[Federal Register Volume 83, Number 88 (Monday, May 7, 2018)]
[Notices]
[Pages 20074-20077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09622]
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FEDERAL RESERVE SYSTEM
[Docket No. OP-1607]
Policy on Payment System Risk and Expanded Real-Time Monitoring
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice; request for comment.
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SUMMARY: The Board of Governors of the Federal Reserve System (Board)
is requesting comment on the benefits and drawbacks of a potential
change to part II of the Federal Reserve Policy on Payment System Risk
(PSR policy). The potential change would entail the Federal Reserve
Banks (Reserve Banks) monitoring in real time all Fedwire Funds
transfers and rejecting those transfers that would breach the Fedwire
sender's net debit cap, that is, the ceiling on its total daylight
overdraft position that it is permitted to incur in its Federal Reserve
account during any given day. If, after an evaluation of the public
comments on this notice, the Board concludes that an expansion of real-
time monitoring is desirable, the Board will request public comment on
specific proposed changes to the PSR policy.
DATES: Applicable Date: Comments must be received by July 6, 2018.
ADDRESSES: You may submit comments, identified by Docket No. OP-1607,
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 sensitive
personal information at the commenter's request. Public comments may
also be viewed electronically or in paper form in Room 3515, 1801 K
Street NW (between 18th and 19th Streets NW), Washington, DC 20006
between 9:00 a.m. and 5:00 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jeff Walker, Assistant Director (202-
721-4559), Jason Hinkle, Manager (202-912-7805), or Michelle D.
Olivier, Senior Financial Services Analyst (202-452-2404), Division of
Reserve Bank Operations and Payment Systems; Evan Winerman, Counsel
(202-872-7578), Legal Division.
SUPPLEMENTARY INFORMATION:
I. Background
Part II of the Board's PSR policy seeks to balance the costs and
risks associated with the provision of Federal Reserve intraday credit
(or daylight overdrafts) against the benefits of intraday liquidity.
The PSR policy recognizes that the Federal Reserve has an important
role in providing intraday credit to foster the smooth functioning of
the overall payment system and also seeks to control the risks assumed
by the Reserve Banks in providing this intraday credit.
The Reserve Banks provide intraday liquidity by way of supplying
temporary, intraday credit to healthy depository institutions, and the
Reserve Banks could face direct risk of loss should institutions be
unable to settle their daylight overdrafts in their Federal Reserve
accounts before the end of the day. The Reserve Banks control their
exposures through several methods, including by incentivizing
institutions to voluntarily collateralize daylight
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overdrafts, setting limits (net debit caps) on daylight overdrafts in
institutions' Federal Reserve accounts, and requiring collateral in
certain situations. In addition, Reserve Banks have the ability to
monitor an institution's Federal Reserve account activity in real time
and reject certain transactions that would cause an overdraft in excess
of the institution's net debit cap; this capability is known as ``real-
time monitoring.'' \1\ Real-time monitoring allows the Reserve Banks to
prevent an institution from transferring funds from an account that
lacks sufficient funds or overdraft capacity to cover the
payment(s).\2\
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\1\ The Reserve Banks monitor all institutions' account activity
for compliance with the daylight overdraft posting rules on an
after-the-fact or ex post basis. Real-time monitoring supplements
but does not replace Reserve Banks' ex post monitoring.
\2\ Under the current PSR policy, a Reserve Bank will apply
real-time monitoring selectively to an individual institution's
position when the Reserve Bank believes that it faces excessive risk
exposure, for example, from a problem institution or an institution
with chronic overdrafts in excess of what the Reserve Bank
determines is prudent. An institution not considered to pose an
excessive risk exposure may voluntarily elect to have its account
monitored in real time, subject to approval by its Reserve Bank.
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The Board is conducting a review of the Federal Reserve's intraday
credit policies related to real-time monitoring and is exploring the
potential benefits that expanded real-time monitoring for Fedwire Funds
may have in reducing the risk that payments activity, including errant
or fraudulent payments, poses to any institution that maintains a
Federal Reserve account. A risk-focused expansion in the use of the
real-time monitor may provide additional account protection against
mismanagement or misuse of payment services and could help mitigate
risks for both institutions and the Reserve Banks.
