Oversight of Key Financial Market Infrastructures

Reserve Bank Systems

The Reserve Banks operate, among others, two key payment and settlement systems--the Fedwire Funds Service and the Fedwire Securities Service.

Under the Federal Reserve Act, the Board of Governors has broad and comprehensive supervisory authority over the Reserve Banks, including the Reserve Banks' provision of payment and settlement services. The Board recognizes the critical role these services, particularly the Fedwire Funds and Fedwire Securities services, play in the financial system and is committed to strong and effective supervision of these services that is comparable to, or exceeds, the requirements placed on similar private-sector payment and settlement arrangements. The Board exercises this oversight in three ways – application of robust risk management standards; a rigorous examination process; and review of key strategic initiatives, prices and service terms, proposed material changes, and ongoing operations.

The Board’s Payment System Risk (PSR) policy, which incorporates international risk-management standards for payment, clearing and settlement systems, applies to both Reserve-Bank and private-sector systems. The risk management standards adopted in the PSR policy also are consistent with those in proposed Regulation HH, which, when finalized, will be applied to private-sector payment, clearing and settlement systems designated as systemically important by the Financial Stability Oversight Council under Title VIII of the Dodd-Frank Act and supervised by the Board. The Board recognizes the critical role Fedwire plays in the financial system and expects Fedwire to meet or exceed these standards. The Board conducts and publishes comprehensive assessments of the Fedwire Funds Service (see Fedwire Funds assessment) and the Fedwire Securities Service (see Fedwire Securities assessment) against these standards.

The Board conducts regular examinations of the Reserve Banks’ Fedwire services covering, among other things, all the key aspects of the PSR standards, and it regularly monitors Fedwire operations and initiatives through reports, discussions with Reserve Bank management, and its oversight liaison roles on various Reserve Bank management groups. The Board also has ensured that its Fedwire examination process is consistent with the framework that will be used by Federal Reserve supervisors for designated financial market utilities.

The Board is also ensuring that the Reserve Banks are held to procedural requirements with respect to Board review of proposed material changes to Fedwire rules, procedures, and operations that are the same as, or higher than, the requirements for financial market utilities designated as systemically important by the Financial Stability Oversight Council and supervised by the Board. For example, the Board establishes the key rules governing Fedwire (in its Regulation J, subpart B) and reviews all changes to the Reserve Banks’ operating circulars. The Board approves the Reserve Banks’ budgets, including budgets related to the Fedwire service, and approves major strategic initiatives, such as the current Fedwire application and platform modernization program, and the associated expenditures. The Board approves and publishes Fedwire pricing and monitors the Reserve Banks’ ongoing compliance with the cost-recovery requirements of the Monetary Control Act.

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