Maximum daylight overdraft capacity

Federal Reserve Policy on Payment System Risk
As amended effective September 23, 2016

INTRODUCTION ................................................................................................................................ 3

RISKS IN PAYMENT, CLEARING, SETTLEMENT, AND RECORDING SYSTEMS ............. 4

PART I. RISK MANAGEMENT FOR FINANCIAL MARKET INFRASTRUCTURES ........... 6

A. Scope................................................................................................................................6

B. Policy expectations for certain financial market infrastructures .........................................7

1. Risk management ......................................................................................................7

a. Fedwire Services..................................................................................................8

b. Designated financial market utilities for which the Board is the Supervisory

Agency under Title VIII of the Dodd-Frank Act...................................................8

c. Other financial market infrastructures that are subject to the Board’s supervisory

authority under the Federal Reserve Act...............................................................9

d. All other central securities depositories, securities settlement systems, central

counterparties, and trade repositories....................................................................9

e. Other systemically important offshore and cross-border payment systems............9

2. Transparency .............................................................................................................9

C. General policy expectations for other payment systems within the scope of the policy ....10

1. Establishment of a risk-management framework ......................................................11

a. Identify risks clearly and set sound risk-management objectives ........................11

b. Establish sound governance arrangements to oversee the risk-management

framework..........................................................................................................12

c. Establish clear and appropriate rules and procedures to carry out the risk-

management objectives ......................................................................................12

d. Employ the resources necessary to achieve the system’s risk-management

objectives and implement effectively its rules and procedures ............................12

2. Other considerations for a risk-management framework...........................................12

D. Cooperation with other authorities in regulating, supervising, and overseeing financial

market infrastructures......................................................................................................13

PART II. FEDERAL RESERVE INTRADAY CREDIT POLICIES............................................. 15

A. Daylight overdraft definition and measurement ...............................................................15

B. Collateral ........................................................................................................................19

C. Pricing ............................................................................................................................19

D. Net debit caps .................................................................................................................20

1. Definition ................................................................................................................20

2. Cap categories .........................................................................................................21

a. Self-assessed......................................................................................................22

b. De minimis ........................................................................................................23

c. Exempt-from-filing ............................................................................................24

d. Zero ...................................................................................................................24

3. Capital measure .......................................................................................................24

a. U.S.-chartered institutions ..................................................................................24

b. U.S. branches and agencies of foreign banks ......................................................25

E. Maximum daylight overdraft capacity .............................................................................25

1. General procedure....................................................................................................26

2. Streamlined procedure for certain FBOs ..................................................................27

F. Special situations ............................................................................................................27

1. Edge and agreement corporations.............................................................................28

2. Bankers’ banks ........................................................................................................28

3. Limited-purpose trust companies .............................................................................29

4. Government-sponsored enterprises and international organizations..........................29

5. Problem institutions .................................................................................................29

G. Monitoring......................................................................................................................30

1. Ex post.....................................................................................................................30

2. Real time .................................................................................................................30

3. Multi-District institutions.........................................................................................30

H. Transfer-size limit on book-entry securities.....................................................................31

APPENDIX – CPSS-IOSCO PRINCIPLES FOR FINANCIAL MARKET

INFRASTRUCTURES ...................................................................................................................... 32

2

INTRODUCTION
Financial market infrastructures (FMIs) are critical components of the nation’s financial
system. FMIs are multilateral systems among participating financial institutions, including the
system operator, used for the purposes of clearing, settling, or recording payments, securities,
derivatives, or other financial transactions. 1, 2 FMIs include payment systems, central securities
depositories, securities settlement systems, central counterparties, and trade repositories. The
safety and efficiency of these systems may affect the safety and soundness of U.S. financial
institutions and, in many cases, are vital to the financial stability of the United States. Given the
importance of FMIs, the Board of Governors of the Federal Reserve System (Board) has
developed this policy to set out the Board’s views, and related standards, regarding the
management of risks that FMIs present to the financial system and to the Federal Reserve Banks
(Reserve Banks). In adopting this policy, the Board’s objective is to foster the safety and
efficiency of payment, clearing, settlement, and recording systems and to promote financial
stability, more broadly.
Part I of this policy sets out the Board’s views, and related standards, regarding the
management of risks in FMIs, including those operated by the Reserve Banks. In setting out its
views, the Board seeks to encourage FMIs and their primary regulators to take the standards in
this policy into consideration in the design, operation, monitoring, and assessment of these
systems. The Board will be guided by this part, in conjunction with relevant laws, regulations,
and other Federal Reserve policies, when exercising its supervisory and regulatory authority over
FMIs or their participants, providing accounts and services to FMIs, participating in cooperative
oversight and similar arrangements for FMIs with other authorities, or providing intraday credit
to eligible Federal Reserve account holders. Designated financial market utilities subject to the
Board’s Regulation HH are not subject to the risk-management or transparency expectations set
out in this policy. 3
Part II of this policy governs the provision of intraday credit or “daylight overdrafts” in
accounts at the Reserve Banks and sets out the general methods used by the Reserve Banks to
1

This definition is based on the definition provided in the Committee on Payment and Settlement Systems (CPSS)
and Technical Committee of the International Organization of Securities Commissions (IOSCO) report on
Principles for Financial Market Infrastructures (PFMI), April 2012, available at
http://www.bis.org/cpmi/publ/d101a.pdf. (Effective September 2014, the CPSS changed its name to the Committee
on Payments and Market Infrastructures.) Further, an FMI generally embodies one or more of the following
characteristics: (1) a multilateral arrangement with three or more participants; (2) a set of rules and procedures,
common to all participants, that govern the clearing (comparison and/or netting), settlement, or recording of
payments, securities, derivatives, or other financial transactions; (3) a common technical infrastructure for
conducting the clearing, settlement, or recording process; and (4) a risk-management or capital structure that takes
into account the multilateral dependencies inherent in the system.
2
The term “financial institution,” as used in this policy, refers to a broad array of organizations that engage in
financial activity, including depository institutions, securities dealers, and futures commission merchants.
3
The term “financial market utility” is defined in Title VIII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) as “any person that manages or operates a multilateral system for the purpose of
transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or
between financial institutions and the person.” Trade repositories, which the Dodd-Frank Act defines as providing
“facilities for comparison of data respecting the terms of settlement of securities or futures transactions,” are not
included in the term “financial market utility” (12 U.S.C. 5462). Financial market utilities are, therefore, a subset of
the broader set of entities defined as FMIs. Under Title VIII, the Financial Stability Oversight Council designates
certain financial market utilities as systemically important. The Board’s Regulation HH is discussed in section
I.B.1.b below.

