Based on these and other criteria, the Reserve Banks may decrease or reduce to zero an institution's net debit cap.
Reserve Banks may also choose to monitor an institution's payment activity in such a way that if an outgoing Fedwire funds transfer exceeds the institution's available funds, the transfer will not be processed and may be immediately rejected and sent back to that institution. Additionally, a Reserve Bank may require an institution to pledge collateral in certain circumstances, such as when an institution presents heightened risk to the Reserve Bank or the Reserve Bank determines that an institution's account-management practices are not sufficient to prevent impermissible daylight overdrafts.
Daylight overdrafts must be extinguished by the end of the operating day. Daylight overdrafts can be extinguished by incoming payments to an institution's Reserve Bank account, including payments from financing obtained in the money markets, or borrowed funds from the Reserve Banks' discount window. To obtain a discount window loan, an institution must have executed the appropriate legal agreements with and pledged adequate collateral to its Reserve Bank. Daylight overdrafts are not automatically converted into discount window loans.
An institution must contact its Reserve Bank and explicitly request the discount window loan. A discount window loan is made at the discretion of a Reserve Bank. Institutions that do not extinguish their daylight overdraft position by the end of the Fedwire Funds Service operating day may be charged for an overnight overdraft. The rate charged on overnight overdrafts is generally four percentage points more than the primary credit rate on the date the overdraft occurred.
An overdraft or negative balance is also included in the calculation of an institution's average balance held over a maintenance period. If the average balance held by an institutions is less than its reserve balance requirement, the institution is assessed a reserve deficiency fee. Institutions that incur daylight overdrafts in excess of their net debit caps are contacted by the Reserve Banks and counseled to keep future overdrafts within the appropriate limits.
Institutions that frequently exceed their net debit caps may be required to apply for a higher cap, to increase their balances, to pledge collateral, or to have payments monitored in real time. The Reserve Banks maintain a series of tools for managing the financial risk posed by Fedwire Funds Service participants. These tools include an account balance monitor, a daylight overdraft reporting and pricing system, a collateral-management system, and a database that aggregates supervisory, financial, and other information for assessing risk and creditworthiness.
The Reserve Banks monitor, in real time, the payment activity and intraday account balances of certain institutions, including those deemed to pose heightened risk to the Reserve Banks, such as institutions in deteriorating financial condition or with a history of excessive overdrafts. If an institution that is being monitored sends an outgoing Fedwire funds transfer that exceeds the institution's available funds, the transfer is immediately rejected and sent back to that institution.
Because only a small number of institutions are monitored in this way, it is possible, although not permitted under the policy, for institutions that are not on the monitor to send payments in excess of their available funds, exposing the Reserve Banks to credit risk beyond institutions' net debit caps.
Fedwire Funds Service participants can monitor their intraday account balances to manage their use of intraday credit. The Reserve Banks provide a web-based monitoring tool, which provides a real-time account balance summary of Fedwire Funds Service and Fedwire Securities Service transfer activity. Debits and credits resulting from other payment activity processed by a Reserve Bank, such as check and automated clearinghouse ACH activity, are captured periodically throughout the day by the monitoring tool.
The Reserve Banks have another analytical tool for monitoring institutions' overdraft activity and compliance with the PSR policy on an ex-post basis, as well as for calculating daylight overdraft charges. This tool produces various ex-post reports for institutions to monitor daylight overdrafts, prohibited overdrafts in excess of net debit caps, and account balances. The Reserve Banks have additional tools related to overdraft activity that are not available to the participants.
One web-based application integrates information needed to support risk-management decisions, including ex post daylight overdraft data. This application provides access to information for monitoring the condition of institutions, automates the administration of certain risk management policies, and provides advanced analytical tools to support credit risk management decisions.
In addition, the Reserve Banks support a collateral-management system, which is an automated collateral inventory and transaction-processing application used to monitor collateral held for discount window, PSR, and Treasury programs. The system supports the valuation of collateral pledged to the Reserve Banks. Fedwire Funds Service participants do not have access to this system, but do periodically receive reports regarding their collateral holdings from the Reserve Banks.
Fedwire observes Core Principle IV. As discussed in section 1 of this assessment, Regulation J provides the legal foundation for settlement finality in the Fedwire Funds Service. Payment to the receiving participant over the Fedwire Funds Service is final and irrevocable upon the crediting of the receiving participant's account, or when the payment order is sent to the receiving participant, whichever is earlier.
