Front Matter

Front Matter Page

© 2010 International Monetary Fund

May 2010

IMF Country Report No. 10/122

United States: Publication of Financial Sector Assessment Program Documentation—Technical Note on Selected Issues on Liquidity Risk Management in Fedwire Funds and Private Sector Payment

This Technical Note on Selected Issues on Liquidity Risk Management in Fedwire Funds and Private Sector Payment for the United States was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in May 7, 2010. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of the United States or the Executive Board of the IMF.

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Front Matter Page

Financial Sector Assessment Program

United States of America

Selected Issues on Liquidity Risk Management in Fedwire Funds and Private Sector Payment Systems

Technical Note

MAY 2010

International Monetary Fund

Monetary and Capital Markets department


  • Glossary

  • Executive Summary

  • I. Overview

  • II. Central Bank Policy in Providing Liquidity to Payment Systems and Critical Market Infrastructures

    • A. Observations on the Current Daylight Credit Policy

    • B. Main Features of the New Daylight Credit Policy

    • C. Assessment of the New Daylight Credit Policy of the Fed

  • III. Efforts to Reduce Late-Day Settlement in Payment Systems and Market Infrastructures

    • A. Liquidity Saving Mechanism in Fedwire Funds

    • B. Reducing End-of-Day Settlement in CHIPS

  • IV. Risk Management

    • A. Concentration of Settlement

    • B. Stress Testing and Simulations

    • C. Operational Resilience

    • D. Access of Systemically Important Infrastructures to Central Bank Services

    • E. Interdependencies

  • Tables

  • 1. Overview of the Large Value Payment Systems Operating in the United States

  • 2. Comparison of Intraday Credit Policies Between the U.S. and Selected Countries

  • 3. Key Elements of the Current and Revised PSR Policy for Daylight Credit

  • Box

  • 1. Overview of the CHIPS Settlement Model



Clearing House Interbank Payments System


Continuous Linked Settlement


Collateral Management System


CPSS Core Principles for Systemically Important Payment Systems


Committee on Payment and Settlement Systems


Depository Trust Company


Electronic Payments Network


Foreign Banking Organizations


Federal Reserve


Fixed Income Clearing Corporation


Foreign Exchange


International Organization of Securities Commissions


Monetary Control Act


Payment Risk Committee


Payment System Risk


Real Time Gross Settlement System


Securities Settlement System


Wholesale Customer Advisory Group

Executive Summary1

The U.S. payment and settlement systems continued to function smoothly during the 2007-2008 period of market stress. This owed both to the robustness of the systems’ risk management and infrastructure and to the actions by the Federal Reserve (Fed) to sharply increase balances held at the Federal Reserve Banks by financial institutions (reserve balances).

However, especially as the Fed’s extraordinary liquidity support is withdrawn, underlying vulnerabilities within the system will need to be addressed, most notably:

  • Intraday credit from the Fed is largely in the form of uncollateralized but capped daylight overdrafts (where uncollateralized intraday overdraft caps are generally set as a percentage of the capital of the financial institution), subject to an administered fee. Caps and fees encourage some large depository institutions to delay settlement of large-value funds payments over Fedwire Funds (the Fed’s Real Time Gross Settlement (RTGS) system) until late in the day, especially for fees avoidance purposes.

  • The fact that the Fedwire Funds system provides neither a central queuing/payment offsetting mechanism nor other liquidity saving features exacerbates the problem of late payments in Fedwire Funds.2

These issues pose risks both domestically and internationally. Domestically, the increase in late-in-the-day payments leaves the payment system as a whole more vulnerable in case of a late-in-the-day operational disruption. Internationally, the end-of-day closure of U.S. payment systems effectively means the worldwide “end-of day” so a liquidity disruption in the U.S. system could constitute a critical shock that could propagate systemic risk at the following day opening in Asia and Europe.

The new intraday liquidity policy of the Fed, to be implemented late 2010 or early 2011, will help address some of the risks presently facing the payment system. The new Payment System Risk (PSR) policy promotes the collateralization of intraday credit. Collateralized overdrafts under the new policy will not be charged a fee and will therefore work both to reduce the incentive to delay certain payments until late in the day, as well as to reduce the Fed’s credit risk from providing intraday credit. Although substantial, the effectiveness of these changes (and others underway) in encouraging Fedwire participants to send payments earlier in the day will need to be assessed over the medium term, and it remains to be seen whether additional steps to amend the intraday credit framework (e.g., relaxing further or removing net debit caps) would also help.

While an asymmetric treatment of foreign banking organizations (FBOs) exists regarding the calculation of the capital measure for caps and the fee deductible, policy provisions implemented in March 2009 substantially addressed this asymmetry. For example, highly-rated FBOs are eligible for a fee deductible based on 100 percent of worldwide capital, the same capital measure used for U.S. chartered institutions, and highly-rated FBOs are eligible for additional collateralized capacity under a streamlined process. Additionally, under the new policy, the fee deductible is eliminated for all institutions—FBOs and U.S. chartered institutions. While these changes represent substantial progress toward the equitable treatment of FBOs, additional steps could be considered to provide a more level playing field relative to U.S. banks while ensuring an adequate level of comfort with respect to credit risk mitigation.

Steps are needed to amend Fedwire’s settlement procedures for tri-party repo transactions, Depository Trust Company (DTC), and Clearing House Interbank Payments System (CHIPS) to discourage late-in the-day payments. The Fed identified a four-prong approach, including revising the PSR policy, exploring the introduction of a liquidity saving mechanism for Fedwire Funds, and making liquidity improvements for CHIPS and DTC, to move payments earlier in the day.3 The CHIPS system has been successful in reducing the amount of payments processed late, especially by encouraging its participants voluntarily to provide supplemental funding earlier. However, further efforts in this area should be encouraged especially since the underlying risks may re-emerge as liquidity levels return to normal.

Ongoing Efforts and Recommendations

Ongoing efforts

  • Over the past several years, the Fed has outlined steps to improve the payment system, including the following:

    • ▪ Implement and take further steps, as appropriate, to increase collateralized intraday credit and reduce uncollateralized overdrafts as a way to (i) strengthen the credit risk management of the Reserve Banks, (ii) incentivize institutions to send large-value funds payments earlier in the day, and (iii) further align the treatment of FBOs and U.S. chartered banks.

    • ▪ Explore the introduction of liquidity-saving features in Fedwire Funds.

    • ▪ Support the continued efforts by the private sector to reduce late-in-the-day settlements associated primarily with tri-party repo and settlement processes in DTC and CHIPS.


  • In line with the Administration’s proposal, the Fed Banks should be granted the legal right to give access to accounts and liquidity to systemically important post-trade market infrastructures as an additional buffer to mitigate systemic risk.

  • The Fed, in cooperation with other relevant agencies, should continue to review the ability of payment, clearing, and settlement systems to cope with extreme liquidity stress scenarios in light of the lessons of the crisis, on the basis of stress testing scenarios and simulations, taking into account the concentration of payment and settlement services, as well as the complex interdependencies among systems.

United States: Publication of Financial Sector Assessment Program Documentation: Technical Note on Selected Issues on Liquidity Risk Management in Fedwire Funds and Private Sector Payment
Author: International Monetary Fund