[Federal Register Volume 84, Number 249 (Monday, December 30, 2019)]
[Notices]
[Pages 71940-71946]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28002]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1692]


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

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board of Governors (Board) has approved 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 will 
extend the daily operating hours of the National Settlement Service 
(NSS) and the Fedwire[supreg] Funds Service. To mitigate the risk that 
these modified hours will cause more frequent delays to the 9:00 p.m. 
eastern time (ET) reopening of the Fedwire Funds Service, the Reserve 
Banks will modify the practice of maintaining a 2-hour window between 
the closing and reopening of the Fedwire Funds Service to maintain only 
a 90-minute window, and will increase the $1 billion value threshold 
for extending the closing of the Fedwire Funds Service to $3 billion. 
Finally, the Board has approved corresponding changes to the Federal 
Reserve Policy on Payment System Risk (PSR policy).

DATES: Implementation date: March 19, 2021.

FOR FURTHER INFORMATION CONTACT: Michael Ballard, Senior Financial 
Institution and Policy Analyst (202-452-2384); Ann Sun, Lead Financial 
Institution and Policy Analyst (202-912-7938), 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

    On May 16, 2019, the Board published a Federal Register notice 
(Notice) seeking public comment on modifications to the Reserve Banks' 
payment services to facilitate adoption of a later same-day ACH 
processing and settlement window.\1\ As described more fully in the 
Notice, the ACH network is made up of two network operators: The 
Reserve Banks, which operate the FedACH[supreg] service, and The 
Clearing House Payments Company L.L.C. (TCH), which operates the 
Electronic Payments Network (EPN) service.\2\ The ACH network is 
governed by the rules of the ACH operators, which generally incorporate 
the Nacha Operating Rules

[[Page 71941]]

and Guidelines adopted by Nacha's members.\3\ Nacha amended its 
operating rules on September 13, 2018, to implement a later same-day 
ACH window.\4\ The amended operating rules, however, are contingent on 
changes to Reserve Bank services that would enable TCH, the private-
sector ACH operator, using NSS, to settle transactions between its 
customers during this later same-day ACH window.\5\
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    \1\ 84 FR 22123 (May 16, 2019). In addition, the Board has 
announced that the Federal Reserve intends to explore further 
expanded hours for NSS and the Fedwire Funds Service, up to 24 x 7 x 
365, to support a wide range of payment activities, including 
liquidity management in private-sector real-time gross settlement 
services for faster payments. See 84 FR 39297 (August 9, 2019). The 
Board is analyzing the risk, operational, and policy implications of 
further expanding operating hours of NSS and the Fedwire Funds 
Service.
    \2\ The Reserve Banks settle all ACH transactions that are 
originated or received by FedACH customers, including transactions 
that are exchanged between the two operators. TCH arranges 
settlement for only those ACH transactions that are originated and 
received by EPN customers (that is, transactions within the EPN 
network). 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 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 transactions.
    \3\ Nacha's membership consists of insured financial 
institutions and regional payment associations.
    \4\ See https://www.Nacha.org/news/same-day-ach-will-be-enhanced-meet-ach-end-user-needs.
    \5\ See n.2, supra.
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    Currently, there are three ACH processing and settlement windows: 
One next-day window and two same-day windows. The two current same-day 
windows consist of (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.\6\ The later same-day ACH processing and settlement 
window outlined in the Notice would have an afternoon submission 
deadline of 4:45 p.m. ET and settlement at 6:00 p.m. ET, which is later 
than the current operating hours of NSS.\7\
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    \6\ During each window, the ACH operators process the 
transactions received by the submission deadline and either 
distribute the transactions to the receiving depository financial 
institutions (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.
    \7\ The actual schedules and timing are determined by each ACH 
operator and are not set by the Nacha Operating Rules and 
Guidelines.
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    The Board requested comment on (1) extending the closing time of 
NSS by one hour, from 5:30 p.m. ET to 6:30 p.m. ET, (2) extending the 
cutoff time for Reserve Bank account holders 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, 
and (3) extending the closing of the Fedwire Funds Service by 30 
minutes, from 6:30 p.m. ET to 7:00 p.m. ET. These proposed changes were 
intended to allow sufficient time for depository institutions and their 
customers to reposition balances and manage liquidity between the 
closing of NSS, the Fedwire Funds third-party cutoff, and the closing 
of the Fedwire Funds Service. Table 1 summarizes the proposed changes 
to closings and cutoffs for Reserve Bank services, while Table 2 
illustrates the proposed changes in times between service closings and 
cutoffs.

