Payments System Risk (PSR) Policy

Given the role of payments and securities settlement systems as critical components of the nation's financial system, the Federal Reserve Board has developed a policy to foster the safety and efficiency of these systems.The regulatory agencies have also issued interagency and agency-specific policies on payments and payment system risk. The "Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial Sys-tem," for example, identifies sound practices focusing on minimizing the immediate systemic effects of a wide-scale disruption to critical financial markets. The sound practices discussed in this paper supplement the agen-cies' respective policies and other guidance on business continuity planning. See

One major component of the Federal Reserve's policy addresses the extent to which institutions with Federal Reserve accounts are allowed to have daylight overdrafts in that account. Additional information about this aspect of the PSR policy is provided in Appendix E. A daylight overdraft occurs when an institution's Federal Reserve account is in a negative position during the business day. Negative balances typically occur when there are insufficient funds in an institution's account to cover outgoing Fedwire funds transfers, incoming book-entry securities transfers, or other payment activity processed by a Federal Reserve Bank. The PSR policy applies a series of limits and incentives to control the Federal Reserve Banks' exposures to the credit risk associated with these daylight overdrafts. Limits on net debit positions are sufficiently flexible to reflect the overall financial condition and operational capacity of each institution using Federal Reserve Bank payment services.

Institutions with the highest net debit caps are subject to an annual self-assessment process that is outlined in the "Guide to the Federal Reserve's Payments System Risk Policy." In addition to an analysis of the institution's general creditworthiness, institutions eligible for a self-assessed cap should manage and control their intraday funds positions, maintain credit policies and controls at the customer level, and employ operational controls and contingency plans. In particular, institutions with self assessed caps need to be able to monitor and control the intraday credit they extend to their customers. Such credit has the potential to result in Federal Reserve daylight overdrafts for the institution. The risks associated with customers' daylight overdrafts are discussed below.

Another major component of the PSR policy provides expectations for risk management in payments and securities settlement systems, and adopts international standards for systemically important systems.See for details and further references. This portion of the policy is directed at system operators, but contains key information about the risks that such systems present to system participants, and in some cases, requires covered systems to provide participants with clear information about these risks. Moreover, examined institutions may have an important role in the governance of wholesale payments and securities settlement systems, as many private sector systems are owned by their participant financial institutions.


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