3

control their intraday credit exposures. 4 Under this part, the Board recognizes that the Federal
Reserve has an important role in providing intraday balances and credit to foster the smooth
operation of the payment system. The Reserve Banks provide intraday balances by way of
supplying temporary, intraday credit to healthy depository institutions, predominantly through
collateralized intraday overdrafts. 5 The Board believes that such a strategy enhances intraday
liquidity while controlling risk to the Reserve Banks by providing incentives to collateralize
daylight overdrafts. The Board also aims to limit the burden of the policy on healthy depository
institutions that use small amounts of intraday credit.
Through this policy, the Board expects financial system participants, including privatesector FMIs and the Reserve Banks, to reduce and control settlement and other systemic risks
arising in FMIs, consistent with the smooth operation of the financial system. This policy is also
designed to govern the provision of intraday balances and credit while controlling the Reserve
Banks’ risk by (1) making financial system participants and FMIs aware of the types of basic
risks that may arise in the payment, clearing, settlement, or recording process; (2) setting explicit
risk-management expectations; (3) promoting appropriate transparency by FMIs to help inform
participants and the public; and (4) establishing the policy conditions governing the provision of
Federal Reserve intraday credit to eligible account holders. The Board’s adoption of this policy
in no way diminishes the primary responsibilities of financial system participants to address the
risks that may arise through their operation of or participation in FMIs.
RISKS IN PAYMENT, CLEARING, SETTLEMENT, AND RECORDING SYSTEMS
The basic risks in payment, clearing, settlement, and recording systems may include
credit risk, liquidity risk, operational risk, and legal risk. In the context of this policy, these risks
are defined as follows: 6
• Credit risk: the risk that a counterparty, whether a participant or other entity, will be
unable to meet fully its financial obligations when due, or at any time in the future.
• Liquidity risk: the risk that a counterparty, whether a participant or other entity, will be
unable to meet fully its financial obligations when due, although it may be able to do so
in the future. An FMI, through its design or operation, may bear or generate liquidity risk
in one or more currencies in its payment or settlement process. 7 In this context, liquidity
risk may arise between or among the system operator and the participants in the FMI, the
4

To assist depository institutions in implementing part II of this policy, the Board has prepared two documents, the
Overview of the Federal Reserve’s Payment System Risk Policy (Overview) and the Guide to the Federal Reserve’s
Payment System Risk Policy (Guide), which are available at
http://www.federalreserve.gov/paymentsystems/psr_relpolicies.htm. The Overview summarizes the Board’s policy
on the provision of intraday credit, including net debit caps and daylight overdraft fees, and is intended for use by
institutions that incur only small amounts of daylight overdrafts. The Guide explains in detail how these policies
apply to different institutions and includes procedures for completing a self-assessment and filing a cap resolution,
as well as information on other aspects of the policy.
5
The term “depository institution,” as used in this policy, refers not only to institutions defined as depository
institutions in 12 U.S.C. 461(b)(1)(A), but also to U.S. branches and agencies of foreign banking organizations,
Edge and agreement corporations, trust companies, and bankers’ banks, unless the context indicates a different
reading.
6
The definitions of credit risk, liquidity risk, operational risk, and legal risk are consistent with those presented in
the PFMI.
7
Deliveries of currency are payments, and FMIs that conduct such activity should consider these deliveries to be
payments in the management of liquidity risk.

4

system operator and other entities (such as settlement banks, nostro agents, or liquidity
providers), the participants in the FMI and other entities, or two or more participants in
the FMI.
• Operational risk: the risk that deficiencies in information systems or internal processes,
human errors, management failures, or disruptions from external events will result in the
reduction, deterioration, or breakdown of services provided by the FMI. 8
• Legal risk: the risk of loss from the unexpected or uncertain application of a law or
regulation.
These risks also arise between financial institutions as they clear, settle, and record
payments and other financial transactions and must be managed by institutions, both individually
and collectively. 9
Further, FMIs may increase, shift, concentrate, or otherwise transform risks in
unanticipated ways. FMIs, for example, may pose systemic risk to the financial system because
the inability of one or more of its participants to perform as expected may cause other
participants to be unable to meet their obligations when due. The failure of one or more of an
FMI’s participants to settle their payments or other financial transactions as expected, in turn,
could create credit or liquidity problems for participants and their customers, the system
operator, other financial institutions, and the financial markets the FMI serves. Thus, such a
failure might lead ultimately to a disruption in the financial markets more broadly and undermine
public confidence in the nation’s financial system.
Mitigating the risks that arise in FMIs is especially important because of the
interdependencies such systems inherently create among financial institutions. In many cases,
interdependencies are a normal part of an FMI’s structure or operations. Although they can
facilitate the safety and efficiency of the FMI’s payment, clearing, settlement, or recording
processes, interdependencies can also present an important source or transmission channel of
systemic risk. Disruptions can originate from any of the interdependent entities, including the
system operator, the participants in the FMI, and other systems, and can spread quickly and
widely across markets if the risks that arise among these parties are not adequately measured,
monitored, and managed. For example, interdependencies often create complex and timesensitive transaction and payment flows that, in combination with an FMI’s design, can lead to
significant demands for intraday credit or liquidity, on either a regular or an extraordinary basis.
The Board recognizes that the Reserve Banks, as settlement institutions, have an
important role in providing intraday balances and credit to foster the smooth operation and
timely completion of money settlement processes among financial institutions and between
financial institutions and FMIs. To the extent that the Reserve Banks are the source of intraday
credit, they may face a risk of loss if such intraday credit is not repaid as planned. In addition,

8

Operational risk also includes physical threats, such as natural disasters and terrorist attacks, and information
security threats, such as cyberattacks. Further, deficiencies in information systems or internal processes include
errors or delays in processing, system outages, insufficient capacity, fraud, data loss, and leakage.
9
Several existing regulatory and bank supervision guidelines and policies also are directed at financial institutions’
management of the risks posed by interbank payment and settlement activity. For example, the Board’s Regulation
F (12 CFR Part 206) directs insured depository institutions to establish policies and procedures to avoid excessive
exposures to any other depository institution, including exposures that may be generated through the clearing and
settlement of payments.

5

measures taken by Reserve Banks to limit their intraday credit exposures may shift some or all of
the associated risks to financial institutions and FMIs.
In addition, mitigating the risks that arise in certain FMIs is critical to the areas of
monetary policy and banking supervision. The effective implementation of monetary policy, for
example, depends on both the orderly settlement of open market operations and the efficient
movement of funds throughout the financial system via the financial markets and the FMIs that
support those markets. Likewise, supervisory objectives regarding the safety and soundness of
financial institutions must take into account the risks FMIs, both in the United States and abroad,
pose to financial institutions that participate directly or indirectly in, or provide settlement,
custody, or credit services to, such systems.
PART I. RISK MANAGEMENT FOR FINANCIAL MARKET INFRASTRUCTURES
This part sets out the Board’s views, and related standards, regarding the management of
risks in FMIs, including those operated by the Reserve Banks. The Board will be guided by this
part, in conjunction with relevant laws, regulations, and other Federal Reserve policies, when
exercising its authority in (1) supervising the Reserve Banks under the Federal Reserve Act; (2)
supervising state member banks, Edge and agreement corporations, and bank holding companies,
including the exercise of authority under the Bank Service Company Act, where applicable; (3)
carrying out certain of its responsibilities under Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act); (4) setting or reviewing the terms and
conditions for the use of Reserve Bank accounts and services; and (5) developing and applying
policies for the provision of intraday liquidity to eligible Reserve Bank account holders. This
part will also guide the Board, as appropriate, in its interactions and cooperative efforts with
other domestic and foreign authorities that have responsibilities for regulating, supervising, or
overseeing FMIs within the scope of this part. The Board’s adoption of this policy is not
intended to exert or create supervisory or regulatory authority over any particular class of
institutions or arrangements where the Board does not have such authority.
A. Scope
FMIs within the scope of part I include public- and private-sector payment systems that
expect to settle a daily aggregate gross value of U.S. dollar-denominated transactions exceeding
$5 billion on any day during the next 12 months. 10, 11 FMIs within the scope of this part also
include central securities depositories, securities settlement systems, central counterparties, and
trade repositories irrespective of the value or nature of the transactions processed by the
system. 12 These FMIs may be organized, located, or operated within the United States (domestic
10

