy on Payment System Risk, Request for Comments

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice and request for public comment.

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SUMMARY: The Board of Governors (Board) is requesting comment on 
potential modifications to the Federal Reserve Banks' (Reserve Banks) 
payment services to facilitate adoption of a later same-day automated 
clearinghouse (ACH) processing and settlement window. Specifically, the 
Reserve Banks would extend the daily operating hours of the National 
Settlement Service (NSS) to allow the private-sector ACH operator to 
settle its in-network transactions resulting from the later same-day 
ACH window. To support these new NSS operating hours, the Reserve Banks 
would extend the daily operating hours of the Fedwire[supreg] Funds 
Service, creating implications for extension policies for contingencies 
that might result in more frequent delays to the reopening of the 
Fedwire[supreg] Funds Service. Finally, the Board is requesting

[[Page 22124]]

comment on corresponding changes to the Federal Reserve Policy on 
Payment System Risk related to a new posting time and an increase to 
the daylight overdraft fee rate.

DATES: Comments must be received by July 15, 2019.

ADDRESSES: You may submit comments, identified by Docket No. OP-1664, 
by any of the following methods:
     Agency website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments are available from the Board's website at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons or to remove 
personally identifiable information at the commenter's request. 
Accordingly, comments will not be edited to remove any identifying or 
contact information. Public comments may also be viewed electronically 
or in paper in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Michael Ballard, Senior Financial 
Institution and Policy Analyst (202-452-2384); Mark Magro, Manager 
(202-452-3944), Division of Reserve Bank Operations and Payment 
Systems; or Evan H. Winerman, Senior Counsel (202-872-7578), Legal 
Division; for users of Telecommunication Devices for the Deaf (TDD) 
only, contact (202-263-4869).

SUPPLEMENTARY INFORMATION: 

I. Background

    The ACH network serves as a ubiquitous, nationwide mechanism for 
processing batch-based credit and debit transfers electronically. 
Currently, the ACH network includes two network operators: The Reserve 
Banks, through FedACH[supreg], and The Clearing House (TCH), through 
the Electronic Payments Network (EPN). The ACH network is governed by 
the rules of the ACH operators, which generally incorporate the NACHA 
Operating Rules and Guidelines adopted by NACHA's members.\1\ In the 
ACH network, originating depository financial institutions (ODFIs) are 
defined as those entities that originate ACH transactions while 
receiving depository financial institutions (RDFIs) receive ACH 
transactions.
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    \1\ NACHA's membership consists of insured depository financial 
institutions and regional payment associations. As an ACH operator, 
the Reserve Banks, through Operating Circular 4, generally 
incorporate NACHA's Operating Rules and Guidelines as rules that 
govern clearing and settlement of commercial ACH transactions (i.e., 
non-government ACH transactions) by the Reserve Banks. The Reserve 
Banks, as fiscal agents of the United States, also handle ACH 
transactions for which an agency of the Federal Government is the 
sending bank or the receiving bank under Treasury Department 
regulations (including 31 CFR parts 210, 203, and 370) and Treasury 
procedures.
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    Currently, there are three ACH processing and settlement windows: 
One that allows for the processing and settlement of ACH transactions 
the next business day and two that allow for the processing and 
settlement of ACH transactions on the same business day. In 2015, NACHA 
members approved amendments to the Operating Rules and Guidelines that 
required all RDFIs to accept same-day ACH payments, with ODFIs paying 
an interbank fee to RDFIs for each same-day ACH forward transaction.\2\ 
Beginning in 2016, the ACH operators adopted two same-day ACH windows: 
(1) A morning window with a submission deadline at 10:30 a.m. ET and 
settlement at 1:00 p.m. ET and (2) an afternoon window with a 
submission deadline at 2:45 p.m. ET and settlement at 5:00 p.m. ET. 
During each window, the ACH operators process the transactions received 
by the submission deadline and either distribute the transactions to 
RDFIs that are their direct customers or exchange with each other the 
ACH transactions that are destined to RDFIs that are customers of the 
other operator. The Reserve Banks settle all ACH transactions that are 
originated or received by FedACH[supreg] customers, including 
transactions that are exchanged between the two operators. TCH arranges 
settlement for only those ACH transactions that are originated and 
received by TCH customers (that is, in-network transactions). The 
Reserve Banks settle ACH transactions by posting credits and debits to 
the sending and receiving banks' Federal Reserve accounts at the 
settlement time and date provided in the FedACH[supreg] processing 
schedule. TCH uses NSS to settle its in-network ACH transactions in 
participants' Federal Reserve accounts, typically sending NSS files at 
the same times the Reserve Banks settle FedACH[supreg] transactions.
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    \2\ The Reserve Banks started offering an optional 
FedACH[supreg] SameDay Service to Reserve Bank ACH customers in 
2010, but it experienced limited adoption because participation was 
voluntary, with few RDFIs signing up to accept same-day ACH 
payments. These amendments were approved by NACHA's voting members 
in 2015 and became effective in three phases, beginning with same-
day ACH credits in September 2016, same-day ACH debits in 2017, and 
faster funds availability in March 2018. The Board requested comment 
on enhancements to align FedACH[supreg] services with the amendments 
in May 2015 and approved the enhancements in September 2015. See 80 
FR 30246, 30248 (May 27, 2015) and 80 FR 58248, 58253 (Sep. 28, 
2015).
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    In December 2017, NACHA proposed a third same-day ACH window that 
would allow an ODFI to submit same-day ACH transactions later in the 
day. Specifically, NACHA proposed an afternoon submission deadline of 
4:45 p.m. ET with settlement at 6:00 p.m. ET.\3\ NACHA's proposal was 
intended to allow originators, ODFIs, and other participants to use the 
same-day ACH service during a greater portion of their business 
hours.\4\ The current deadline for the afternoon window is early in the 
business day for ODFIs outside the eastern time zone, reducing the 
ability of those financial institutions, originators, and end users to 
take full advantage of existing same-day ACH services. To meet the 
operators' processing deadlines, ODFIs may need to impose even earlier 
deadlines for their originators (for example, merchants), particularly 
if such ODFIs rely on correspondent institutions to process their ACH 
transactions.
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    \3\ As noted in NACHA's proposal, schedules and timing will be 
determined by each ACH operator and are not set by the amended 
operating rules.
    \4\ See https://www.nacha.org/rules/expanding-same-day-ach.
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    NACHA's membership approved the proposal on September 13, 2018.\5\ 
The amended operating rules, however, are contingent on changes to 
Reserve Bank services necessary to enable the third same-day ACH 
window.\6\ These changes are discussed in further detail below.
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    \5\ See https://www.nacha.org/news/same-day-ach-will-be-enhanced-meet-ach-end-user-needs.
    \6\ See n.4, supra.
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    While the proposals discussed in this notice fall under the general 
topic of enhancing existing services, the Board is not at this time 
directly addressing the comments received in response to its October 
2018 request for public comment on potential actions the Federal 
Reserve could take to support faster (real-time) payments in the United 
States. Those potential actions included development of (1) a service 
for 24x7x365 real-time interbank settlement of faster payments and (2) 
a liquidity management tool that would enable transfers between Reserve 
Bank