                   Table 1--Proposed Changes to Closings and Cutoffs for Reserve Bank Services
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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--Proposed Changes in Times Between Service Closings and Cutoffs
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                                     Current time        Proposed time
                                   between closings/   between closings/
                                        cutoffs             cutoffs
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Time between closing of NSS and           30 minutes         15 minutes.
 Fedwire Funds third-party
 cutoff.........................
Time between Fedwire Funds third-         30 minutes         15 minutes.
 party cutoff and closing of
 Fedwire Funds Service..........
Time between closing of NSS and           60 minutes         30 minutes.
 closing of Fedwire Funds
 Service........................
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    The Board requested comment on how depository institutions and 
their customers might use a third same-day ACH window and the extended 
NSS/Fedwire Funds Service hours. The Board also requested comment on 
whether reducing the time between service closings and cutoffs would 
increase risks and costs for depository institutions and their 
customers. Additionally, the Board requested comment on certain 
operational and policy changes to reduce the risk that the proposed 
changes to service closings and cutoffs would increase the frequency of 
delays to the reopening of the Fedwire Funds Service. Specifically, the 
Board requested comment on modifying (1) 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) and (2) the Reserve 
Banks' dollar value threshold for providing extensions to the Fedwire 
Funds Service hours. Finally, the Board requested comment on 
corresponding changes to the PSR policy.

II. Summary of Comments and Analysis

    The Board received 77 comments from small and midsize banks, large 
banks, banking trade associations, end users and associations 
representing end users, payment trade associations (including national 
and regional payment associations), third-party processors and service 
providers, TCH, Nacha, and other interested parties.\8\ Sixty-five 
commenters generally supported the Board's proposed changes, 10 
commenters did not support the proposed changes, and 2 commenters took 
no clear position.
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    \8\ Duplicate submissions or similar comments from the same 
commenter were treated as a single submission. Throughout this 
notice, the term ``bank'' will be used to refer to any type of 
depository institution. Depository institutions include commercial 
banks, savings banks, savings and loan associations, and credit 
unions.
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A. Supporting the Third Same-Day ACH Processing and Settlement Window

    Most commenters supported a third same-day ACH processing and 
settlement window alongside the proposed operating changes to Reserve 
Banks' payment services, emphasizing the potential benefits to banks 
and customers located outside the eastern time zone. These commenters 
believed that making same-day ACH available during greater portions of 
the business day could make the service more attractive for time-
sensitive payments, particularly for banks and customers located in the 
mountain and Pacific time zones. These commenters also suggested that a 
third same-day ACH window may encourage more banks to offer same-day 
ACH services to customers.

[[Page 71942]]