A “payment system” is a set of instruments, procedures, and rules for the transfer of funds between or among
participants. Payment systems include, but are not limited to, large-value funds transfer systems, automated
clearinghouse systems, check clearinghouses, and credit and debit card settlement systems. The scope of this policy
also includes payment-versus-payment settlement systems for foreign exchange transactions.
11
In determining whether it is included in the scope of this policy, a payment system should look at its projected
“next” twelve-month period. “Aggregate gross value of U.S. dollar-denominated transactions” refers to the total
dollar value of individual U.S. dollar transactions settled in the payment system, which also represents the sum of
total U.S. dollar debits (or credits) to all participants before or in absence of any netting of transactions.
12
A “central securities depository” is an entity that provides securities accounts and central safekeeping services. A
“securities settlement system” is an entity that enables securities to be transferred and settled by book entry and
allows transfers of securities free of or against payment. A “central counterparty” is an entity that interposes itself

6

systems), outside the United States (offshore systems), or both (cross-border systems) and may
involve currencies other than the U.S. dollar (non-U.S. dollar systems and multi-currency
systems). 13 The scope of the policy also includes any payment system based or operated in the
United States that engages in the settlement of non-U.S. dollar transactions if that payment
system would be otherwise subject to the policy. 14
Part I does not apply to market infrastructures such as trading exchanges, trade-execution
facilities, or multilateral trade-compression systems. This part is also not intended to apply to
bilateral payment, clearing, or settlement relationships, where an FMI is not involved, between
financial institutions and their customers, such as traditional correspondent banking and
government securities clearing services. The Board believes that these market infrastructures
and relationships do not constitute FMIs for purposes of this policy and that risk-management
issues associated with these market infrastructures and relationships are more appropriately
addressed through other relevant supervisory and regulatory processes.
B. Policy expectations for certain financial market infrastructures
This section sets out the Board’s views, and related standards, with respect to riskmanagement and transparency for the subset of FMIs described below in section B.1, including
the Reserve Banks’ Fedwire Funds Service and Fedwire Securities Service (collectively, Fedwire
Services). The Board believes these FMIs should have comprehensive risk management as well
as a high degree of transparency.
1. Risk management
Authorities, including central banks, have promoted sound risk-management practices by
developing internationally accepted minimum standards that promote the safety and efficiency of
FMIs. Specifically, the Committee on Payment and Settlement Systems (CPSS) and Technical
Committee of the International Organization of Securities Commissions (IOSCO) report on
Principles for Financial Market Infrastructures (PFMI) establishes minimum standards for
payment systems that are systemically important, central securities depositories, securities
settlement systems, central counterparties, and trade repositories for addressing areas such as
legal risk, governance, credit and liquidity risks, general business risk, operational risk, and other
types of risk. 15 The PFMI reflects broad market input and has been widely recognized,
supported, and endorsed by U.S. authorities, including the Federal Reserve, U.S. Securities and
Exchange Commission (SEC), and U.S. Commodity Futures Trading Commission (CFTC).
These standards are also part of the Financial Stability Board’s (FSB’s) Key Standards for Sound
Financial Systems. 16

between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and

the seller to every buyer. A “trade repository” is an entity that maintains a centralized electronic record of

transaction data. These definitions are based on those in the PFMI.

13
Non-U.S. dollar systems may be of interest to the Board if they are used by U.S. financial institutions or may have

the ability to affect financial stability, more broadly.

14
The daily gross value threshold will be calculated on a U.S. dollar equivalent basis.

15
In addition to these risk-management standards, the PFMI sets out responsibilities for authorities for FMIs,

including central banks, in order to provide for effective regulation, supervision, and oversight of FMIs.

16
The FSB’s Key Standards for Sound Financial Systems are available at

http://www.financialstabilityboard.org/cos/key_standards.htm. The FSB is an international forum that was

7

The Board believes that the implementation of the PFMI by the FMIs within the scope of
this section will help promote their safety and efficiency in the financial system and foster
greater financial stability in the domestic and global economy. Accordingly, the Board has
incorporated into the PSR policy principles 1 through 24 from the PFMI, as set forth in the
appendix. 17 In applying part I of this policy, the Board will be guided by the key considerations
and explanatory notes from the PFMI as well as its interpretation of the corresponding provisions
of Regulation HH. 18
a. Fedwire Services
The Board recognizes the critical role the Reserve Banks’ Fedwire Services play in the
financial system and requires them to meet or exceed the standards set forth in the appendix to
this policy, consistent with the guidance on central bank-operated systems provided in the PFMI
and with the requirements in the Monetary Control Act.19
b. Designated financial market utilities for which the Board is the Supervisory Agency
under Title VIII of the Dodd-Frank Act
The Board’s Regulation HH imposes risk-management standards applicable to a
designated financial market utility for which the Board is the Supervisory Agency. 20 The riskmanagement standards in Regulation HH are based on the PFMI. As required under Title VIII of
the Dodd-Frank Act, the risk-management standards seek to promote robust risk management,
promote safety and soundness, reduce systemic risks, and support the stability of the broader
financial system. Designated financial market utilities for which the Board is the Supervisory
Agency are required to comply with the risk-management standards in Regulation HH and are
not subject to the standards in the appendix.

established to develop and promote the implementation of effective regulatory, supervisory and other financial
sector policies. The FSB includes the U.S. Department of the Treasury, the Board, and the SEC.
17
The Board’s Regulation HH contains risk-management standards that are based on the PFMI for certain
designated financial market utilities. Regulation HH (12 CFR Part 234) is available at
http://www.federalreserve.gov/bankinforeg/reglisting.htm#HH.
18
The Board will also look to the CPSS-IOSCO Principles for Financial Market Infrastructures: Disclosure
Framework and Assessment Methodology, which is available at http://www.bis.org/cpmi/publ/d106.pdf, and other
related documents.
19
Certain standards may require flexibility in the way they are applied to central bank-operated systems because of
central banks’ unique role in the financial markets and their public responsibilities. These principles include
principle 2 on governance, principle 3 on the framework for the comprehensive management of risks, principle 4 on
credit risk, principle 5 on collateral, principle 7 on liquidity risk, principle 13 on participant-default rules and
procedures, principle 15 on general business risk, and principle 18 on access and participation requirements. For
instance, the Reserve Banks should refer to part II of this policy for managing their credit risk arising from the
provision of intraday credit to users of the Fedwire Services.
20
The term “Supervisory Agency” is defined in Title VIII as the “Federal agency that has primary jurisdiction over a
designated financial market utility under Federal banking, securities, or commodity futures laws” (12 U.S.C.
5462(8)). Under Title VIII, the Board must prescribe risk-management standards for designated financial market
utilities for which the Board or another Federal banking agency is the appropriate Supervisory Agency (12 U.S.C.
5464(a)). There are currently no designated financial market utilities for which another federal banking agency is
the Supervisory Agency.