Payment orders generally are processed immediately following a Reserve Bank's receipt of a transfer message. Although Regulation J allows a Reserve Bank to reject a payment order for any reason, payment orders are generally accepted as long as security procedures are met and online messages conform to the proper message format. If an institution is being monitored by the Reserve Banks' account balance monitor as described in section 3 of this assessment , the institution must also have available funds to make the transfer.
An institution that has a payment order rejected is usually informed of the rejection immediately. The intended receiving institution is not made aware of the rejection.
As discussed in section 1 of this assessment, U. The payment from the originator to the beneficiary should not be affected by the insolvency of an institution unless the institution is the originator and a court finds the payment void as a fraudulent conveyance, unlawful preference, or some similar inequitable conduct. Core Principle V is, therefore, not applicable. Such transfers between Reserve Bank accounts are by definition settled in central bank money.
The Fedwire Funds Service maintains a high degree of security and operational reliability. Stringent security standards protect Fedwire Funds Service applications and payment orders. Contingency operations are effective and are tested on a regular basis. The Fedwire Funds Service operates within the context of the Federal Reserve's overall information security program, consisting of defined policies and an architectural framework.
This program is designed to protect information from loss or misuse, and thereby to minimize the risk of monetary loss, productivity loss, or reputational damage to the Federal Reserve. One component of the program is an information security policy that describes the procedures for maintaining confidentiality and integrity of information.
The information security policy requires each Reserve Bank with managerial responsibility for a business function, such as the Fedwire Funds Service, to complete an information security risk assessment to determine whether the appropriate levels of security controls are in place. Risk assessments must address the risk of monetary loss, productivity loss, and reputational damage to the Federal Reserve.
The assessments consider both the likelihood and the impact of threats. The applications, networks, and data centers that are critical to the Fedwire Funds Service rely on numerous security controls. These controls are routinely reviewed and enhanced. The Reserve Banks outline security procedures for online and offline Fedwire Funds Service funds transfers in their operating circulars and other administrative and security documents.
Among the security procedures for online transfers are embedded protocols in the transmission hardware and software; identification codes, confidential passwords, and digital certificates used for access control; and traffic encryption across private or virtual private network connections.
In addition, online participants must implement their own physical and logical security and management controls that appropriately protect the hardware, software, and access controls. Participants are also responsible for implementing any additional procedures set forth in the applicable security documentation provided by the Reserve Banks. Offline security procedures include the use of individual identification codes provided by the Reserve Banks and involve call back or listen back procedures.
The reliability of the Fedwire Funds Service depends, among other things, on the availability of the Fedwire Funds application, environmental applications, and the national communications network. The Fedwire Funds Service is considered unavailable when customers cannot send or receive Fedwire funds transfers, regardless of whether the cause is related to a fault or failure in an application, environmental software, or the telecommunications network infrastructure the Reserve Banks rely on to effect Fedwire funds transfers for customers.
In , the Fedwire Funds Service was available Financial System. The Reserve Banks conduct multiple on-site and remote-site recovery tests each year.
As outlined in OC 6, Fedwire Funds Service participants are responsible for developing their own contingency and recovery plans, such as backup computer and operations facilities, to ensure their ability to continue operations in the event of an equipment failure or other operational disruption.
The Reserve Banks require high-volume and high-value customers to participate in a minimum number of contingency tests each year, including tests from the customers' own backup sites. In , for example, approximately 30 Fedwire Funds Service participants were required to participate in three of four contingency tests, and approximately 50 additional Fedwire Funds Service participants were required to participate in two of four contingency tests.
The Reserve Banks also maintain multiple testing facilities that are available to all Fedwire Funds Service participants. In addition, the Federal Financial Institutions Examination Council FFIEC has issued supervisory guidance to regulated financial institutions regarding business resumption and information systems contingency planning.
The Fedwire Funds Service operates efficiently, providing high-quality, practical services to participants.
Management regularly seeks user feedback on services and systems, working to ensure future efficiency and practicality. Fedwire Funds Service funds transfer prices are reviewed annually according to the principles of the MCA to ensure recovery of the cost of service provision, thereby encouraging private-sector competition. The creation of the Fedwire Funds Service substantially reduced the cost of interbank settlements, and the Fedwire Funds Service continues to contribute to economic efficiency today.