    Some commenters also noted the benefits of extending NSS and 
Fedwire Funds Service hours for reasons unrelated to same-day ACH. 
Commenters suggested that extended NSS and Fedwire Funds Service hours 
would provide further flexibility for their customers to use these 
services later in the business day. Additionally, commenters suggested 
that these changes would incrementally improve the ability to transfer 
funds between Federal Reserve accounts for a private-sector real-time 
gross settlement service for faster payments.
    Ten commenters did not support a third same-day ACH window because 
of potential staffing costs associated with a longer operating day and, 
by extension, did not support the proposed changes to the cutoff and 
closing times for NSS and the Fedwire Funds Service. Most of these 
commenters were small and midsize banks located in the eastern or 
central time zones that would need to modify staffing hours to cover a 
third same-day ACH window. These banks noted that they generally do not 
originate same-day ACH transactions. At the same time, 21 small and 
midsize banks (many located in the Pacific time zone) supported the 
proposed changes. The Board recognizes that adding a third same-day ACH 
window may incrementally increase costs for certain banks. The Board, 
however, believes that adding a third-same day ACH window will enhance 
the availability of the same-day ACH service nationwide, particularly 
for banks and customers in the mountain and Pacific and time zones, 
enabling those banks to receive advantages similar to those already 
experienced by banks in eastern or central time zones. In addition, 
supporting a third same-day ACH window would advance the Federal 
Reserve's ongoing objective to improve the speed and efficiency of the 
payment system in the United States.

B. Extending the Operating Hours of NSS and the Fedwire Funds Service

    As described above, to accommodate a third same-day ACH window, the 
Board proposed that the Reserve Banks extend the operating hours of 
NSS, the Fedwire Funds third-party cutoff, and the operating hours of 
the Fedwire Funds Service. The Board requested comment on whether the 
reduction in time between the closing of NSS, the Fedwire Funds Service 
third-party cutoff, and the closing of the Fedwire Funds Service would 
pose challenges for banks' end-of-day processes.\9\
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    \9\ 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.
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    Supportive commenters generally indicated that the changes and 
costs associated with extending the operating hours of NSS and the 
Fedwire Funds Service would not be significant. While the supportive 
commenters noted that they would need to modify internal processes and 
procedures, staffing, and certain technological systems and 
applications, these commenters did not believe that these modifications 
would be extensive. These commenters indicated that they would be able 
to make the necessary changes by March 19, 2021, which is Nacha's 
current effective date for implementing the later same-day ACH window. 
As noted previously, some small and mid-size bank commenters were not 
supportive of the third same-day ACH window or the proposed changes to 
the cutoff and closing times for NSS and the Fedwire Funds Service.
    Six commenters, including two large banks, noted that the 
compressed end-of-day timeline may increase the frequency of requests 
to extend the closing of the Fedwire Funds Service operating day; 
conversely, seven commenters, including one large bank, stated that the 
compressed end-of-day timeline would not increase the frequency of 
extension requests.
    The Board has approved the proposed extensions to the operating 
hours of NSS, the Fedwire Funds third-party cutoff, and the closing of 
the Fedwire Funds Service. When the Reserve Banks implement these 
changes on March 19, 2021, NSS will close at 6:30 p.m. ET, the Fedwire 
Funds third-party cutoff will occur at 6:45 p.m. ET, and the Fedwire 
Funds Service will close at 7:00 p.m. ET. The Reserve Banks will 
monitor for any increased frequency of extension requests resulting 
from this compressed end-of-day timeline. As described further below, 
the Reserve Banks will take certain steps to reduce the risk that 
extension requests will result in more frequent delays to the reopening 
of the Fedwire Funds Service.
    In addition, as the Board analyzed the changes further, it examined 
the interplay between extending the operating hours for the Fedwire 
Funds Service alongside the time frame for repositioning securities 
free of payment within the Fedwire Securities Service. Currently, the 
closing time for the Fedwire Securities Service for repositioning free 
of payment is 7:00 p.m. ET, 30 minutes after the close of the Fedwire 
Funds Service at 6:30 p.m. ET.\10\ While the Board did not receive any 
comments raising concerns related to the timing for repositioning 
securities relative to expanding the operating hours of the Fedwire 
Funds Service, Reserve Bank staff intends to engage with Fedwire 
Securities Service participants to determine, in consultation with the 
Board, if a change to the closing time for repositioning securities 
free of payment in the relevant Operating Circular would be warranted. 
At this time, based on the low amount of past usage of the 
repositioning window, the Board believes that any potential changes to 
the closing time for repositioning securities free of payment at 7:00 
p.m. ET would not have a long-run effect on the payment system, because 
that period is generally used for intraparticipant repositioning and 
therefore would not necessarily warrant public comment.
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    \10\ See Operating Circular 7, appendix B at https://www.frbservices.org/assets/resources/rules-regulations/operating-circular-7-102917.pdf.
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C. Reducing the Risk of More Frequent Delays to the Reopening of the 
Fedwire Funds Service