8

c. Other financial market infrastructures that are subject to the Board’s supervisory
authority under the Federal Reserve Act
The Board expects all other FMIs that are subject to its supervisory authority under the
Federal Reserve Act, including FMIs that are members of the Federal Reserve System, to meet
or exceed the risk-management standards in the appendix.
d. All other central securities depositories, securities settlement systems, central

counterparties, and trade repositories

The Board encourages all other central securities depositories, securities settlement
systems, central counterparties, and trade repositories, whether they are located within or outside
the United States, to meet or exceed the risk-management standards in the appendix to this
policy. Where the Board does not have authority over a central securities depository, securities
settlement system, central counterparty, or trade repository, the Board will be guided by this
policy in its cooperative efforts with other FMI authorities.
e. Other systemically important offshore and cross-border payment systems
The Board encourages systemically important offshore and cross-border payment
systems that are not included in any of the categories above to meet or exceed the riskmanagement standards in the appendix to this policy. 21 The Board will be guided by this policy
in its cooperative efforts with other payment system authorities.
2. Transparency
Transparency helps ensure that relevant information is provided to an FMI’s participants,
authorities, and the public to inform sound decisionmaking, improve risk management, enable
market discipline, and foster confidence in markets more broadly. In particular, public
disclosures play a critical role in allowing current and prospective participants, as well as other
stakeholders, to understand an FMI’s operations and the risks associated with using its services
and to manage more effectively their risks with respect to the FMI. The Board believes that
FMIs are well-positioned to provide the information necessary to support greater market
transparency and to maintain financial stability.
The Board expects an FMI that is subject to its supervisory authority, but not subject to
Regulation HH, to disclose to its participants information about the risks and costs that they incur
by participating in the FMI, consistent with the requirements in principle 23 in the appendix. 22
At a minimum, the FMI should disclose to its participants overviews of the FMI’s system design
and operations, rules and key procedures, key highlights of business continuity arrangements,
fees and other material costs, aggregate transaction volumes and values, levels of financial
resources that can be used to cover participant defaults, and other information that would
facilitate its participants’ understanding of the FMI and its operations and their evaluation of the
risks associated with using that FMI.
In addition, the Board expects such an FMI to complete the disclosure framework set
forth in the CPSS-IOSCO Principles for Financial Market Infrastructures: Disclosure
21

These systems may be used by U.S. financial institutions, clear or settle U.S. dollars, or have the ability to affect

financial stability, more broadly.

22
The Board’s Regulation HH imposes an equivalent public disclosure requirement.

9

Framework and Assessment Methodology (“disclosure framework” and “assessment
methodology”). 23 The disclosure framework establishes the international baseline set of
information that all FMIs are expected to disclose publicly and review regularly. 24 An FMI is
encouraged to use the guiding questions in the assessment methodology to guide the content and
level of detail in their disclosures. The Board expects each FMI to make its disclosure readily
available to the public, such as by posting it on the FMI’s public website, to achieve maximum
transparency.
To ensure each FMI’s accountability for the accuracy and completeness of its disclosure,
the Board expects the FMI’s senior management and board of directors to review and approve
each disclosure upon completion. Further, in order for an FMI’s disclosure to reflect its current
rules, procedures, and operations, the Board expects the FMI to update the relevant parts of its
disclosure following changes to the FMI or the environment in which it operates, which would
significantly change the accuracy of the statements in its disclosure. At a minimum, the FMI is
expected to review and update as warranted its disclosure every two years.
As part of its ongoing oversight of FMIs, the Board will review public disclosures by
FMIs subject to its supervisory authority to ensure that the Board’s policy objectives and
expectations are being met. 25 Where necessary, the Board will provide feedback to the FMIs
regarding the content of these disclosures and their effectiveness in achieving the policy
objectives discussed above. 26 The Board acknowledges that FMIs vary in terms of the scope of
instruments they settle and markets they serve. It also recognizes that FMIs may operate under
different legal and regulatory constraints, charters, and corporate structures. The Board will
consider these factors when reviewing the disclosures and in evaluating how an FMI addresses a
particular standard. Where the Board does not have statutory or exclusive authority over an
FMI, it will be guided by this policy in cooperative efforts with other domestic or foreign
authorities to promote comprehensive disclosures by FMIs as a means to achieve greater safety
and efficiency in the financial system.
C. General policy expectations for other payment systems within the scope of the policy
The Board encourages payment systems within the scope of this policy, but that are not
included in any of the categories in section B above, to implement a general risk-management
framework appropriate for the risks the payment system poses to the system operator, system
participants, and other relevant parties as well as the financial system more broadly.

23

See CPSS-IOSCO, Principles for Financial Market Infrastructures: Disclosure Framework and Assessment
Methodology, December 2012, available at http://www.bis.org/cpmi/publ/d106.pdf.
24
Although the Board expects disclosures to be robust, it does not expect FMIs to disclose to the public sensitive
information that could expose system vulnerabilities or otherwise put the FMI at risk (for example, specific business
continuity plans).
25
Any review of a disclosure by the Board should not be viewed as an approval or guarantee of the accuracy of an
FMI’s disclosure. Without the express approval of the Board, an FMI may not state that its disclosure has been
reviewed, endorsed, approved, or otherwise not objected to by the Board.
26
If the Board materially disagrees with the content of an FMI’s disclosure, it will communicate its concerns to the
FMI’s senior management and possibly to its board of directors, as appropriate. The Board may also discuss its
concerns with other relevant authorities, as appropriate.

10

1. Establishment of a risk-management framework
A risk-management framework is the set of objectives, policies, arrangements,
procedures, and resources that a system employs to limit and manage risk. Although there are a
number of ways to structure a sound risk-management framework, all frameworks should
a. identify risks clearly and set sound risk-management objectives;
b. establish sound governance arrangements to oversee the risk-management
framework;
c. establish clear and appropriate rules and procedures to carry out the risk-management
objectives; and
d. employ the resources necessary to achieve the system’s risk-management objectives
and implement effectively its rules and procedures.
a. Identify risks clearly and set sound risk-management objectives
The first element of a sound risk-management framework is the clear identification of all
risks that have the potential to arise in or result from the system’s settlement process and the
development of clear and transparent objectives regarding the system’s tolerance for and
management of such risks. System operators should identify the forms of risk present in their
system’s settlement process as well as the parties posing and bearing each risk. In particular,
system operators should identify the risks posed to and borne by them, the system participants,
and other key parties such as a system’s settlement banks, custody banks, and third-party service
providers. System operators should also analyze whether risks might be imposed on other
external parties and the financial system more broadly.
In addition, system operators should analyze how risk is transformed or concentrated by
the settlement process. System operators should also consider the possibility that attempts to
limit one type of risk could lead to an increase in another type of risk. Moreover, system
operators should be aware of risks that might be unique to certain instruments, participants, or
market practices. Where payment systems have inter-relationships with or dependencies on
other FMIs, system operators should also analyze whether and to what extent any cross-system
risks exist and who bears them.
Using their clear identification of risks, system operators should establish the risk
tolerance of the system, including the levels of risk exposure that are acceptable to the system
operator, system participants, and other relevant parties. System operators should then set riskmanagement objectives that clearly allocate acceptable risks among the relevant parties and set
out strategies to manage this risk. Risk-management objectives should be consistent with the
objectives of this policy, the system’s business purposes, and the type of payment instruments
and markets for which the system clears and settles. Risk-management objectives should also be
communicated to and understood by both the system operator’s staff and system participants.
System operators should reevaluate their risks in conjunction with any major changes in
the settlement process or operations, the transactions settled, the system’s rules or procedures, or
the relevant legal and market environments. System operators should review the riskmanagement objectives regularly to ensure that they are appropriate for the risks posed by the
system, continue to be aligned with the system’s purposes, remain consistent with this policy,
and are being effectively adhered to by the system operator and participants.