In 2001, the Board requested comment on expanding real-time
monitoring capabilities to all transactions subject to settlement-day
finality for all institutions but ultimately decided not to pursue the
expansion.\3\ At the time of the previous request for comment, applying
the real-time monitoring technology to an institution's account would
have resulted in both Fedwire funds transfers and National Settlement
Service (NSS) transactions being rejected, and would have necessitated
that the institution prefund its automated clearinghouse (ACH) credit
originations. Commenters indicated that monitoring ACH credit
originations and requiring institutions to prefund them might be overly
burdensome to institutions and disruptive to the payment system
overall. Since the 2001 proposal, the Federal Reserve has enhanced the
functionality of the real-time monitoring technology to permit more
selective application by payment type. During this period, depository
institutions and their supervisors have dedicated greater attention to
the risks associated with fraudulent transactions, notably those
stemming from illicit or unauthorized penetration of institutions'
information processing systems.
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\3\ The request for comment and the subsequent notice of the
Board's decision not to pursue the proposed real-time monitoring
changes can be found, respectively, at 66 FR 30208 (June 5, 2001)
and 67 FR 54424 (August 22, 2002).
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The Reserve Banks recently implemented a voluntary, no-cost pilot
program for the real-time monitoring of Fedwire funds transfers,
available to institutions with total assets under $50 billion.\4\
Effective October 2, 2017, any Fedwire funds transfer that would cause
(or increase) an overdraft in a participating institution's Federal
Reserve account in excess of its net debit cap is rejected, unless the
institution has specifically opted out of the program. A rejection
gives the participating institution an additional opportunity to verify
authorization and authenticity and to fund the transaction, and limits
the associated financial risk to both the institution and its Reserve
Bank. The Reserve Banks expect this program will provide risk
mitigation benefits for the participating institutions as well as the
Reserve Banks. In addition, the program should allow Reserve Banks and
institutions to assess the potential benefits and drawbacks of routine
real-time monitoring of all Fedwire funds transfers.
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\4\ Participation in the pilot program is restricted to
institutions not currently on the monitor at the direction of their
Reserve Bank. The Reserve Banks continue to apply real-time
monitoring on an involuntary basis to individual institutions when
the account-holding Reserve Bank believes that the account
relationship poses an excessive risk exposure.
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The policy change under consideration by the Board would amend the
PSR policy to apply real-time monitoring as a mandatory practice for
all institutions, regardless of total asset size. The potential policy
change, as discussed below, would apply real-time monitoring only to
institutions' outgoing Fedwire funds transfers.
II. Potential Policy Change: Monitoring in Real Time All Institutions'
Fedwire Funds Payments
The Board is exploring the benefits and drawbacks of a real-time
monitoring expansion for Fedwire funds transfers (RTME), which is
defined as using the Reserve Banks' real-time monitoring technology to
reject any outgoing Fedwire funds transfer that would cause any
institution's overdrafts to exceed its net debit cap.\5\ Taking a risk-
focused approach, the Board is only considering real-time monitoring
for Fedwire funds transfers because these transactions can be high-
value and settle immediately and irrevocably, and therefore represent a
potentially greater credit risk to both the Reserve Banks and Fedwire
senders than transactions with typically lower per-transfer values or
without settlement-day finality. Fedwire funds payments represent the
majority of the dollar value of payments that the Reserve Banks
process, and in 2016, Fedwire funds activity totaled approximately $767
trillion, with an average transaction value of $5.2 million.\6\ If a
payor institution does not fund its settlement with the Reserve Bank
for transactions that do not have settlement-day finality, such as
checks and ACH debit transactions, the Reserve Bank may return or
reverse the transactions. As a consequence, those transactions pose
less risk to the Reserve Banks in the event the payor institution
defaults. The Board is not at this time considering monitoring and
rejecting payments other than Fedwire funds, such as Fedwire securities
transfers, NSS transactions, ACH credit transactions, or cash
withdrawals. Furthermore, the Board is not seeking comment on existing
policies related to real-time monitoring and rejecting payments for
institutions that fall within established parameters for such
treatment, including those in weakened financial condition.