    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 currently 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.\11\ With a change to the closing time 
of the Fedwire Funds Service from 6:30 p.m. ET to 7:00 p.m. ET, the 
window between the closing and reopening of the Fedwire Funds Service 
would be reduced 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, any extension granted to the closing of the Fedwire Funds 
Service would result in the delayed reopening of the Fedwire Funds 
Service for the next business day.\12\
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    \11\ See https://www.frbservices.org/resources/financial-services/wires/extension-guidelines.html. 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'').
    \12\ For example, a 15-minute extension to the Fedwire Funds 
Service 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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    The Reserve Banks allow participants to request extensions to the 
Fedwire Funds third-party cutoff or the Fedwire

[[Page 71943]]

Funds Service closing time if, among other things, the dollar value of 
delayed transfers would exceed $1 billion.\13\ The Reserve Banks also 
allow participants to request extensions to the NSS closing, although 
such requests are uncommon.\14\ Extensions to the Fedwire Funds third-
party cutoff, the Fedwire Funds Service closing time, or both currently 
occur approximately twice per month and, in most cases, do not affect 
the reopening time of the Fedwire Funds Service for the next business 
day.\15\ Given the compressed end-of-day time frame, any extension to 
the closing of NSS or the Fedwire Funds third-party cutoff will require 
an extension to the Fedwire Funds Service closing time.\16\ If the 
Reserve Banks maintain their current practice of providing a 2-hour 
window between the closing and reopening of the Fedwire Funds Service, 
any extension granted to the closing of the Fedwire Funds Service would 
result in the delayed reopening of the Fedwire Funds Service for the 
next business day.
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    \13\ See Operating Circular 6, section 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.
    \14\ Operating Circular 12, section 5.8, provides discretion to 
a Reserve Bank to extend the NSS settlement window. 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.
    \15\ Over a 43-month period from January 2016 through July 2019, 
the Reserve Banks granted 47 extensions to the closing of the 
Fedwire Funds Service, ultimately resulting in seven delays to the 
reopening of the Fedwire Funds Service. Thirty-three of these 
extensions were a result of extensions granted to the Fedwire Funds 
third-party cutoff. The Reserve Banks also granted 23 extensions to 
the Fedwire Funds third-party cutoff that did not require extensions 
to the closing of the Fedwire Funds Service. Currently, the Reserve 
Banks can provide up to a 45-minute extension to the Fedwire Funds 
third-party cutoff (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 also can provide a 30-minute 
extension 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 cutoff and the closing of the Fedwire 
Funds Service and (b) a 2-hour window between the closing and 
reopening of the Fedwire Funds Service.
    \16\ 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). 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).
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    Delays to the reopening of the Fedwire Funds Service 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). Seven commenters, including five large banks, emphasized the 
importance of preserving the consistent and regular opening of the 
Fedwire Funds Service at 9:00 p.m. ET. These commenters noted that the 
CHIPS[supreg] funds-transfer system, a large-value payment system that 
is owned and operated by TCH, relies on the Fedwire Funds Service for 
prefunding at 9:00 p.m. ET.\17\ These commenters also noted that the 
9:00 p.m. ET opening of the Fedwire Funds Service has helped U.S. banks 
remain competitive in providing U.S. dollar (USD) payment services to 