11

b. Establish sound governance arrangements to oversee the risk-management

framework

Systems should have sound governance arrangements to implement and oversee their
risk-management frameworks. The responsibility for sound governance rests with a system
operator’s board of directors or similar body and with the system operator’s senior management.
Governance structures and processes should be transparent; enable the establishment of clear
risk-management objectives; set and enforce clear lines of responsibility and accountability for
achieving these objectives; ensure that there is appropriate oversight of the risk-management
process; and enable the effective use of information reported by the system operator’s
management, internal auditors, and external auditors to monitor the performance of the riskmanagement process. 27 Individuals responsible for governance should be qualified for their
positions, understand their responsibilities, and understand their system’s risk-management
framework. Governance arrangements should also ensure that risk-management information is
shared in forms, and at times, that allow individuals responsible for governance to fulfill their
duties effectively.
c. Establish clear and appropriate rules and procedures to carry out the risk-

management objectives

Systems should have rules and procedures that are appropriate and sufficient to carry out
the system’s risk-management objectives and that are consistent with its legal framework. Such
rules and procedures should specify the respective responsibilities of the system operator, system
participants, and other relevant parties. Rules and procedures should establish the key features of
a system’s settlement and risk-management design and specify clear and transparent crisis
management procedures and settlement failure procedures, if applicable. 28
d. Employ the resources necessary to achieve the system’s risk-management objectives
and implement effectively its rules and procedures
System operators should ensure that the appropriate resources and processes are in place
to allow the system to achieve its risk-management objectives and implement effectively its rules
and procedures. In particular, the system operator’s staff should have the appropriate skills,
information, and tools to apply the system’s rules and procedures and achieve the system’s riskmanagement objectives. System operators should also ensure that their facilities and
contingency arrangements, including any information system resources, are sufficient to meet
their risk-management objectives.
2. Other considerations for a risk-management framework
Payment systems differ widely in form, function, scale, and scope of activities, and these
characteristics result in differing combinations and levels of risks. Thus, the exact features of a
system’s risk-management framework should be tailored to the risks of that system. The specific
27

The risk-management and internal audit functions should also be independent of those responsible for day-to-day
functions.
28
Examples of key features that might be specified in a system’s rules and procedures are controls to limit
participant-based risks, such as membership criteria based on participants’ financial and operational health; limits on
credit exposures; and the procedures and resources to liquidate collateral. Other examples of key features might be
business continuity requirements and loss-allocation procedures.

12

features of a risk-management framework may entail tradeoffs between efficiency and risk
reduction, and payment systems will need to consider these tradeoffs when designing appropriate
rules and procedures. In considering such tradeoffs, however, it is critically important that
system operators take into account the costs and risks that may be imposed on all relevant
parties, including parties with no direct role in the system. Furthermore, in light of rapidly
evolving technologies and risk-management practices, the Board encourages all system operators
to consider making risk-management improvements when cost-effective.
The Board may seek to understand how a system achieves the four elements of a sound
risk-management framework set out above. In this context, the Board may seek to obtain
information from system operators regarding their risk-management framework, riskmanagement objectives, rules and procedures, significant legal analyses, general risk analyses,
analyses of the credit and liquidity effects of settlement disruptions, business continuity plans,
crisis management procedures, and other relevant documentation. 29 The Board also may seek to
obtain data or statistics on system activity on an ad hoc or ongoing basis. All information
provided to the Federal Reserve for the purposes of this policy will be handled in accordance
with all applicable Federal Reserve policies on information security, confidentiality, and
conflicts of interest.
D. Cooperation with other authorities in regulating, supervising, and overseeing financial
market infrastructures
When the Board does not have statutory or exclusive authority over an FMI covered by
this policy, this section will guide the Board, as appropriate, in its interactions with other
domestic and foreign authorities to promote effective risk management in and transparency by
FMIs. For example, the Federal Reserve may have an interest in the safety and efficiency of
FMIs outside the United States that are subject to regulation, supervision, or oversight by another
authority but that provide services to financial institutions supervised by the Board or conduct
activity that involves the U.S. dollar. 30 In its interactions with other domestic and foreign
authorities, the Board will encourage these authorities to adopt and to apply the internationally
accepted principles set forth in the appendix when evaluating the risks posed by and to FMIs and
individual system participants that these authorities regulate, supervise, or oversee.
In working with other authorities, the Board will seek to establish arrangements for
effective and practical cooperation that promote sound risk-management outcomes. The Board
believes that cooperative arrangements among relevant authorities can be an effective
mechanism for, among other things, (1) sharing relevant information concerning the policies,
procedures, and operations of an FMI; (2) sharing supervisory views regarding an FMI; (3)
discussing and promoting the application of robust risk-management standards; and (4) serving
as a forum for effective communication, coordination, and consultation during normal
circumstances, as well as periods of market stress.
29

To facilitate analysis of settlement disruptions, systems may need to develop the capability to simulate credit and
liquidity effects on participants and on the system resulting from one or more participant defaults, or other possible
sources of settlement disruption. Such simulations may need to include, if appropriate, the effects of changes in
market prices, volatilities, or other factors.
30
An FMI may be subject to supervision or oversight by the Board and other authorities, as a result of its legal
framework, operating structure (for example, multi-currency or cross-border systems), or participant base. In such
cases, the Board will be sensitive to the potential for duplicative or conflicting requirements, oversight gaps, or
unnecessary costs and burdens imposed on the FMI.

13

When establishing such cooperative arrangements, the Board will be guided, as
appropriate, by international principles on cooperative arrangements for the regulation,
supervision, and oversight of FMIs. In particular, responsibility E in the PFMI addresses
domestic and international cooperation among central banks, market regulators, and other
relevant authorities and provides guidance to these entities for supporting each other in fulfilling
their respective mandates with respect to FMIs. The CPSS report on Central Bank Oversight of
Payment and Settlement Systems also provides important guidance on international cooperation
among central banks. 31 The Board believes this international guidance provides important
frameworks for cooperating and coordinating with other authorities to address risks in domestic,
cross-border, multi-currency, and, where appropriate, offshore FMIs.

31

See Central Bank Oversight of Payment and Settlement Systems, part B on “Principles for international cooperative
oversight,” May 2005, available at http://www.bis.org/cpmi/publ/d68.pdf.

14

PART II. FEDERAL RESERVE INTRADAY CREDIT POLICIES
This part outlines the methods used to provide intraday credit to ensure the smooth
functioning of payment and settlement systems, while controlling credit risk to the Reserve
Banks associated with such intraday credit. These methods include voluntary collateralization of
intraday credit, a limit on total daylight overdrafts in institutions’ Federal Reserve accounts, and
a fee for uncollateralized daylight overdrafts. This part also provides a fee waiver to limit the
impact of collateralization on depository institutions that use relatively small amounts of intraday
credit.
To assist institutions in implementing this part of the policy, the Federal Reserve has
prepared two documents: the Overview of the Federal Reserve’s Payment System Risk Policy on
Intraday Credit (Overview) and the Guide to the Federal Reserve’s Payment System Risk Policy
on Intraday Credit (Guide). 32 The Overview summarizes the Board’s policy on the provision of
intraday credit, including net debit caps, daylight overdraft fees, and the fee waiver. This
document is intended for use by institutions that incur only small amounts of daylight overdrafts.
The Guide explains in detail how these policies apply to different institutions and includes
procedures for completing a self-assessment and filing a cap resolution, as well as information
on other aspects of the policy.
A. Daylight overdraft definition and measurement
A daylight overdraft occurs when an institution’s Federal Reserve account is in a
negative position during the business day. The Reserve Banks use an ex post system to measure
daylight overdrafts in institutions’ Federal Reserve accounts. Under this ex post measurement
system, certain transactions, including Fedwire funds transfers, book-entry securities transfers,
and net settlement transactions, are posted as they are processed during the business day. Other
transactions, including ACH and check transactions, are posted to institutions’ accounts
according to a defined schedule. The following table presents the schedule used by the Federal
Reserve for posting transactions to institutions’ accounts for purposes of measuring daylight
overdrafts.
Procedures for measuring daylight overdrafts 33
Opening balance (previous day’s closing balance)
Post throughout business day:
+/- Fedwire funds transfers 34
+/- Fedwire book-entry securities transfers
+/-

National Settlement Service entries.