Upon its creation, the Fedwire Funds Service helped eliminate the regional exchange rates for the U. The Fedwire Funds Service also reduced the cost of making interbank payments, particularly payments associated with interbank lending and monetary policy. The MCA, designed in part to encourage competition between the Reserve Banks and private-sector providers of payment services, requires the Board to develop a set of pricing principles, and to use those principles to set fees for certain Reserve Bank services.
The MCA requires the Board to set service fees that, over the long run, recover the actual costs incurred to provide the services, as well as imputed costs the Reserve Banks would have incurred and imputed profits they would have expected to earn if they were private-sector firms. The fee schedule for includes fixed fees, volume-based fees, and several surcharges based on time of day, value, and access solution.
Fedwire Funds Service participants pay both for originating and for receiving transfers. Offline participants are assessed a surcharge to originate or receive a funds transfer. This surcharge reflects the additional cost of handling offline transfers, which require manual processing. The Reserve Banks also charge connection fees to recover costs associated with communications infrastructure provided for online participants. Connections are priced by line speed and type.
The Reserve Banks have undertaken a number of initiatives to improve the efficiency of the Fedwire Funds Service. During the mids, they consolidated Fedwire Funds Service processing from twelve primary sites to one primary site, and upgraded the Fedwire Funds Service applications. In , the Reserve Banks consolidated offline Fedwire Funds Service processing from twelve to two sites. These changes significantly reduced the cost of providing the Fedwire Funds Service.
Between and , total Fedwire Funds Service costs declined more than 25 percent. Since then, costs have increased due to an ongoing large-scale initiative to modernize the Fedwire Funds Service applications and underlying infrastructure. Overall, net cost reductions combined with other efficiencies resulted in a 60 percent reduction in the average price per online funds transfer between and The Reserve Banks strive to ensure the efficiency of the Fedwire Funds Service by providing high-quality, practical services for participants.
By offering a variety of access vehicles, including the FedLine Direct access solution for high-volume institutions, the FedLine Advantage access solution for moderate-use institutions, and offline services for low-volume users, the Reserve Banks allow participants to match connection needs and costs appropriately. Extended operating hours and an expanded Fedwire Funds Service message format have enhanced service practicality for participants.
In , the Reserve Banks extended Fedwire Funds Service operating hours from 10 to 18, and then in further extended the hours to This change increased overlap of operating hours with foreign markets and helped reduce foreign exchange settlement risk. In and , the Reserve Banks modified the format of Fedwire Funds Service transfer messages to allow for increased levels of straight-through processing. These changes helped eliminate the need for manual modifications of transfer messages that were received from or transferred to other communication networks or funds transfer systems.
More recently, the Reserve Banks have enhanced the Fedwire Funds Service message format to accommodate both cover payments and payments containing extended business remittance information and payment notification details. Cover payments are used in correspondent banking, usually to facilitate international transactions. They are payments made through a chain of correspondent banks to settle cover a funds transfer that travels a more direct route to the ultimate beneficiary's bank.
The format changes to support the transparency of cover payments were originally implemented in November and then enhanced in The extended Fedwire Funds Service message format for business remittance information and payment notification details was also implemented in The WPO uses external user groups to obtain information on best practices, participant business needs, demand for new features, and cost reduction.
The CRSO obtains customer input through regular interactions with individual customers as well as through the administration of periodic customer satisfaction surveys. A private-sector advisory group composed of large institutions provides a mechanism for ongoing communication and collaboration between the WPO, other Reserve Bank business functions, and representative Fedwire Funds Service participants.
The WPO uses its advisory group to better understand customer demands. The advisory group works closely with the WPO to suggest and describe potential changes and enhancements to the Fedwire Funds Service, to identify and consider the likely implications of changes to the service, to suggest and structure additional analysis or market research needed to evaluate potential changes to the service, and to participate in the review of high-level specifications for changes and enhancements selected for implementation.
The Reserve Banks and the WPO, working together with the CRSO, periodically seek input on specific issues through interviews with customers, customer surveys, focus groups, or meetings with corporate trade groups. The WPO also formally requests input on proposed operational changes from Fedwire participants. The mechanism for formal public comment is discussed in section 10 of this assessment. Consolidated business and technical customer support units provide support and problem resolution related to specific service issues, such as answering questions about how to use features of the service, solving problems, reconciling transactions, and establishing and testing electronic access connections.