[[Page 22125]]

accounts on a 24x7x365 basis.\7\ The Board continues to evaluate, and 
will separately respond to, comments on the 2018 notice. The notice 
issued today is narrowly focused on whether the Reserve Banks should 
modify the operating hours for their wholesale services to support a 
third same-day ACH processing and settlement window.
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    \7\ 83 FR 57351, 57364 (Nov. 15, 2018).
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II. Potential Modifications to Reserve Bank Payment Services

    The Board is seeking comment on potential modifications to the 
operating hours of NSS and the Fedwire Funds Service to facilitate 
adoption of a later same-day ACH processing and settlement window with 
an afternoon submission deadline of 4:45 p.m. ET and settlement at 6:00 
p.m. ET.
    Specifically, the current closing time of NSS is 5:30 p.m. ET, 30 
minutes earlier than NACHA's proposed 6:00 p.m. ET settlement time for 
the third same-day ACH window. In order to accommodate this later same-
day ACH window, the Reserve Banks would extend the closing of NSS one 
hour, from 5:30 p.m. ET to 6:30 p.m. ET. This proposed change to NSS 
operating hours would allow TCH to settle in-network same-day ACH 
transactions submitted during the third same-day ACH window. The 
Federal Reserve has previously undertaken similar operating-hour 
extensions to support private-sector payment systems.\8\
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    \8\ Specifically, the Reserve Banks extended NSS operating hours 
in 2015 from 5:00 p.m. ET to 5:30 p.m. ET so that operators of 
private-sector check-clearing systems could settle transactions at 
the same time the Reserve Banks post commercial check transactions. 
The Board had amended Part II of the PSR policy to establish a new 
5:30 p.m. ET posting time for commercial check transactions settled 
through the Reserve Banks. See 79 FR 72112, 72116 (Dec. 5, 2014) 
(noting that ``[t]he establishment of posting rules outside of the 
NSS operating day could potentially create competitive disparities 
between Reserve Bank and private-sector clearing and settlement 
systems'').
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    The proposal to extend NSS operating hours would also require the 
Reserve Banks to (1) extend the closing of the Fedwire Funds Service by 
30 minutes, from 6:30 p.m. ET to 7:00 p.m. ET, and (2) extend the 
cutoff time for Reserve Bank accountholders to initiate transfers on 
behalf of third parties via the Fedwire Funds Service (Fedwire Funds 
third-party cutoff) by 45 minutes, from 6:00 p.m. ET to 6:45 p.m. 
ET.\9\ This change would reduce the time between the Fedwire Funds 
third-party cutoff and the closing of the Fedwire Funds Service by 15 
minutes. Collectively, these proposed changes are intended to allow 
sufficient time between the closing of NSS, the Fedwire Funds third-
party cutoff, and the closing of the Fedwire Funds Service, in order 
for depository institutions and their customers to reposition balances 
and manage liquidity. Table 1 summarizes the current and proposed 
closings and cutoffs for Reserve Bank services, while table 2 
illustrates the changes in times between service closings and cutoffs.
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    \9\ The Federal Reserve has long provided at least 30 minutes 
between the last NSS settlement and the closing of the Fedwire Funds 
Service, recognizing that ``the Fedwire funds transfer service is 
the primary alternative for orderly and efficient settlement of 
bilateral obligations in case a settlement arrangement is unable to 
complete its multilateral settlement through NSS.'' See 63 FR 60000, 
60004 (Nov. 6, 1998). Further, NSS settlement entries may result in 
changes to depository institutions' master account positions, 
necessitating the use of the Fedwire Funds Service to send or 
receive funds to close the day at the position they intend. The 
Fedwire Funds third-party cutoff was established to stop the flow of 
customer transactions and allow financial institutions a settlement 
period to conduct bank-to-bank transfers to adjust master account 
positions before the closing of the Fedwire Funds Service. The 
current Fedwire Funds third-party cutoff of 6:00 p.m. ET was 
established in 1990. See 55 FR 18755, 18758 (May 4, 1990).