32

Available at http://www.federalreserve.gov/paymentsystems/psr_relpolicies.htm.
This schedule of posting rules does not affect the overdraft restrictions and overdraft-measurement provisions for
nonbank banks established by the Competitive Equality Banking Act of 1987 and the Board’s Regulation Y (12
CFR § 225.52).
34
Funds transfers that the Reserve Banks function for certain international organizations using internal systems
other than payment processing systems such as Fedwire will be posted throughout the business day for purposes of
measuring daylight overdrafts.
33

15

+

Fedwire book-entry interest and redemption payments on securities that are

not obligations of, or fully guaranteed as to principal and interest by, the

United States 35

+

Electronic payments for matured coupons and definitive securities that are

not obligations of, or fully guaranteed as to principal and interest by, the

United States. 36

Post at 8:30 a.m. eastern time:
+/-

Term deposit maturities and accrued interest

+/-
+/-

Government and commercial ACH transactions, including return items 37
Commercial check transactions, including returned checks 38

+

Treasury checks, postal money orders, local Federal Reserve Bank checks,

and savings bond redemptions in separately sorted deposits; these items must

be deposited by the latest applicable deposit deadline preceding the posting

time

+

Advance-notice Treasury investments

35

The GSEs include Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), entities of the Federal Home Loan Bank System (FHLBS), the Farm Credit System, the
Federal Agricultural Mortgage Corporation (Farmer Mac), the Student Loan Marketing Association (Sallie Mae),
the Financing Corporation, and the Resolution Funding Corporation. The international organizations include the
World Bank, the Inter-American Development Bank, the Asian Development Bank, and the African Development
Bank. The Student Loan Marketing Association Reorganization Act of 1996 requires Sallie Mae to be completely
privatized by 2008; however, Sallie Mae completed privatization at the end of 2004. The Reserve Banks no longer
act as fiscal agents for new issues of Sallie Mae securities, and Sallie Mae is not considered a GSE.
The term “interest and redemption payments” refers to payments of principal, interest, and redemption on securities
maintained on the Fedwire Securities Service.
The Reserve Banks will post these transactions, as directed by the issuer, provided that the issuer’s Federal Reserve
account contains funds equal to or in excess of the amount of the interest and redemption payments to be made. In
the normal course, if a Reserve Bank does not receive funding from an issuer for the issuer’s interest and redemption
payments by the established cut-off hour of 4:00 p.m. eastern time on the Fedwire Securities Service, the issuer’s
payments will not be processed on that day.
36
Electronic payments for credits on these securities will post according to the posting rules for the mechanism
through which they are processed, as outlined in this policy. However, the majority of these payments are made by
check and will be posted according to the established check posting rules as set forth in this policy.
37
Institutions that are monitored in real time must fund the total amount of their commercial ACH credit
originations in order for the transactions to be processed. If the Federal Reserve receives commercial ACH credit
transactions from institutions monitored in real time after the scheduled close of the Fedwire Funds Service, these
transactions will be processed at 12:30 a.m. the next business day, or by the ACH deposit deadline, whichever is
earlier. The Account Balance Monitoring System provides intraday account information to the Reserve Banks and
institutions and is used primarily to give authorized Reserve Bank personnel a mechanism to control and monitor
account activity for selected institutions. For more information on ACH transaction processing, refer to the ACH
Settlement Day Finality Guide available through the Federal Reserve Financial Services website at
http://www.frbservices.org.
The federal government will not participate in the same-day ACH service upon initial implementation in
September 2016. ACH forward transactions originated or received by the federal government will not be eligible
for same-day settlement and will settle on the next business day, or on a future date as indicated by the effective
settlement date.
38
For the three commercial check transaction posting times, the Reserve Banks will post credits and debits to
institutions' accounts for checks deposited and presented, respectively, at least 30 minutes before the posting time.

16

-

Penalty assessments for tax payments from the Treasury Investment Program

(TIP). 39

Post at 8:30 a.m. eastern time and hourly, on the half-hour, thereafter:
+/-
+/-

Main account administrative investment or withdrawal from TIP
Special Direct Investment (SDI) administrative investment or withdrawal
from TIP

+
+

31 CFR Part 202 account deposits from TIP
Credit corrections amounting to $1 million or more 40

+
-
-

Credit adjustments amounting to $1 million or more 41
Uninvested paper tax (PATAX) deposits from TIP
Main account balance limit withdrawals from TIP

-
-

Collateral deficiency withdrawals from TIP
31 CFR Part 202 deficiency withdrawals from TIP

Post at 8:30 a.m., 1:00 p.m., and 6:30 p.m. eastern time:
-

Main account Treasury withdrawals from TIP. 42

Post by 9:15 a.m. eastern time:
+
U.S. Treasury and government agency Fedwire book-entry interest and

redemption payments 43

+

Electronic payments for U.S. Treasury and government agency matured

coupons and definitive securities. 44

Post Beginning at 9:15 a.m. eastern time:
-

Original issues of Treasury securities. 45

39

The Reserve Banks will identify and notify institutions with Treasury-authorized penalties on Thursdays. In the
event that Thursday is a holiday, the Reserve Banks will identify and notify institutions with Treasury-authorized
penalties on the following business day. Penalties will then be posted on the business day following notification.
40
Corrections are account entries made to correct discrepancies detected by a Reserve Bank during the initial
processing of checks.
41
Adjustments are account entries made to correct discrepancies detected by an institution after entries have posted
to Federal Reserve accounts.
42
On rare occasions, the Treasury may announce withdrawals in advance that are based on institutions’ closing
balances on the withdrawal date. The Federal Reserve will post these withdrawals after the close of Fedwire.
43
For purposes of this policy, government agencies are those entities (other than the U.S. Treasury) for which the
Reserve Banks act as fiscal agents and whose securities are obligations of, or fully guaranteed as to principal and
interest by, the United States.
44
Electronic payments for credits on these securities will post by 9:15 a.m. eastern time; however, the majority of
these payments are made by check and will be posted according to the established check posting rules as set forth in
this policy.
45
Original issues of government agency, government-sponsored enterprise, or international organization securities
are delivered as book-entry securities transfers and will be posted when the securities are delivered to the purchasing
institutions.

17

Post at 9:30 a.m. eastern time and hourly, on the half-hour, thereafter:
+

Federal Reserve Electronic Tax Application (FR-ETA) value Fedwire

investments from TIP.

Post at 11:00 a.m. eastern time and hourly thereafter:
+

Currency and coin deposits

Post at 12:30 p.m. eastern time and hourly, on the half-hour, thereafter:
+

Dynamic investments from TIP.

Post by 1:00 p.m. eastern time:
+/-

Commercial check transactions, including returned checks

+/+

FedACH SameDay Service transactions, including return items
Same-day Treasury investments.