clients in the Asia-Pacific market, consistent with the Federal 
Reserve's original rationale for opening the Fedwire Funds Service at 
9:00 p.m. ET.\18\ Commenters further stated that, if delays to the 
reopening of the Fedwire Funds Service were to become more frequent, 
customers in the Asia-Pacific markets could switch to offshore USD 
clearing systems or could transact in non-USD currencies.
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    \17\ Through October 31, 2019, CHIPS cleared and settled nearly 
$1.7 trillion in domestic and international payments on average per 
day. See https://www.theclearinghouse.org/-/media/new/tch/documents/payment-systems/chips-volume_v2.pdf. TCH noted in a comment letter 
that 12 percent of CHIPS transaction volume and 5 percent of daily 
transaction value are sent to CHIPS during the first hour of CHIPS 
processing, from 9:00 p.m. to 10:00 p.m. ET.
    \18\ In May 2003, the Board approved the expansion of the 
operating hours for the Fedwire Funds Service by changing the 
opening of the service from 12:30 a.m. ET to 9:00 p.m. ET on the 
previous calendar day. The Federal Reserve adopted these expanded 
hours in response to industry requests for greater overlap of U.S. 
wholesale payment system operating hours with those of the Asia-
Pacific markets, including Australia, Hong Kong, Japan, and New 
Zealand. See 68 FR 28826, 28828 (May 27, 2003).
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    The Board believes it is important to limit, if possible, the 
increase of delays to the reopening of the Fedwire Funds Service for 
the reasons discussed by commenters. As described below, the Reserve 
Banks will adopt certain operational and policy changes to limit the 
increase in delays to the reopening of the Fedwire Funds Service.
i. Changing the Practice of Maintaining a 2-Hour Window Between the 
Closing and Reopening of the Fedwire Funds Service
    Seventeen commenters addressed the option of modifying the current 
practice of maintaining a 2-hour window between the closing and 
reopening of the Fedwire Funds Service to allow only a 90-minute 
window. Sixteen commenters, including six large banks, three small and 
midsize banks, three payment trade associations, two banking trade 
associations, TCH, and Nacha, supported the reduction to a 90-minute 
window. One commenter (a midsize bank) did not support this option, 
suggesting that a 90-minute window may not be adequate for institutions 
to perform their end-of-day processes.
    While the Board recognizes that certain banks may need to make 
operational adjustments to accommodate a 90-minute window between the 
closing and reopening of the Fedwire Funds Service, the Board believes 
that reducing this window will provide a crucial 30-minute buffer (as 
exists today) for the Reserve Banks to extend the closing of the 
Fedwire Funds Service(when necessary to prevent significant market 
disruptions) without delaying the reopening of the Fedwire Funds 
Service. This buffer would limit the potential increase in delays to 
the 9:00 p.m. ET reopening of the Fedwire Funds Service, which would 
reduce disruptions and liquidity strains for institutions that expect 
payments at 9:00 p.m. ET and shortly thereafter. The Board has approved 
this modification, which the Reserve Banks will implement on March 19, 
2021.
ii. Changing the Guidelines for Providing Extensions to the Fedwire 
Fund Service
    Twenty commenters addressed the proposed option of modifying the 
guidelines for granting extensions to the Fedwire Funds Service hours 
(which have been in effect since 1997) by increasing the dollar value 
threshold from $1 billion to $5 billion.\19\ Nine commenters, including 
four payment trade associations, two small and midsize banks, a large 
bank, a banking trade organization, and Nacha, supported the Board's 
proposed increase of the dollar value threshold to $5 billion. Five 
commenters supported the notion of increasing the threshold but did not 
support the Board's proposed $5 billion threshold. Of those commenters, 
two commenters supported increasing the threshold to $2