                                                     Table 1
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                                        Current closings/cutoffs              Proposed closings/cutoffs
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NSS closing.........................  5:30 p.m. ET................  6:30 p.m. ET.
Fedwire Funds third-party cutoff....  6:00 p.m. ET................  6:45 p.m. ET.
Fedwire Funds Service closing.......  6:30 p.m. ET................  7:00 p.m. ET.
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                                 Table 2
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                                     Current time        Proposed time
                                   between closings/   between closings/
                                   cutoffs (minutes)   cutoffs (minutes)
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Time between closing of NSS and                   30                  15
 Fedwire Funds third-party
 cutoff.........................
Time between Fedwire Funds third-                 30                  15
 party cutoff and closing of
 Fedwire Funds Service..........
Time between closing of NSS and                   60                  30
 Fedwire Funds Service..........
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III. Discussion and Request for Comment

    The potential modifications to operating hours for NSS and the 
Fedwire Funds Service are each considered major service enhancements. 
Any potential new payment service or major enhancements to an existing 
service must meet the following criteria: The Federal Reserve must 
expect to achieve full recovery of costs over the long run; the Federal 
Reserve must expect that its providing the service will yield a clear 
public benefit; and the service should be one that other providers 
alone cannot be expected to provide with reasonable effectiveness, 
scope, and equity.\10\
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    \10\ Clear public benefits include promoting the integrity of 
the payment system, improving the effectiveness of financial 
markets, reducing the risk associated with payment and securities-
transfer services, or improving the efficiency of the payment 
system. Board of Governors of the Federal Reserve System, ``Federal 
Reserve in the Payment System,'' Issued 1984; revised 1990. 
Available at http://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm.
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    The Board expects that, over the long run, the Reserve Banks would 
be able to recover the costs associated with the proposed extended 
operating hours. The proposed operating hours for NSS and the Fedwire 
Funds Service would require minor technical changes and additional 
staffing during the extended business day, resulting in minimal one-
time implementation costs and ongoing additional staffing costs. The 
Reserve Banks anticipate recovering these costs through existing fees 
charged for NSS and the Fedwire Funds Service.
    The Board also expects that extending operating hours for NSS and 
the Fedwire Funds Service to support a

[[Page 22126]]

third same-day ACH window would offer public benefits. Same-day ACH 
transactions are used for payroll (especially emergency payroll), 
business-to-business payments, consumer bill payments, and consumer 
account-to-account payments. By allowing ODFIs to submit same-day ACH 
transactions later in the business day, the third same-day ACH window 
could encourage more ODFIs (particularly those in the Pacific and 
mountain time zones) to offer same-day ACH to their customers, 
potentially increasing usage more broadly and resulting in increased 
adoption of same-day ACH payments. This in turn would further advance 
the Federal Reserve's ongoing objective to improve the safety and 
efficiency of payment systems in the United States. The Board 
recognizes, however, that the proposal may increase certain risks and 
costs for Reserve Bank accountholders and their customers, including 
risks and costs related to compression of end-of-day processing 
activities, decreased availability of extensions to operating hours, 
and more-frequent delays to the reopening of the Fedwire Funds Service. 
As discussed further below, the Board requests comment on these 
potential risks and costs.
    Finally, the Board does not expect that other providers alone could 
provide the enhanced services with reasonable effectiveness, scope, and 
equity. TCH relies on NSS to settle its in-network ACH transactions, 
including same-day ACH transactions, and so would be unable to offer a 
third same-day ACH window with settlement at 6:00 p.m. ET unless the 
Reserve Banks extend the closing time of NSS.
    The Board's Principles for the Pricing of Reserve Bank Services 
further require that the Board seek public comment on changes to 
Reserve Bank services that would have significant longer-run effects on 
the nation's payment system.\11\ The Board believes that extending the 
operating hours of NSS and the Fedwire Funds Service could have such an 
effect. Accordingly, the Board requests comment on all aspects of these 
potential changes, including the Board's analysis of the potential 
public benefits as well as the potential options to mitigate the risk 
of more-frequent delays to the reopening of the Fedwire Funds Service.
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    \11\ Board of Governors of the Federal Reserve System, 
``Principles for the Pricing of Federal Reserve Bank Services,'' 
Issued 1980.
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    The Board requests public comment on the following questions:
    1. How might institutions and their customers use a later same-day 
ACH window?
    2. Would institutions and their customers use expanded hours of NSS 
and the Fedwire Funds Service for purposes unrelated to the later same-
day ACH window? If so, how?

