Fedwire

1
Fedwire

• Moving Money at the Speed of Light

2
How many

• On an annual basis
• 1987 52,375,438
• 1992 67,567,765
• 1997 89,510,261
• 2003 123,280,721

3
Dollars Involved

• On an annual basis (in Millions of )
• 1987 152,453,528
• 1992 199,175,034
• 1997 288,419,808
• 2003 436,706,269

4
That amounts to

• 491,158 wire transfers per day in 2003
• Moving 1.74 trillion dollars per day
• Which equates to 3.54 million per transaction
• So a 90,000 wire transfer in Miami is not a big
  deal.

5
Fedwire Funds Service

• The Fedwire Funds Service provides a real-time
  gross settlement system in which more than 9,500
  participants initiate funds transfers that are
  immediate, final, and irrevocable when processed.
  
• Only the originating financial institution can
  remove funds from its Federal Reserve account.
  Originators provide payment instructions to the
  Federal Reserve either on line or off line.

6
Off-Line

• Off-line participants give instructions to the
  Reserve Banks by telephone. Once the telephone
  request is authenticated, the Reserve Bank enters
  the transfer instruction into the Fedwire system
  for execution. The manual processing required for
  off-line transactions makes them more costly, and
  thus they are suitable only for institutions with
  small, infrequent transfers.
• That is why there is a relatively large charge at
  local banks for this service.

7
On-Line

• On-line participants send instructions through
  either a mainframe or PC connection to Fedwire,
  and no manual processing by the Federal Reserve
  Banks is necessary.
• The Fedwire Funds Service business day begins at
  900 p.m. Eastern Time (ET) on the preceding
  calendar day and ends at 630 p.m. ET, Monday
  through Friday

8
Cost of Service

• The Monetary Control Act of 1980 requires the
  Federal Reserve to recover fully the cost
  associated with the provision of most financial
  services it provides, including a private sector
  adjustment factor, as discussed in Section 8.
  Currently, Fedwire transaction fees are charged
  to both the originating institution (debit side)
  and receiving institution (credit side). Fees are
  based on the volume of transfers, ranging from 33
  cents to 16 cents per transfer, per institution.
  A surcharge of 15 is charged to initiate or
  receive an off-line transfer. Electronic access
  fees (connection and terminal charges) are
  assessed separately.

9
The Core Principles

• Fedwire adheres to the 10 core Principles as
  outlined by the Committee on Payment and
  Settlement Systems (CPSS)
• This is an international group whos sole purpose
  is to create a secure payments system
• With rapid change nationally and internationally
  in technology and competition in this sector,
  public policy needs to focus more systematically
  on encouraging safe and efficient payment systems
  at a national and international level.

10
Global Reach

• The Core Principles are intended to be applied in
  all countries, within a realistic time scale,
  whether economies are developed, in transition or
  emerging. The particular way in which the Core
  Principles are used varies with the stage of
  economic development and with the economys
  framework of institutions and infrastructure.

11
I-II-III

• I The system should have a well-founded legal
  basis under all relevant jurisdictions
• II - The systems rules and procedures should
  enable participants to have a clear understanding
  of the systems impact on each of the financial
  risks they incur through participation in it.
• III - The system should have clearly defined
  procedures for the management of credit risks and
  liquidity risks, which specify the respective
  responsibilities of the system operator and the
  participants and which provide appropriate
  incentives to manage and contain those risks.

12
IV-V-VI

• IV - The system should provide prompt final
  settlement on the day of value, preferably during
  the day and at a minimum at the end of the day.
• V - A system in which multilateral netting takes
  place should, at a minimum, be capable of
  ensuring the timely completion of daily
  settlements in the event of an inability to
  settle by the participant with the largest single
  settlement obligation.
• VI - Assets used for settlement should preferably
  be a claim on the central bank where other
  assets are used, they should carry little or no
  credit risk and little or no liquidity risk.

13
VII-VIII-IX-X

• VII - The system should ensure a high degree of
  security and operational reliability and should
  have contingency arrangements for timely
  completion of daily processing.
• VIII - The system should provide a means of
  making payments which is practical for its users
  and efficient for the economy.
• IX - The system should have objective and
  publicly disclosed criteria for participation,
  which permit fair and open access.
• X - The systems governance arrangements should
  be effective, accountable and transparent.

14
The Whole Thing

• Implementing the 10 Core Principles
• http//www.bis.org/publ/cpss34ep2.pdf

15
Central Banks

• CPSS talks of Central BanksWhat are they, who
  are they, how many of them are there?
• The Federal Reserve Bank is the Central Bank for
  the United States.