[[Page 71944]]

billion; one commenter supported increasing the threshold by some 
amount less than $5 billion but did not take a position on the amount; 
and two commenters proposed alternative structures or measures for 
modifying the threshold. These commenters proposed options that 
involved (1) increasing the threshold to account for inflation and 
observed changes in the average daily value of Fedwire Funds Service 
transactions; (2) creating a tiered threshold, with a lower threshold 
for an initial extension and a higher threshold for subsequent 
extension requests from the same requestor on the same day; or (3) 
maintaining the current threshold of $1 billion for the first two 
fifteen-minute extension requests and increasing the threshold to $5 
billion for subsequent extensions.
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    \19\ One of these commenters, TCH, addressed this option but did 
not take a position.
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    Finally, five commenters did not support increasing the threshold, 
including three commenters who did not provide a rationale for this 
position. The other two commenters noted that the current $1 billion 
threshold represents ``material value'' to Fedwire Funds Service 
participants, that the $1 billion threshold provides benefits to 
sending and receiving banks and to their respective customers, and that 
a higher threshold may result in more wire transfers being delayed 
until the next business day.
    In light of these comments, the Board further assessed a range of 
options and scenarios for increasing the dollar value threshold for 
extensions to the Fedwire Fund Service. The Board's analysis assumed 
that the Reserve Banks would modify the policy of maintaining a two-
hour window between the closing and reopening of the Fedwire Funds 
Service to maintain only 90 minutes.
    The Board used data from a 43-month period, from January 2016 
through July 2019, to analyze whether changing the dollar-value 
threshold would reduce the risk of more-frequent delays to the 
reopening of the Fedwire Funds Service. From January 2016 through July 
2019, the Reserve Banks granted approximately 13 extensions per year to 
the Fedwire Funds Service hours, approximately 2 of which required the 
Reserve Banks to delay the 9:00 p.m. ET reopening of the Fedwire Funds 
Service.\20\ Over that same period, if the Reserve Banks had maintained 
a $1 billion threshold but expanded the operating hours of NSS and the 
Fedwire Funds Service as the Board has approved in this notice, the 
Reserve Banks would have granted approximately 20 extensions per year, 
approximately 7 of which would have required a delay to the reopening 
of the Fedwire Funds Service. If the Reserve Banks had adopted a value 
threshold of $3 billion over that same period with expanded operating 
hours of NSS and the Fedwire Funds Service, the Reserve Banks would 
have granted approximately 13 extensions per year, approximately 5 of 
which would have required a delay to the reopening. Finally, if the 
Reserve Banks had adopted a value threshold of $5 billion over that 
period with expanded operating hours of NSS and the Fedwire Funds 
Service, the Reserve Banks would have granted approximately 10 
extensions per year, approximately 4 of which would have required a 
delay to the reopening of the Fedwire Funds Service.
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    \20\ Over the 43-month period from January 2016 through July 
2019, the Reserve Banks cumulatively granted 47 extensions to the 
Fedwire Funds Service hours, 7 of which required the Reserve Banks 
to delay the 9:00 p.m. ET reopening of the Fedwire Funds Service.
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    The Board also analyzed adjusting the $1 billion threshold to 
account for inflation since 1997, but that adjustment would raise the 
value threshold to an amount less than $2 billion, which would not 
materially reduce the number of extensions granted, and by extension, 
not reduce the number of delayed reopenings of the Fedwire Funds 
Service. Further, the Board believes that changing the structure of the 
threshold as suggested by certain commenters (for example, adopting a 
tiered threshold) would add unnecessary complexity to the process the 
Reserve Banks use to administer extensions.
    The Board has approved an increase to the Reserve Banks' dollar 
value threshold for extension requests for the Fedwire Funds Service 
hours to $3 billion, starting on March 19, 2021. The Board believes 
that increasing the extension threshold to $3 billion will limit the 
increase in disruptive delays to the 9:00 p.m. ET reopening of the 
Fedwire Funds Service while recognizing the concerns of commenters who 
favored a threshold lower than $5 billion. The Reserve Banks will 
closely monitor delays in reopening the Fedwire Funds Service and will 
determine, in consultation with the Board, whether further increases to 
the threshold are warranted.\21\
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    \21\ The Reserve Banks will continue to use discretion when 
granting extensions. Also, given the comments received through this 
notice, the Board does not believe that a potential future change to 
the extension threshold would necessarily warrant public comment.
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iii. Implementing Both Options Simultaneously
    The Board requested comment on whether the Reserve Banks should 
implement the options described above simultaneously--that is, whether 
the Reserve Banks should simultaneously reduce the 2-hour window to 90 
minutes and increase the dollar threshold for extensions. One commenter 
recommended an incremental approach in which the Reserve Banks would 
first increase the dollar threshold and subsequently reduce the window 
between the closing and reopening of the Fedwire Funds Service. The 
commenter suggested that an incremental approach would give financial 
institutions more time to enhance the efficiency of their end-of-day 
processing. The Board believes that implementing both options 
simultaneously is necessary to reduce to the extent possible delays to 
the reopening of the Fedwire Funds Service. If the Reserve Banks were 
to follow an incremental approach and raise the dollar threshold before 
reducing the 2-hour window to 90 minutes, the Reserve Banks would grant 
fewer extensions to the closing of the Fedwire Funds Service, but each 
extension would require a delay to the reopening of the Fedwire Funds 
Service.
    The Board has approved these modifications for implementation 
simultaneously on March 19, 2021.