A. Risk Considerations

1. End-of-Day Compression
    The Federal Reserve has long provided at least thirty minutes 
between the last NSS settlement and the closing of the Fedwire Funds 
Service.\12\ Depository institutions and their customers use the time 
between the closing of NSS and the closing of the Fedwire Funds Service 
to reposition balances and manage liquidity.\13\
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    \12\ See n.9, supra.
    \13\ For example, if a large debit from an NSS file creates an 
overdraft in a depository institution's account, that institution 
may reposition balances so that it does not have a negative account 
balance at the closing of the Fedwire Funds Service.
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    In order to accommodate a third same-day ACH settlement window, the 
Reserve Banks' current windows between service closings and cutoffs 
would, as outlined in tables 1 and 2, be reduced 50 percent. These 
reduced windows would limit the time available for depository 
institutions and their customers to reposition balances and manage 
liquidity after the processing and settlement of an NSS file or third-
party-initiated Fedwire Funds transactions. As a result, the Board 
believes that depository institutions and their customers may need to 
make technical, operational, and/or procedural changes to adjust to the 
proposed end-of-day timeline. If depository institutions do not make 
such changes, the Board believes that Reserve Banks may experience 
increases in requests to extend the closing of the Fedwire Funds 
service, in requests for discount window loans, or in overnight 
overdrafts.
    Additionally, any extension to the closing of NSS or the Fedwire 
Funds third-party cutoff would require an extension to the closing of 
the Fedwire Funds Service to maintain at least fifteen minutes between 
each deadline.\14\ If the Reserve Banks do not pursue certain risk-
mitigation options described below, any extension granted to NSS or the 
Fedwire Funds third-party cut-off would result in a delayed reopening 
of the Fedwire Funds Service on the next business day. Issues related 
to extensions and the delayed reopening of the Fedwire Funds Service 
are discussed further in the next section.
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    \14\ Operating Circular 12, paragraph 5.8, provides discretion 
to a Reserve Bank to extend the NSS settlement window.
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    The Board requests public comment on the following questions:
    3. What increased risks and costs might your institution and 
customers incur as a result of reduced time between the closing of NSS, 
the Fedwire Funds third-party cutoff, and the closing of the Fedwire 
Funds Service as outlined in Tables 1 and 2?
    4. What changes to internal processes or technologies (if any) 
would your institution need to make to adjust to any of the reduced 
windows outlined in Tables 1 and 2? Approximately how long would it 
take for your institution to implement any necessary changes?
2. Delayed Reopening of the Fedwire Funds Service
    The Fedwire Funds Service operating hours currently begin at 9:00 
p.m. ET on the preceding calendar day and end at 6:30 p.m. ET, Monday 
through Friday. The Reserve Banks allow participants to request 
extensions to the Fedwire Funds third-party cutoff or the Fedwire Funds 
Service closing time if, among other things, the dollar value of 
delayed transfers would exceed $1 billion.\15\ Such extensions occur 
approximately twice per month and range from 15 minutes to 1 hour and 
45 minutes, with most lasting 30 minutes.\16\ In most cases, extensions 
to the Fedwire Funds third-party cutoff or the Fedwire Funds Service 
closing time do not affect the reopening time of the Fedwire Funds 
Service for the next business day.
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    \15\ See Operating Circular 6, paragraph 10.3, and https://www.frbservices.org/resources/financial-services/wires/extension-guidelines.html. Additionally, if the Fedwire Funds Service 
experiences an operational disruption, the Reserve Banks may extend 
the Fedwire Funds Service closing time regardless of the dollar 
value still to be sent.
    \16\ Over a 30-month period between January 2016 and July 2018, 
the Reserve Banks granted 38 extensions to the Fedwire Funds third-
party cut-off and 32 extensions to the closing of the Fedwire Funds 
Service (20 of which were prompted by extensions to the Fedwire 
Funds third-party cut-off), ultimately resulting in three delays to 
the reopening of the Fedwire Funds Service.
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    The Reserve Banks strive to maintain at least a 2-hour window 
between the closing and reopening of the Fedwire Funds Service to allow 
Fedwire participants sufficient time to complete their end-of-day 
cycles and processing.\17\ As discussed above, to