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\5\ In certain circumstances and subject to Reserve Bank
approval, institutions may pledge collateral to their Reserve Banks
to secure daylight overdraft capacity in excess of their debit caps,
known as maximum overdraft capacity or max cap. For purposes of this
notice, net debit cap refers to both institutions' standard net
debit caps as well as any additional collateralized capacity
approved by their Reserve Banks.
\6\ For comparison, the average transaction values for
commercial ACH and check transactions processed by the Reserve Banks
were approximately $1,700 and $1,500, respectively.
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RTME could benefit institutions and the Reserve Banks by providing
additional account management and cyber, fraud, and credit risk
controls for Fedwire funds transfers, supplementing institutions'
internal account management and risk controls.\7\ Specifically, RTME
could assist institutions in managing their Federal Reserve accounts in
compliance with the PSR policy by preventing
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institutions from breaching their net debit caps with Fedwire funds
payments. Because of the heightened cyber risk environment and
unexpected nature of fraudulent funds transactions, an institution's
overdraft could exceed its net debit cap and the institution might not
have the resources to cover the overdraft. RTME would protect against
both fraudulent and authorized Fedwire funds transfers that would
result in an overdraft in excess of an institution's net debit cap.
Expansion of the current limited real-time monitoring pilot to all
institutions would provide these account management and risk mitigation
benefits to more institutions' Federal Reserve accounts. By further
transitioning to a mandatory program, RTME would ensure consistent
treatment of all institutions' Fedwire funds activity. Additionally, a
mandatory program would make certain that the Reserve Banks' risk of
loss from a defaulting institution's Fedwire funds transfers would be
restricted to each account's established net debit cap.
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\7\ Account management tools provided by the Reserve Banks,
including real-time monitoring, are intended to supplement rather
than replace institutions' independent account management and risk
controls.
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While RTME could mitigate risks for the Reserve Banks and
institutions that hold Federal Reserve accounts, the Board is
interested in understanding any concerns about potential negative
consequences. For example, RTME could increase the risk of payment
delays or gridlock. In the event of a rejected Fedwire funds transfer,
RTME would require an institution to review and, if appropriate, fund
and resubmit the transfer, requiring prompt account management to avoid
delay. A delay caused by a rejected transfer may adversely affect the
intended receiver and similarly require account management adjustments
should the funds fail to arrive when expected. An institution that is
closely managing to its net debit cap to avoid the rejection of Fedwire
funds transfers may choose to throttle payments during the day,
restricting and delaying funds transfers until sufficient funds are
available. As a consequence, the receiver of these Fedwire funds
transfers will not obtain the funds until later than it otherwise would
have and may likewise choose to throttle payments.
To analyze the potential for rejected payments, the Board reviewed
institutions' recent Fedwire funds activity against their net debit
caps. Analysis of 2016 annual payment data indicates that RTME would
have rejected less than 0.003 percent of the approximately 133 million
Fedwire funds transfers sent by institutions that may be covered by the
program.\8\ In terms of value, only 0.002 percent of the over $484
trillion of Fedwire funds transfers sent by these institutions would
have been affected. Approximately 5 percent of these institutions would
have had at least one Fedwire funds transfer rejected per year under
RTME.\9\ As a result of this initial analysis, the Board estimates that
under current conditions and payment activities, most institutions
covered by the proposed RTME program would not experience rejected
payments.
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\8\ Analysis excludes the secondary impact that a rejected
Fedwire funds transfer might have on the funding of the receiving
institution's outgoing Fedwire funds transfers.
\9\ The Board also reviewed institutions' intraday credit use in
2016 and found that most institutions did not fully use their
daylight overdraft capacity--in fact, approximately 80 percent of
institutions used less than 25 percent of their capacity for their
peak overdraft. The Board recognizes that historically high levels
of reserve balances have decreased the need for intraday credit for
some institutions. For comparison, the Board reviewed peak cap
utilization in 2007, during which approximately 50 percent of
institutions used less than 25 percent of their capacity for their
peak overdraft and the vast majority of institutions, over 80
percent, never exceeded their net debit cap at any time during the
year. In addition, many institutions currently maintain net debit
caps below the maximum level that would be permitted under the PSR
policy; such institutions could request a higher net debit cap,
which would likely alleviate potential payment disruptions as the
institutions adjust their account management behavior or balances in
response to RTME. For example, approximately 80 percent of
institutions with a positive net debit cap have an exempt cap, and
these institutions could double their daylight overdraft capacity by
requesting a de minimis cap with only a marginal increase in
administrative burden to the institution.
