Policy on Payment System Risk and Expanded Real-Time Monitoring, 20074-20077 [2018-09622]

Download as PDF 20074 Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices Fund Receivership name City State 10460 ................ 10035 ................ 10459 ................ Excel Bank ............................................................ Alliance Bank ........................................................ First United Bank .................................................. Sedalia .................................................................. Culver City ............................................................ Crete ..................................................................... MO CA .. IL .... daltland on DSKBBV9HB2PROD with NOTICES The liquidation of the assets for each receivership has been completed. To the extent permitted by available funds and in accordance with law, the Receiver will be making a final dividend payment to proven creditors. Based upon the foregoing, the Receiver has determined that the continued existence of the receiverships will serve no useful purpose. Consequently, notice is given that the receiverships shall be terminated, to be effective no sooner than thirty days after the date of this notice. If any person wishes to comment concerning the termination of any of the receiverships, such comment must be made in writing, identify the receivership to which the comment pertains, and be sent within thirty days of the date of this notice to: Federal Deposit Insurance Corporation, Division of Resolutions and Receiverships, Attention: Receivership Oversight Department 34.6, 1601 Bryan Street, Dallas, TX 75201. No comments concerning the termination of the above-mentioned receiverships will be considered which are not sent within this time frame. CONTACT PERSON FOR MORE INFORMATION: Judith Ingram, Press Officer, Telephone: (202) 694–1220. Individuals who plan to attend and require special assistance, such as sign language interpretation or other reasonable accommodations, should contact Dayna C. Brown, Secretary and Clerk, at (202) 694–1040, at least 72 hours prior to the meeting date. Dayna C. Brown, Secretary and Clerk of the Commission. [FR Doc. 2018–09804 Filed 5–3–18; 4:15 pm] BILLING CODE 6715–01–P FEDERAL RESERVE SYSTEM [Docket No. OP–1607] Policy on Payment System Risk and Expanded Real-Time Monitoring Board of Governors of the Federal Reserve System. ACTION: Notice; request for comment. AGENCY: The Board of Governors of the Federal Reserve System (Board) is requesting comment on the benefits and Dated at Washington, DC, on May 2, 2018. drawbacks of a potential change to part Federal Deposit Insurance Corporation. II of the Federal Reserve Policy on Robert E. Feldman, Payment System Risk (PSR policy). The Executive Secretary. potential change would entail the Federal Reserve Banks (Reserve Banks) [FR Doc. 2018–09666 Filed 5–4–18; 8:45 am] monitoring in real time all Fedwire BILLING CODE 6714–01–P Funds transfers and rejecting those transfers that would breach the Fedwire sender’s net debit cap, that is, the FEDERAL ELECTION COMMISSION ceiling on its total daylight overdraft position that it is permitted to incur in Sunshine Act Meeting its Federal Reserve account during any given day. If, after an evaluation of the TIME AND DATE: Thursday, May 10, 2018 public comments on this notice, the at 10:00 a.m. Board concludes that an expansion of PLACE: 1050 First Street NE, real-time monitoring is desirable, the Washington, DC (12th Floor) Board will request public comment on STATUS: This meeting will be open to the specific proposed changes to the PSR public. policy. MATTERS TO BE CONSIDERED: DATES: Applicable Date: Comments Correction and Approval of Minutes for must be received by July 6, 2018. March 8, 2018 Draft Advisory Opinion 2018–04: ADDRESSES: You may submit comments, Conservative Primary LLC identified by Docket No. OP–1607, by Draft Advisory Opinion 2018–06: Liuba any of the following methods: for Congress • Agency website: https:// Internet Communication Disclaimers www.federalreserve.gov. Follow the Illustrative Examples instructions for submitting comments at Management and Administrative https://www.federalreserve.gov/apps/ Matters foia/proposedregs.aspx. VerDate Sep<11>2014 17:38 May 04, 2018 Jkt 244001 SUMMARY: PO 00000 Frm 00043 Fmt 4703 Sfmt 4703 Date of appointment of receiver 10/19/2012 02/06/2009 09/28/2012 • Email: regs.comments@ federalreserve.gov. 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 https:// 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 E:\FR\FM\07MYN1.SGM 07MYN1 Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES 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 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 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. 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). VerDate Sep<11>2014 17:38 May 04, 2018 Jkt 244001 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. 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. 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 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. PO 00000 Frm 00044 Fmt 4703 Sfmt 4703 20075 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. 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 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. 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. E:\FR\FM\07MYN1.SGM 07MYN1 daltland on DSKBBV9HB2PROD with NOTICES 20076 Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices 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. 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 8 Analysis excludes the secondary impact that a rejected Fedwire funds transfer might have on the VerDate Sep<11>2014 17:38 May 04, 2018 Jkt 244001 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. 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 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. PO 00000 Frm 00045 Fmt 4703 Sfmt 4703 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 realtime 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 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). E:\FR\FM\07MYN1.SGM 07MYN1 Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices 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. 