Post at 5:00 p.m. eastern time:
+/+

FedACH SameDay Service transactions, including return items46
Treasury checks, postal money orders, and savings bond redemptions in

separately sorted deposits; these items must be deposited by the latest

applicable deposit deadline preceding the posting time

+

Local Federal Reserve Bank checks; these items must be presented before
3:00 p.m. eastern time

Post at 5:30 p.m. eastern time:
+/+/-

FedACH SameDay Service return transactions
Commercial check transactions, including returned checks

Post at 6:30 p.m. eastern time: 47
+

Penalty Abatements from TIP.

Post after the close of Fedwire Funds Service:
+/-

All other transactions. These transactions include the following: currency
and coin shipments; noncash collection; term-deposit settlements; Federal
Reserve Bank checks presented after 3:00 p.m. eastern time but before 3:00
p.m. local time; foreign check transactions; small-dollar credit corrections
and adjustments; term deposit settlements; and all debit corrections and

46

Paper returns, FedLine Web returns, paper notifications of change (NOCs), and FedLine Web NOCs will only
post at 8:30 a.m. and 5:00 p.m., depending on when the item is received by the Reserve Banks.
47
The Federal Reserve Banks will process and post Treasury-authorized penalty abatements on Thursdays. In the
event that Thursday is a holiday, the Federal Reserve Banks will process and post Treasury-authorized penalty
abatements on the following business day.

18

adjustments. Discount-window loans and repayments are normally posted
after the close of Fedwire as well; however, in unusual circumstances a
discount window loan may be posted earlier in the day with repayment 24
hours later, or a loan may be repaid before it would otherwise become due.
Equals:
Closing Balance.
B. Collateral
To help meet institutions’ demand for intraday balances while mitigating Reserve Bank
credit risk, the Board sets forth this policy whereby the Reserve Banks supply intraday balances
and credit predominantly through explicitly collateralized daylight overdrafts to healthy
depository institutions. 48 This policy offers pricing incentives to encourage greater
collateralization (see section II.C.). To avoid disrupting the operation of the payment system and
increasing the cost burden on a large number of institutions using small amounts of daylight
overdrafts, the use of collateral is generally voluntary. 49
Collateral eligibility and margins remain the same for PSR policy purposes as for the
discount window. 50 Unencumbered collateral can be used to collateralize daylight overdrafts. 51
In-transit securities are eligible collateral to pledge for PSR purposes at Reserve Banks’
discretion. 52 All collateral must be acceptable to the Reserve Banks.
C. Pricing
Under the voluntary collateralization regime, the fee for collateralized overdrafts is zero,
while the fee for uncollateralized overdrafts is 50 basis points. The two-tiered fee for
collateralized and uncollateralized overdrafts is intended to provide a strong incentive for a
depository institution to pledge collateral to its Reserve Bank to reduce or eliminate the
institution’s uncollateralized daylight overdrafts and associated charges for its use of intraday
credit.
Reserve Banks charge institutions for daylight overdrafts incurred in their Federal
Reserve accounts. For each two-week reserve-maintenance period, the Reserve Banks calculate
and assess daylight overdraft fees, which are equal to the sum of any daily uncollateralized
daylight overdraft charges during the period.
Daylight overdraft fees for uncollateralized overdrafts (or the uncollateralized portion of
a partially collateralized overdraft) are calculated using an annual rate of 50 basis points, quoted
48

Collateral is also used to manage risk posed by daylight overdrafts of problem institutions (institutions in a weak
or deteriorating financial condition), entities not eligible for Federal Reserve intraday credit (see section II.F.), and
institutions that have obtained maximum daylight overdraft capacity (see section II.E.).
49
The Reserve Banks may require collateral in certain circumstances, such as when institutions breach their net
debit caps.
50
See http://www.frbdiscountwindow.org/ for information on the discount window and PSR collateral acceptance
policy and collateral margins.
51
Under some circumstances, rules for determining whether collateral is available may differ for PSR and discount
window purposes.
52
In-transit securities are book-entry securities transferred over the Fedwire Securities Service that have been
purchased by a depository institution but not yet paid for or owned by the institution’s customers.

19

on the basis of a 24-hour day and a 360-day year. To obtain the effective annual rate for the
standard Fedwire operating day, the 50-basis-point annual rate is multiplied by the fraction of a
24-hour day during which Fedwire is scheduled to operate. For example, under a 21.5-hour
scheduled Fedwire operating day, the effective annual rate used to calculate daylight overdraft
fees equals 44.79 basis points (50 basis points multiplied by 21.5/24).53 The effective daily rate
is calculated by dividing the effective annual rate by 360. 54 An institution’s daily daylight
overdraft charge is equal to the effective daily rate multiplied by the institution’s average daily
uncollateralized daylight overdraft.
An institution’s average daily uncollateralized daylight overdraft is calculated by dividing
the sum of its negative uncollateralized Federal Reserve account balances at the end of each
minute of the scheduled Fedwire operating day by the total number of minutes in the scheduled
Fedwire operating day. A negative uncollateralized Federal Reserve account balance is
calculated by subtracting the unencumbered, net lendable value of collateral pledged from the
total negative Federal Reserve account balance at the end of each minute. Each positive end-of­
minute balance in an institution’s Federal Reserve account is set to equal zero. Fully
collateralized end-of-minute negative balances are similarly set to zero.
The daylight overdraft charge is reduced by a fee waiver of $150, which is primarily
intended to minimize the burden of the PSR policy on institutions that use small amounts of
intraday credit. The waiver is subtracted from gross fees in a two-week reserve-maintenance
period. 55
Certain institutions are subject to a penalty fee and modified daylight overdraft fee
calculation as described in section II.F. The fee waiver is not available to these institutions. 56
D. Net debit caps
1. Definition
In accord with sound risk-management practices, to limit the amount of intraday credit
that a Reserve Bank extends to an individual institution and the associated risk, each institution
incurring daylight overdrafts in its Federal Reserve account must adopt a net debit cap, that is, a
ceiling on the total daylight overdraft position that it can incur during any given day. An
institution must be financially healthy and have regular access to the discount window in order to
adopt a net debit cap greater than zero. Granting a net debit cap, or any extension of intraday
credit, to an institution is at the discretion of the Reserve Bank.

53

A change in the length of the scheduled Fedwire operating day should not significantly change the amount of fees
charged because the effective daily rate is applied to average daylight overdrafts, whose calculation would also
reflect the change in the operating day.
54
Under the current 21.5-hour Fedwire operating day, the effective daily daylight-overdraft rate is truncated to
0.0000124.
55
The waiver shall not result in refunds or credits to an institution and cannot be carried to another reserve
maintenance period.
56
The fee waiver is not available to Edge and agreement corporations, bankers’ banks that have not waived their
exemption from reserve requirements, limited-purpose trust companies, and government-sponsored enterprises and
international organizations. These types of institutions do not have regular access to the discount window and,
therefore, are expected not to incur daylight overdrafts in their Federal Reserve accounts.