D. Related Changes to the PSR Policy

    The Board also proposed conforming changes to Part II of the PSR 
policy, which 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, to enable adding a third same-day 
ACH window.\22\ Specifically, adopting a third same-day ACH processing 
window requires that the Board modify the PSR policy by adding a 6:00 
p.m. ET posting time for settlement of commercial and government same-
day ACH transactions and removing the current 5:30 p.m. ET posting time 
for ACH return transactions, because these return transactions will 
post at the new 6:00 p.m. ET posting time for same-day ACH 
transactions.\23\ Additionally, extending the closing time of the 
Fedwire Funds Service will increase slightly the fee that an 
institution pays for daylight overdrafts, because (under section II.C 
of the PSR policy) the Reserve Banks calculate the daylight overdraft 
fees

[[Page 71945]]

based on the length of the standard Fedwire operating day.
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    \22\ The PSR policy is available at https://www.federalreserve.gov/paymentsystems/files/psr_policy.pdf.
    \23\ Posting of paper returns of same-day forward items that 
currently post at 5:30 p.m. ET will also move to the new 6:00 p.m. 
ET posting time.
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    Commenters supported the proposed conforming changes to the PSR 
policy. These changes will take effect when the Reserve Banks implement 
the related changes to NSS and the Fedwire Funds Service on March 19, 
2021.

III. Criteria for Evaluating the Federal Reserve's Role in the Payment 
System

    As described in the Notice, the 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.\24\
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    \24\ 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 will 
be able to recover the costs associated with the extended operating 
hours. Extending the operating hours for NSS and the Fedwire Funds 
Service requires relatively 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 third same-day ACH window will 
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. As expressed 
in the feedback received from commenters, by allowing banks to submit 
same-day ACH transactions later in the business day, the third same-day 
ACH window could encourage more banks (particularly those in the 
mountain and Pacific 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.\25\ Increased usage would 
further advance the Federal Reserve's ongoing objective to improve the 
speed and efficiency of the payment system in the United States. 
Further, the Board believes that extending the operating hours for NSS 
and the Fedwire Funds Service offers public benefits for reasons 
unrelated to a third same-day ACH window. For example, these extended 
operating hours will allow banks to offer increased availability of the 
Fedwire Funds Service during the day to their customers.
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    \25\ In the ACH network, RDFIs are defined as entities that 
receive ACH transactions, while Originating Depository Financial 
Institutions (ODFIs) are defined as those entities that originate 
ACH transactions.
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    The Board recognizes, however, that extending operating hours may 
increase certain risks and costs for banks and their customers, 
including risks and costs related to additional staffing, 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 described in this notice, 
the Board has approved a modification to the Reserve Banks practice of 
maintaining a 2-hour window between the closing and the reopening of 
the Fedwire Funds Service to maintain only a 90-minute window as well 
as an increase to the Reserve Banks threshold for granting extensions 
to the Fedwire Funds Service closing time from $1 billion to $3 billion 
to mitigate these 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 if the 
Reserve Banks did not extend the closing time of NSS.