[[Page 22127]]

facilitate a third same-day ACH window, the Reserve Banks would change 
the closing time of the Fedwire Funds Service from 6:30 p.m. ET to 7:00 
p.m. ET, which would reduce the window between the closing and 
reopening of the Fedwire Funds Service from 2 hours and 30 minutes to 2 
hours. Accordingly, if the Reserve Banks maintain their current 
practice of providing a 2-hour window between the closing and reopening 
of the Fedwire Funds Service, all extensions granted to the closing of 
the Fedwire Funds Service would result in a delayed reopening of the 
Fedwire Funds Service for the next business day.\18\ Such delays would 
likely occur routinely as the Reserve Banks currently extend the 
Fedwire Funds third-party cutoff or the closing of the Fedwire Funds 
Service approximately twice per month. These delays could affect 
Fedwire Funds Service participants that wish to send payment orders at 
the start of the Fedwire Funds Service business day. On average, $35 
billion is settled over the Fedwire Funds Service during the first hour 
of the Fedwire Funds Service business day (9:00 p.m. ET to 10:00 p.m. 
ET), with a majority of transactions supporting the international 
markets and a portion of the amount funding settlement in other U.S. 
payment systems.
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    \17\ See https://www.frbservices.org/resources/financial-services/wires/extension-guidelines.htm. See also 68 FR 28826, 28827 
(May 27, 2003) (``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''). End-of-day cycles and processing 
typically involve the reconciliation and preparation of systems for 
the next cycle date as well as the production of customer 
statements.
    \18\ For example, a 15-minute extension to the Fedwire Funds 
Services closing (from 7:00 p.m. ET to 7:15 p.m. ET) would result in 
a 15-minute delay to the reopening of the Fedwire business day (from 
9:00 p.m. ET to 9:15 p.m. ET).
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    Additionally, if the Reserve Banks change the closing of NSS to 
6:30 p.m. ET and maintain their current practice of providing a two-
hour window between the closing and reopening of the Fedwire Funds 
Service, any extension to the closing of NSS would result in a delayed 
reopening of the Fedwire Funds Service.\19\ While extensions to the 
closing of NSS are uncommon, such extensions could be required when 
system outages or problems prevent the submission or processing of NSS 
files.\20\ Similarly, if the Reserve Banks change the Fedwire Funds 
third-party cutoff to 6:45 p.m. ET as proposed, any extension to this 
cutoff would result in a delayed reopening of the Fedwire Funds 
Service.\21\
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    \19\ For example, a 15-minute extension to the NSS closing (from 
6:30 p.m. ET to 6:45 p.m. ET) would prompt a 15-minute extension to 
the Fedwire Funds Service closing (from 7:00 p.m. ET to 7:15 p.m. 
ET) to allow thirty minutes between the closing of NSS and the 
closing of the Fedwire Funds Service, which would in turn result in 
a 15-minute delay to the reopening of the Fedwire Funds Service 
(from 9:00 p.m. ET to 9:15 p.m. ET).
    \20\ For example, a settlement agent might experience an issue 
with one of its internal systems that prevents the settlement agent 
from submitting a settlement file to NSS. Similarly, the Reserve 
Banks might experience problems with the NSS application, or the 
electronic channels settlement agents use to submit settlement files 
to NSS, that prevent settlement agents from submitting files or 
prevent the Reserve Banks from processing settlement files submitted 
by settlement agents.
    \21\ For example, a 15-minute extension to the Fedwire Funds 
third-party cut-off (from 6:45 p.m. to 7:00 p.m. ET) would prompt a 
15-minute extension to the Fedwire Funds Service closing (from 7:00 
p.m. ET to 7:15 p.m. ET) to allow at least 15 minutes between the 
Fedwire Funds third-party cut-off and the closing of the Fedwire 
Funds Service, which would in turn delay the reopening of the 
Fedwire Funds Service by 15 minutes (from 9:00 p.m. ET to 9:15 p.m. 
ET).
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    Today, delays to the reopening of the Fedwire Funds Service occur 
approximately once per year.\22\ Based on recent data, if the Reserve 
Banks extend the closing of the Fedwire Funds Service to 7:00 p.m. ET, 
delays to the reopening of the service could occur approximately twice 
per month. The Federal Reserve continues to believe that it is 
important to minimize the frequency of Fedwire Funds Service 
extensions, especially those that result in delayed reopenings to the 
service. Accordingly, if the Reserve Banks implement the proposed 