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Although RTME appears unlikely to disrupt the payment system in the
aggregate, the Board recognizes the potential for unintended
consequences that may not be evident by analyzing historical payments
data, possibly associated with certain institution types or payments
activity functioned through Federal Reserve accounts. To better assess
the potential benefits and negative effects of such a program, the
Board is soliciting feedback on expanding real-time monitoring to all
Fedwire funds transfers and is particularly interested in any negative
consequences of RTME not identified in this notice. Should the Board
choose to move forward with developing and implementing an RTME
program, the Board will request public comment on a specific RTME
proposal.
III. Request for Comment
The Board is seeking comment on all aspects of a potential
mandatory, expanded real-time monitoring program that would monitor and
reject Fedwire funds payments sent by all institutions. As described
previously, an RTME program would reject any Fedwire funds transfer
that would breach the Fedwire funds sender's net debit cap, as
established under part II of the PSR policy.
The Board also requests comment on the following specific questions
regarding a potential RTME program:
1. What would be the benefits and drawbacks of a mandatory RTME
program to institutions' operations and funding? Are there
characteristics of an RTME program that could mitigate any potential
drawbacks?
2. Would RTME lead to significantly greater payment delays, or
would it have a negligible effect? Would real-time monitoring of
Fedwire funds transfers at the net debit cap level affect the way
institutions manage their Federal Reserve accounts with respect to
daylight overdrafts? Would an RTME program cause institutions to delay
sending payments?
3. Would RTME lead your institution to apply for a higher net debit
cap in order to avoid rejection of Fedwire funds transfers?
4. If your institution participates or participated in the Enhanced
Overdraft Protection Tool (EOPT) pilot program, please describe your
experience.
5. If the Federal Reserve implemented a mandatory RTME program, how
would this action affect your institution's payments business going
forward? Would RTME encourage institutions to move their large-dollar
payments activity from Fedwire funds to other payment channels? What
operational or risk challenges would this movement present?
6. Does your institution currently have programs and practices in
place that address the risk of an errant or fraudulent payment,
particularly those that might result in an excessive overdraft? If a
mandatory RTME policy were adopted, would those programs and practices
be kept or replaced? Does having certain programs and practices in
place provide the institution or Federal Reserve a sufficient reduction
in risk to warrant exclusion from a mandatory RTME program?
IV. Competitive Impact Analysis
The Board has established procedures for assessing the competitive
impact of rule or policy changes that have a substantial impact on
payment system participants.\10\ Under these procedures, the Board will
assess whether a change would have a direct and material adverse effect
on the ability of other service providers to compete effectively
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with the Federal Reserve in providing similar services due to differing
legal powers or constraints, or due to a dominant market position of
the Federal Reserve deriving from such differences. If no reasonable
modifications would mitigate the adverse competitive effects, the Board
will determine whether the anticipated benefits are significant enough
to proceed with the change despite the adverse effects.
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\10\ These procedures are described in the Board's policy
statement ``The Federal Reserve in the Payments System,'' as revised
in March 1990. 55 FR 11648 (March 29, 1990).
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The Board does not anticipate that RTME would have a direct and
material impact on the ability of other service providers to compete
effectively with the Reserve Banks' payment services but requests
comment on that issue and on whether, even if there are adverse
competitive effects, they are outweighed by the potential benefits of
RTME. If the Board chooses to move forward with developing and
implementing an RTME program, the Board will evaluate these options
under its competitive impact procedures.
By order of the Board of Governors of the Federal Reserve
System, May 2, 2018.
Michele Taylor Fennell,
Assistant Secretary of the Board.
[FR Doc. 2018-09622 Filed 5-4-18; 8:45 am]
BILLING CODE 6210-01-P