Appendix D: Legal Framework for Interbank Payment Systems
State and federal statutes, regulations, and case law govern the payment systems in the United States. The relevant legal principles depend on the method of payment (paper-based or electronic) and in some cases the status of parties to a payment (consumer, merchant, or financial institution). Several federal laws apply to payment activities, particularly in the consumer sector. At the state level, the Uniform Commercial Code (UCC) establishes a set of model statutes governing certain commercial and financial activities, including some banking and securities market transactions. Articles of the UCC pertinent to payment and settlement activities are the following: Article 3 (negotiable instruments), Article 4 (bank deposits and collections), Article 4A (funds transfers, including wholesale ACH credit transfers) and Article 8 (investment securities).See SR Letter 03-9, dated May 28, 2003, Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System, for further information. The agencies included the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.
Every state has incorporated these Articles, sometimes with local variations, into the state laws. In addition, the rules and membership agreements of private clearing and settlement arrangements provide a contractual framework for payment activity within the relevant governing law.
Fedwire Funds Service
The Federal Reserve's Regulation J governs payment transactions using the Fedwire Funds Service and incorporates the requirements of Article 4A of the UCC. The Regulation, in particular subpart B, defines the rights and responsibilities of financial institutions that use Fedwire, as well as the rights and responsibilities of the Federal Reserve Bank. Federal Reserve Bank Operating Circular 6 covers items such as Fedwire operating hours, security, authentication, fees, and certain restrictions.Federal Reserve Operating Circulars are available at http://www.frbservices.org/OperatingCirculars/index.html. It also contains time schedules, holidays, and guidelines pertaining to the extension of Fedwire hours.
Under subpart B of Regulation J and Operating Circular 6, the Federal Reserve Banks can impose conditions on an institution's use of Fedwire. In particular, the regulation and operating circular require each Fedwire participant to enter into a security procedure agreement with its Federal Reserve Bank and includes institution responsibilities for information security, business continuity, and related administrative information.
Federal Reserve Regulation CC, Availability of Funds and Collection of Checks, also regulates the time within which a depository institution receiving a Fedwire or CHIPS funds transfer on behalf of a customer must make those funds available to its customer.
National Settlement Service (NSS)
Federal Reserve Bank Operating Circular 12 establishes the terms and conditions under which participants using NSS submit settlement files to the Federal Reserve Banks. The provision of intraday settlement finality is similar to the Fedwire Funds Service and enables the Federal Reserve Banks to manage and limit settlement risk by incorporating risk controls on extensions of daylight credit.
Payment messaging systems allow financial institutions to initiate payment orders, providing that the institution is authorized to act on behalf of its customers. It is important for financial institutions to establish the authenticity and time of receipt of payment order messages. UCC4A establishes responsibility for the execution of a payment order and requires financial institutions to agree to the terms and conditions established by the responsible messaging system with respect to security procedures.
Funds transfers made through CHIPS are subject to CHIPS rules and procedures. The CHIPS rules stipulate that the laws of the state of New York, which include Article 4A of the UCC, also apply to CHIPS transactions. CHIP Co. is not responsible for losses resulting from system errors. Each participant agrees to indemnify and to hold harmless CHIPS from such losses. Any participant losses are settled by a loss sharing agreement, and if a participant commits a fraud, that participant will bear the loss. CHIP Co. maintains a financial institution bond for possible employee fraud. Losses exceeding CHIPS's bond coverage are shared on a pro rata basis of each participant's average daily CHIPS usage for the 30-day calendar period preceding the notice of loss to the underwriters of the bond.
Appendix C: Laws, Regulations and Guidance
Appendix E: Federal Reserve Board Payment System Risk Policy: Daylight Overdrafts