changes to the closing and cutoff times for NSS and the Fedwire Funds 
Service, the Reserve Banks may need to be more restrictive in granting 
service extensions.
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    \22\ See n.16, supra.
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    The Reserve Banks could make certain operational and policy changes 
to reduce the risk of frequent delays to the reopening of the Fedwire 
Funds Service. One option is to change the Reserve Banks' guidelines 
for providing extensions to the Fedwire Funds Service (which have been 
in effect since 1997) by increasing the current $1 billion value 
threshold. If the Reserve Banks were to raise the extension threshold 
to $5 billion, for example, it is estimated that, based on recent data, 
the Reserve Banks would grant approximately half the current number of 
extensions to the Fedwire Funds third-party cutoff or the closing of 
the Fedwire Funds Service. A $5 billion value threshold may also be 
more appropriate based on the average daily value of transactions 
settled over the Fedwire Funds Service.\23\ Even with a $5 billion 
value threshold, however, every extension to the proposed closing of 
NSS, the Fedwire Funds third-party cutoff, or the closing of the 
Fedwire Funds Service would still result in the delayed reopening of 
the Fedwire Funds Service for the next business day. An analysis of 
recent data indicates that such extensions and delayed reopenings could 
occur approximately once a month.
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    \23\ The average daily value of transactions settled over the 
Fedwire Funds Service more than doubled from 1997 to 2017, from 
approximately $1.1 trillion to approximately $2.9 trillion.
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    A second option would be for Reserve Banks to change the practice 
of maintaining a 2-hour window between the closing of the Fedwire Funds 
Service (for one funds-transfer business day) and the reopening of the 
Fedwire Funds Service (for the next funds-transfer business day). For 
example, if the Reserve Banks were to maintain a 90-minute window 
rather than a 2-hour window, the Reserve Banks could extend the closing 
of the Fedwire Funds Service by 30 minutes without delaying the 
reopening of the Fedwire Funds Service. This change would reduce the 
frequency of delays to the reopening of the Fedwire Funds Service, 
although an analysis of recent data indicates that such delays would 
still occur more frequently than they do today, resulting in 
approximately five delays to the reopening of the Fedwire Funds Service 
per year.\24\
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    \24\ Currently, the Reserve Banks can provide forty-five minute 
extensions to the Fedwire Funds third-party cut-off (from 6:00 p.m. 
ET to 6:45 p.m. ET) without delaying the reopening of the Fedwire 
Funds Service; in such circumstances, the Reserve Banks can provide 
thirty-minute extensions to the closing of Fedwire Funds Service 
(from 6:30 p.m. to 7:00 p.m. ET) and still maintain (a) a 15-minute 
window between the Fedwire Funds third-party cut-off and the closing 
of the Fedwire Funds Service and (b) a two-hour window between the 
closing and reopening of the Fedwire Funds Service. Under the 
proposed changes in operating hours, a forty-five minute extension 
to the Fedwire Funds third-party cut-off (from 6:45 p.m. ET to 7:30 
p.m. ET) would require the Reserve Banks to extend the Fedwire Funds 
Service closing by forty-five minutes (from 7:00 p.m. ET to 7:45 
p.m. ET) in order to provide a 15-minute window between the Fedwire 
Funds third-party cut-off and the closing of the Fedwire Funds 
Service; this would in turn require the Reserve Banks to delay the 
reopening of the Fedwire Funds Service by 15 minutes (from 9:00 p.m. 
ET to 9:15 p.m. ET) in order to maintain the proposed ninety-minute 
window between the closing of the Fedwire Funds Service and the 
reopening of the Fedwire Funds Service.
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    A third option would be for the Reserve Banks to implement a $5 
billion threshold for extensions and reduce the two-hour window between 
closing and reopening of the Fedwire Funds Service to ninety minutes. 
This approach would result in approximately three delays to the 
reopening of the Fedwire Funds Service per year.
    The Board requests comment on the following questions:
    5. If your institution typically makes payments during the first 
hour of the Fedwire Funds Service business day, what would be the 
consequences of delaying the reopening of the Fedwire Funds Service? 
Are the consequences more significant for certain types of payments? 
Are there steps your institution, the Reserve Banks, or others