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 FEDERAL RESERVE SYSTEM daltland on DSKBBV9HB2PROD with NOTICES Formations of, Acquisitions by, and Mergers of Bank Holding Companies The companies listed in this notice have applied to the Board for approval, pursuant to the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) (BHC Act), Regulation Y (12 CFR part 225), and all other applicable statutes and regulations to become a bank holding company and/or to acquire the assets or the ownership of, control of, or the power to vote shares of a bank or bank holding company and all of the banks and nonbanking companies owned by the bank holding company, including the companies listed below. The applications listed below, as well as other related filings required by the Board, are available for immediate inspection at the Federal Reserve Bank indicated. The applications will also be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing on the standards enumerated in the BHC Act (12 U.S.C. 1842(c)). If the proposal also involves the acquisition of a nonbanking company, the review also includes whether the acquisition of the nonbanking company complies with the standards in section 4 of the BHC Act (12 U.S.C. 1843). Unless otherwise VerDate Sep<11>2014 17:38 May 04, 2018 Jkt 244001 noted, nonbanking activities will be conducted throughout the United States. Unless otherwise noted, comments regarding each of these applications must be received at the Reserve Bank indicated or the offices of the Board of Governors not later than June 5, 2018. A. Federal Reserve Bank of Minneapolis (Mark A. Rauzi, Vice President), 90 Hennepin Avenue, Minneapolis, Minnesota 55480–0291: 1. Benc Holdings, Inc., Coon Rapids, Minnesota; to become a bank holding company by acquiring up to 100 percent of KES Bancshares, Inc., Virginia, Minnesota, and thereby indirectly acquire shares of Northern State Bank, Virginia, Minnesota. Board of Governors of the Federal Reserve System, May 2, 2018. Yao-Chin Chao, Assistant Secretary of the Board. [FR Doc. 2018–09645 Filed 5–4–18; 8:45 am] 20077 indicated or the offices of the Board of Governors not later than June 5, 2018. A. Federal Reserve Bank of Cleveland (Nadine Wallman, Vice President) 1455 East Sixth Street, Cleveland, Ohio 44101–2566. Comments can also be sent electronically to Comments.applications@clev.frb.org: 1. Dollar Mutual Bancorp, Pittsburgh, Pennsylvania; to acquire 100 percent of the voting shares of Dollar Bank, FSB, Pittsburgh, Pennsylvania, upon its conversion from mutual to stock form. Board of Governors of the Federal Reserve System, May 2, 2018. Yao-Chin Chao, Assistant Secretary of the Board. [FR Doc. 2018–09644 Filed 5–4–18; 8:45 am] BILLING CODE P FEDERAL RESERVE SYSTEM BILLING CODE P FEDERAL RESERVE SYSTEM Formations of, Acquisitions by, and Mergers of Savings and Loan Holding Companies The companies listed in this notice have applied to the Board for approval, pursuant to the Home Owners’ Loan Act (12 U.S.C. 1461 et seq.) (HOLA), Regulation LL (12 CFR part 238), and Regulation MM (12 CFR part 239), and all other applicable statutes and regulations to become a savings and loan holding company and/or to acquire the assets or the ownership of, control of, or the power to vote shares of a savings association and nonbanking companies owned by the savings and loan holding company, including the companies listed below. The applications listed below, as well as other related filings required by the Board, are available for immediate inspection at the Federal Reserve Bank indicated. The application also will be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing on the standards enumerated in the HOLA (12 U.S.C. 1467a(e)). If the proposal also involves the acquisition of a nonbanking company, the review also includes whether the acquisition of the nonbanking company complies with the standards in section 10(c)(4)(B) of the HOLA (12 U.S.C. 1467a(c)(4)(B)). Unless otherwise noted, nonbanking activities will be conducted throughout the United States. Unless otherwise noted, comments regarding each of these applications must be received at the Reserve Bank PO 00000 Frm 00046 Fmt 4703 Sfmt 9990 Change in Bank Control Notices; Acquisitions of Shares of a Bank or Bank Holding Company The notificants listed below have applied under the Change in Bank Control Act (12 U.S.C. 1817(j)) and § 225.41 of the Board’s Regulation Y (12 CFR 225.41) to acquire shares of a bank or bank holding company. The factors that are considered in acting on the notices are set forth in paragraph 7 of the Act (12 U.S.C. 1817(j)(7)). The notices are available for immediate inspection at the Federal Reserve Bank indicated. The notices also will be available for inspection at the offices of the Board of Governors. Interested persons may express their views in writing to the Reserve Bank indicated for that notice or to the offices of the Board of Governors. Comments must be received not later than May 21, 2018. A. Federal Reserve Bank of Kansas City (Dennis Denney, Assistant Vice President) 1 Memorial Drive, Kansas City, Missouri 64198–0001: 1. Ann R. Mock, Edmond, Oklahoma, Barry W. Mock, Altus, Oklahoma, and the Mock Irrecocable Trust and its cotrustee Rick Cheanye, both of Altus, Oklahoma; to retain shares of First Altus Bancorp, and thereby retain shares of Frazer Bank, both of Altus, Oklahoma. Board of Governors of the Federal Reserve System, May 2, 2018. Yao-Chin Chao, Assistant Secretary of the Board. [FR Doc. 2018–09643 Filed 5–4–18; 8:45 am] BILLING CODE 6210–01–P E:\FR\FM\07MYN1.SGM 07MYN1

Agencies

[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.

-----------------------------------------------------------------------

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: https://www.federalreserve.gov. Follow the 
instructions for submitting comments at https://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 
https://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

[[Page 20075]]

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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

[[Page 20076]]

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

[[Page 20077]]

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
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