Information from these areas is used to improve the Fedwire Funds Service. The Reserve Banks are currently undertaking a large-scale, multiyear program designed to migrate the technology platform for the Fedwire Funds Service applications from a mainframe to a distributed environment in order to improve resiliency, flexibility, and efficiency.
The program consists of a series of component projects that began in and are scheduled to be completed within the next several years. Criteria for access to the Fedwire Funds Service are grounded in the FRA and related Federal Reserve policies and are clearly disclosed in publicly available documents. These laws and policies act to ensure objectivity and fairness in access to the Fedwire Funds Service.
Any depository institution, Federal Reserve member institution, or otherwise eligible institution, including a U. Reserve Banks retain the right to limit their risk exposure. If an institution presents undue risk to a Reserve Bank, the Reserve Bank will follow a series of escalating steps to reduce its exposure to that institution.
Reserve Banks may counsel the institution, discussing ways to reduce its excessive use of intraday credit. The Reserve Banks also retain the unilateral right to reduce net debit caps, impose collateralization or balance requirements, hold or reject Fedwire Funds Service funds transfers, or in extreme cases limit the institution to originating only offline payment orders or prohibit it from using the Fedwire Funds Service altogether.
The governance structure of the Fedwire Funds Service is effective, accountable, and transparent. The responsibilities of the Reserve Banks and the Board are clearly delineated in U. All Reserve Bank actions, including the operation and management of the Fedwire Funds Service, are subject to the general supervision of the Board, providing accountability both to the Board and the general public.
Moreover, in helping to design and in approving the governance structure of the Fedwire Funds Service, the Board has exercised care to avoid any actual or apparent conflict between the Federal Reserve's role as a financial service provider and its role as a regulator and lender.
As outlined below, the Board makes its major payment system policies, and the underlying considerations, available for public notice and consideration. As a government agency, the Board has broad policymaking powers, including the authority to issue certain regulations and to exercise general supervision over the Reserve Banks. Each Reserve Bank has a board of directors that is responsible for supervising the activities of that Reserve Bank.
Under the Federal Reserve Act, the Board of Governors has broad and comprehensive supervisory authority over the Reserve Banks, including the Reserve Banks' provision of payment and settlement services. The Board recognizes the critical role these services play in the financial system and is committed to strong and effective supervision of these services that is comparable to, or exceeds, the requirements placed on similar private-sector payment and settlement arrangements.
The Board exercises this oversight in three ways: application of robust risk-management standards; a rigorous examination process; and review of key strategic initiatives, prices and service terms, proposed material changes, and ongoing operations. To carry out its responsibilities, the Board has established two committees to provide direction on payment system issues. The Payments System Policy Advisory Committee advises the Board on issues related to risk management, the relationship between wholesale payment systems and financial markets, and medium- and long-term public policy issues surrounding innovation in the retail payments system.
In addition to these two committees, Board staff, through the Division of Reserve Bank Operations and Payment Systems RBOPS , provides support to the Board in exercising its general supervision of Reserve Bank payment services, analyzing payment issues, and developing payment policies and regulations. Other proposals and expenditures may be approved by the Board, or by the Reserve Banks under their own authority.
The Reserve Banks serve as the operating arm of the central bank, providing a variety of services to financial institutions. As discussed in section 1 of this assessment, the FRA outlines the powers of the Reserve Banks in providing payment services.
The Reserve Banks generally are responsible for maintaining customer accounts and relationships, for implementing and updating operating circulars, and for managing and operating systems such as the Fedwire Funds Service in accordance with the FRA and Board policies. Although stock in each Reserve Bank is held by its member institutions, the legal organization of the Reserve Banks includes elements of both public and private accountability.
Member banks must subscribe to stock in their regional Reserve Bank. Each Reserve Bank, in carrying out the powers specifically granted in the FRA and such incidental powers as are necessary, is subject to the supervision and control of its board of directors.
The board of directors may form committees to assist it in carrying out its duties under the FRA. For example, the board of directors of the Federal Reserve Bank of New York has created an audit and risk committee, which is generally responsible for assessing and ensuring the effectiveness and independence of the Bank's internal audit function. The audit and risk committee discusses with Reserve Bank management reports concerning the Reserve Bank's compliance with applicable legal requirements and the effectiveness of the Reserve Bank's internal controls over various types of risk, including operational risk.
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