[[Page 22128]]

could take to reduce those consequences?
    6. How might the proposed compressed end-of-day timeline increase 
the frequency with which institutions request that the Reserve Banks 
extend the operating hours of the Fedwire Funds Service?
    7. Should the Reserve Banks update their criteria for extending the 
closing time of the Fedwire Funds Service to include a higher value 
threshold? If so, would a $5 billion threshold be appropriate? Would 
your institution need to make any operational changes to adjust to a $5 
billion threshold?
    8. Should the Reserve Banks update their criteria for extending the 
closing time of the Fedwire Funds Service to reduce the targeted two-
hour window between the closing and reopening of the Fedwire Funds 
Service? Why or why not? Would a window of 90 minutes (or some other 
period) between the closing and reopening of the Fedwire Funds Service 
provide sufficient time to perform end-of-day processes at your 
institution? What operational or technical changes would your 
institution need to make (if any) to adjust to a reduced window?
    9. Given the risks of more-frequent delays to the reopening of the 
Fedwire Funds Service, should the Federal Reserve simultaneously raise 
the value threshold for extensions to $5 billion and reduce the window 
between the closing and reopening of the Fedwire Funds service? Why or 
why not?
    10. If your institution would need to implement changes to adjust 
to a $5 billion threshold or a reduced window between the closing and 
reopening of the Fedwire Funds Service, when would your institution be 
ready to implement those changes? If your institution is not ready to 
implement any required changes by March 2021, which is NACHA's current 
effective date for implementing the later same-day ACH window, should 
the Federal Reserve delay implementation of the proposed changes to NSS 
and the Fedwire Funds Service? Why or why not?
    11. Are there any other potential benefits, consequences, risks, or 
costs that the Federal Reserve should consider when evaluating the 
adoption of the proposed changes to NSS and the Fedwire Funds Service, 
including potential risks to financial stability? If so, please provide 
a description.

B. Competitive Impact Analysis

    When considering changes to an existing service, the Board conducts 
a competitive impact analysis to determine whether there will be 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 the Federal Reserve's 
dominant market position deriving from such legal differences.\25\ The 
Board believes that there would be no adverse effects to other service 
providers resulting from adding a third same-day ACH settlement window 
and extending the daily operating hours of NSS and the Fedwire Funds 
Service. As described above, the changes to NSS and the Fedwire Funds 
Service would allow TCH, the private-sector ACH operator, to implement 
the third same-day ACH window. This would promote competitive fairness 
between the two ACH operators.
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    \25\ See The Federal Reserve in the Payments System (issued 
1984; revised 1990), Federal Reserve Regulatory Service 9-1558.
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C. Related Changes to the Federal Reserve Policy on Payment System Risk

    Part II of the Federal Reserve Policy on Payment System Risk (PSR 
policy) governs the provision of intraday credit by the Reserve Banks 
and establishes procedures--called ``posting rules''--for the 
settlement of debits and credits to institutions' Federal Reserve 
accounts for different payment types.\26\ The application of these 
posting rules determines an institution's intraday account balance and 
whether the institution has incurred a negative balance (daylight 
overdraft). The Reserve Banks charge fees for certain daylight 
overdrafts.
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    \26\ The PSR policy is available at https://www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
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    The proposed same-day ACH processing window would require modifying 
the PSR policy to add a 6:00 p.m. ET posting time for settlement of 
commercial and government same-day ACH transactions. The Board would 
also remove the current 5:30 p.m. ET posting time for ACH return 
transactions, and these return transactions would post at the new 6:00 
p.m. ET posting time for same-day ACH transactions.\27\
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    \27\ Posting of paper returns of same-day forward items that 
currently post at 5:30 p.m. ET would also move to the new 6:00 p.m. 
ET posting time.
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    Additionally, extending the closing time of the Fedwire Funds 
Service would affect the fee that an institution pays for daylight 
overdrafts, because (under section II.C of the PSR policy) the Reserve 
Banks calculate daylight overdraft fees based on the length of the 
Fedwire operating day. Specifically, the daylight overdraft fee rate is 
calculated using an annual rate of 50 basis points (quoted on the basis 
of a 24-hour day and a 360-day year) that is prorated to the length of 
the Fedwire operating day (currently 21.5 hours). Accordingly, the 
effective annual overdraft rate is (21.5/24) multiplied by 50 basis 
points, or approximately 0.004479, and the effective daily rate is 
0.0000124. If the operating hours of the Fedwire day increase by 30 
minutes, the effective annual rate would be (22/24) multiplied by 50 
basis points, or approximately 0.004583, and the effective daily rate 
would increase by about 2.4 percent to 0.0000127.
    An institution's daily daylight overdraft charge equals the 
effective daily rate multiplied by the institution's average daily 
uncollateralized daylight overdraft, which is calculated by dividing 
the sum of its negative uncollateralized Federal Reserve account 
balances at the end of each minute by the total number of minutes in 
the Fedwire operating day. Because the Fedwire operating day would 
increase to 1,321 minutes from the current 1,291 minutes, average daily 
uncollateralized overdrafts would decrease about 2.3 percent, 
offsetting in part the increase to the effective daily rate.\28\ After 
accounting for changes to both the fee rate and average 
uncollateralized daylight overdraft calculation, the Board estimates 
that gross fees before application of fee waivers would increase by 
less than one-tenth of 1 percent.\29\
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    \28\ Analysis assumes that the size and duration of 
institutions' daylight overdrafts remains unchanged between a 21.5-
hour and 22-hour operating day.
    \29\ Institutions' gross daily daylight overdraft fees are 
summed across a two-week reserve maintenance period and then reduced 
by a fee waiver of $150, which is primarily intended to minimize the 
burden of the PSR policy on institutions that use small amounts of 
intraday credit.
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    The Board requests comment on all aspects of the proposed changes 
to the PSR policy.