IV. 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.\26\ The 
Board believes that there will be no adverse effects to other service 
providers resulting from extending the operating hours of NSS and the 
Fedwire Funds Service. As described earlier, the changes to NSS and the 
Fedwire Funds Service will 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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    \26\ See The Federal Reserve in the Payments System (issued 
1984; revised 1990), Federal Reserve Regulatory Service 9-1558.
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V. Conclusion

    As described above, the Board has approved the following 
modifications and enhancements to NSS and the Fedwire Funds Service and 
the Reserve Banks will implement the changes on March 19, 2021. 
Additionally, the Board has approved changes to the PSR policy that 
will take effect when the Reserve Banks implement the related changes 
to NSS and the Fedwire Funds Service.

A. Fedwire Funds Service Operating Hours

    The Fedwire Funds third-party cutoff will occur at 6:45 p.m. ET and 
the closing of the Fedwire Funds Service will occur at 7:00 p.m. ET. 
The opening time for the Fedwire Funds Service will remain at 9 p.m. ET 
on the previous calendar day. The service will be available for 
business days Monday through Friday, except for specified holidays 
observed by the Reserve Banks.

B. National Settlement Service Operating Hours

    The closing of the National Settlement Service will occur at 6:30 
p.m. ET. The opening time for the National Settlement Service will 
remain at 7:30 a.m. ET.

C. Window Between the Closing and Reopening of the Fedwire Funds 
Service

    The Reserve Banks will modify their current practice of maintaining 
a 2-hour window between the closing and the reopening of the Fedwire 
Funds Service to maintain only a 90-minute window.

D. Fedwire Funds Service Extension Threshold

    The Reserve Banks will raise the threshold for granting extensions 
to the Fedwire Funds Service closing time from $1 billion to $3 
billion. The Reserve Banks, in consultation with the Board, will 
determine whether further increases to the threshold are warranted to 
maintain the regular and consistent open of the Fedwire Funds Service 
at 9:00 p.m. ET.

[[Page 71946]]

E. PSR Policy

    The Board is amending part II of the PSR policy to add a new 6:00 
p.m. ET posting time for same-day ACH transactions, remove the current 
5:30 p.m. ET posting time for ACH return transactions, and make 
conforming changes to the daylight overdraft fee calculation.

VI. Federal Reserve Policy on Payment System Risk (PSR)

    The Board amends part II of the PSR policy.

Revisions to Section II.A of the PSR Policy

    Revise Section II.A, Opening balance (previous day's closing 
balance), 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 \34\
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    \34\ 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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+ Same-day Treasury investments.

Post at 5:00 p.m. eastern time:
+/- Government and commercial FedACH SameDay Service transactions, 
including return items \35\
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    \35\ 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 \36\
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    \36\ 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 will revise section II.C, paragraph 3 of the PSR policy 
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).\55\ The effective daily rate is calculated by 
dividing the effective annual rate by 360.\56\ 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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    \55\ 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.
    \56\ 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

    Revise section II.F, paragraph 3 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.\74\ 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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    \74\ Under the current 22-hour Fedwire operating day, the 
effective daily daylight-overdraft penalty rate is truncated to 
0.0000382.

    By order of the Board of Governors of the Federal Reserve 
System, December 20, 2019.
Ann Misback,
Secretary of the Board.
[FR Doc. 2019-28002 Filed 12-27-19; 8:45 am]
BILLING CODE P