IV. Federal Reserve Policy on Payment System Risk

Revisions to Section II.A of the PSR Policy

    The Board proposes to revise Section II.A of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:
A. Daylight Overdraft Definition and Measurement
* * * * *
Post by 1:00 p.m. eastern time:
+/- Commercial check transactions, including returned checks
+/- Government and commercial FedACH SameDay Service transactions, 
including return items \30\
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    \30\ With the exception of paper returns and paper notifications 
of change (NOCs) of prior-dated items that only post at 5:00 p.m.; 
paper returns of same-day forward items that only post at 6:00 p.m.; 
and FedLine Web returns and FedLine Web NOCs that only post at 8:30 
a.m. and 5:00 p.m., depending on when the item is received by 
Reserve Banks.

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[[Page 22129]]

+ Same-day Treasury investments.
Post at 5:00 p.m. eastern time:
+/- Government and commercial FedACH SameDay Service transactions, 
including return items \31\
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    \31\ With the exception of paper returns of same-day forward 
items that only post at 6:00 p.m.
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+ Treasury checks, postal money orders, and savings bond redemptions in 
separately sorted deposits; these items must be deposited by the latest 
applicable deposit deadline preceding the posting time
+ Local Federal Reserve Bank checks; these items must be presented 
before 3:00 p.m. eastern time

Post at 5:30 p.m. eastern time:
+/- Commercial check transactions, including returned checks

Post at 6:00 p.m. eastern time:
    +/- Government and commercial FedACH SameDay Service transactions, 
including return items \32\
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    \32\ With the exception of paper returns and paper notifications 
of change (NOCs) of prior-dated items that only post at 5:00 p.m.; 
and FedLine Web returns and FedLine Web NOCs that only post at 8:30 
a.m. and 5:00 p.m., depending on when the item is received by 
Reserve Banks.
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* * * * *

Revisions to Section II.C of the PSR Policy

    The Board proposes to revise Section II.C of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:
C. Pricing
* * * * *
    * * *
    Daylight overdraft fees for uncollateralized overdrafts (or the 
uncollateralized portion of a partially collateralized overdraft) are 
calculated using an annual rate of 50 basis points, quoted on the basis 
of a 24-hour day and a 360-day year. To obtain the effective annual 
rate for the standard Fedwire operating day, the 50-basis-point annual 
rate is multiplied by the fraction of a 24-hour day during which 
Fedwire is scheduled to operate. For example, under a 22-hour scheduled 
Fedwire operating day, the effective annual rate used to calculate 
daylight overdraft fees equals 45.83 basis points (50 basis points 
multiplied by 22/24).\33\ The effective daily rate is calculated by 
dividing the effective annual rate by 360.\34\ An institution's daily 
daylight overdraft charge is equal to the effective daily rate 
multiplied by the institution's average daily uncollateralized daylight 
overdraft. * * *
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    \33\ A change in the length of the scheduled Fedwire operating 
day should not significantly change the amount of fees charged 
because the effective daily rate is applied to average daylight 
overdrafts, the calculation of which would also reflect the change 
in the operating day.
    \34\ Under the current 22-hour Fedwire operating day, the 
effective daily daylight-overdraft rate is truncated to 0.0000127.
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* * * * *

Revisions to Section II.F of the PSR Policy

    The Board proposes to revise Section II.F of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:
F. Special Situations
* * * * *
* * *
    Certain institutions are subject to a daylight-overdraft penalty 
fee levied against the average daily daylight overdraft incurred by the 
institution. These include Edge and agreement corporations, bankers' 
banks that are not subject to reserve requirements, and limited-purpose 
trust companies. The annual rate used to determine the daylight-
overdraft penalty fee is equal to the annual rate applicable to the 
daylight overdrafts of other institutions (50 basis points) plus 100 
basis points multiplied by the fraction of a 24-hour day during which 
Fedwire is scheduled to operate (currently 22/24). The daily daylight-
overdraft penalty rate is calculated by dividing the annual penalty 
rate by 360.\35\ The daylight-overdraft penalty rate applies to the 
institution's daily average daylight overdraft in its Federal Reserve 
account. The daylight-overdraft penalty rate is charged in lieu of, not 
in addition to, the rate used to calculate daylight overdraft fees for 
institutions described in this section. * * *
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    \35\ Under the current 22-hour Fedwire operating day, the 
effective daily daylight-overdraft penalty rate is truncated to 
0.0000382.
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* * * * *

    By order of the Board of Governors of the Federal Reserve 
System, May 9, 2019.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2019-09949 Filed 5-15-19; 8:45 am]
 BILLING CODE 6210-01-P