20

An institution’s cap category and capital measure determine the size of its net debit cap.
More specifically, the net debit cap is calculated as an institution’s cap multiple times its capital
measure:
net debit cap =
cap multiple x capital measure
Cap categories (see section II.D.2.) and their associated cap levels, set as multiples of capital
measure, are listed below:
Net Debit Cap Multiples
Cap category

Cap multiple

High
Above average
Average
De minimis
Exempt-from-filing 57
Zero

2.25
1.875
1.125
0.4
$10 million or 0.20
0

The cap is applied to the total of collateralized and uncollateralized daylight overdrafts. 58 For
the treatment of overdrafts that exceed the cap, see section II.G.
The Board’s policy on net debit caps is based on a specific set of guidelines and some
degree of examiner oversight. Under the Board’s policy, a Reserve Bank may further limit or
prohibit an institution’s use of Federal Reserve intraday credit if (1) the institution’s supervisor
determines that the institution is unsafe or unsound; (2) the institution does not qualify for a
positive net debit cap (see section II.D.2.); or (3) the Reserve Bank determines that the institution
poses excessive risk.
While capital measures differ, the net debit cap provisions of this policy apply similarly
to foreign banking organizations (FBOs) as to U.S. institutions. Consistent with practices for
U.S.-chartered depository institutions, the Reserve Banks will advise home-country supervisors
of the daylight overdraft capacity of U.S. branches and agencies of FBOs under their jurisdiction,
as well as of other pertinent information related to the FBOs’ caps. The Reserve Banks will also
provide information on the daylight overdrafts in the Federal Reserve accounts of FBOs’ U.S.
branches and agencies in response to requests from home-country supervisors.
2. Cap categories
The policy defines the following six cap categories, described in more detail below: high,
above average, average, de minimis, exempt-from-filing, and zero. The high, above average, and
average cap categories are referred to as “self-assessed” caps.
57

The net debit cap for the exempt-from-filing category is equal to the lesser of $10 million or 0.20 multiplied by the

capital measure.

58
Collateral will not increase the net debit cap limit. Institutions seeking capacity that exceeds the net debit cap

need to apply for the maximum daylight overdraft capacity (see section II. E).

21

a. Self-assessed
In order to establish a net debit cap category of high, above average, or average, an
institution must perform a self-assessment of its own creditworthiness, intraday funds
management and control, customer credit policies and controls, and operating controls and
contingency procedures. 59 The assessment of creditworthiness is based on the institution’s
supervisory rating and Prompt Corrective Action (PCA) designation. 60 An institution may
perform a full assessment of its creditworthiness in certain limited circumstances, for example, if
its condition has changed significantly since its last examination or if it possesses additional
substantive information regarding its financial condition. An institution performing a selfassessment must also evaluate its intraday funds-management procedures and its procedures for
evaluating the financial condition of and establishing intraday credit limits for its customers.
Finally, the institution must evaluate its operating controls and contingency procedures to
determine if they are sufficient to prevent losses due to fraud or system failures. The Guide
includes a detailed explanation of the self-assessment process.
Each institution’s board of directors must review that institution’s self-assessment and
recommended cap category. The process of self-assessment, with the board of directors review,
should be conducted at least once in each twelve-month period. A cap determination may be
reviewed and approved by the board of directors of a holding company parent of an institution,
provided that (1) the self-assessment is performed by each entity incurring daylight overdrafts,
(2) the entity’s cap is based on the measure of the entity’s own capital, and (3) each entity
maintains for its primary supervisor’s review its own file with supporting documents for its selfassessment and a record of the parent’s board of directors review. 61
In applying these guidelines, each institution should maintain a file for examiner review
that includes (1) worksheets and supporting analysis used in its self-assessment of its own cap
category, (2) copies of senior-management reports to the board of directors of the institution or
its parent (as appropriate) regarding that self-assessment, and (3) copies of the minutes of the

59

This assessment should be done on an individual-institution basis, treating as separate entities each commercial
bank, each Edge corporation (and its branches), each thrift institution, and so on. An exception is made in the case
of U.S. branches and agencies of FBOs. Because these entities have no existence separate from the FBO, all the
U.S. offices of FBOs (excluding U.S.-chartered bank subsidiaries and U.S.-chartered Edge subsidiaries) should be
treated as a consolidated family relying on the FBO’s capital.
60
An insured depository institution is (1) “well capitalized” if it significantly exceeds the required minimum level
for each relevant capital measure, (2) “adequately capitalized” if it meets the required minimum level for each
relevant capital measure, (3) “undercapitalized” if it fails to meet the required minimum level for any relevant
capital measure, (4) “significantly undercapitalized” if it is significantly below the required minimum level for any
relevant capital measure, or (5) “critically undercapitalized” if it fails to meet any leverage limit (the ratio of tangible
equity to total assets) specified by the appropriate federal banking agency, in consultation with the FDIC, or any
other relevant capital measure established by the agency to determine when an institution is critically
undercapitalized (12 U.S.C. 1831o).
61
An FBO should undergo the same self-assessment process as a U.S.-chartered institution in determining a net
debit cap for its U.S. branches and agencies. Many FBOs, however, do not have the same management structure as
U.S. institutions, and adjustments should be made as appropriate. If an FBO’s board of directors has a more limited
role to play in the bank’s management than a U.S. board has, the self-assessment and cap category should be
reviewed by senior management at the FBO’s head office that exercises authority over the FBO equivalent to the
authority exercised by a board of directors over a U.S. institution. In cases in which the board of directors exercises
authority equivalent to that of a U.S. board, cap determination should be made by the board of directors.

22

discussion at the appropriate board of directors meeting concerning the institution’s adoption of a
cap category. 62
As part of its normal examination, the institution’s examiners may review the contents of
the self-assessment file. 63 The objective of this review is to ensure that the institution has
applied the guidelines appropriately and diligently, that the underlying analysis and method were
reasonable, and that the resultant self-assessment was generally consistent with the examination
findings. Examiner comments, if any, should be forwarded to the board of directors of the
institution. If an examiner has concerns, the Reserve Bank would decide whether to modify the
cap category. For example, if the institution’s level of daylight overdrafts constitutes an unsafe
or unsound banking practice, the Reserve Bank would likely assign the institution a zero net
debit cap and impose additional risk controls.
The contents of the self-assessment file will be considered confidential by the
institution’s examiner. Similarly, the Federal Reserve and the institution’s examiner will hold
the actual cap level selected by the institution confidential. Net debit cap information should not
be shared with outside parties or mentioned in any public documents; however, net debit cap
information will be shared with the home-country supervisor of U.S. branches and agencies of
foreign banks.
The Reserve Banks will review the status of any institution with a self-assessed net debit
cap that exceeds its net debit cap during a two-week reserve-maintenance period and will decide
if additional action should be taken (see section II.G.).
b. De minimis
Many institutions incur relatively small overdrafts and thus pose little risk to the Federal
Reserve. To ease the burden on these small overdrafters of engaging in the self-assessment
process and to ease the burden on the Federal Reserve of administering caps, the Board allows
institutions that meet reasonable safety and soundness standards to incur de minimis amounts of
daylight overdrafts without performing a self-assessment. An institution may incur daylight
overdrafts of up to 40 percent of its capital measure if the institution submits a board of directors
resolution.
An institution with a de minimis cap must submit to its Reserve Bank at least once in
each 12-month period a copy of its board of directors resolution (or a resolution by its holding
company’s board) approving the institution’s use of intraday credit up to the de minimis level.
The Reserve Banks will review the status of any institution with a de minimis net debit cap that
exceeds its net debit cap during a two-week reserve-maintenance period and will decide if
additional action should be taken (see section II.G.).

62

In addition, for FBOs, the file that is made available for examiner review by the U.S. offices of an FBO should
contain the report on the self-assessment that the management of U.S. operations made to the FBO’s senior
management and a record of the appropriate senior management’s response or the minutes of the meeting of the
FBO’s board of directors or other appropriate management group, at which the self-assessment was discussed.
63
Between examinations, examiners or Reserve Bank staff may contact an institution about its cap if there is other
relevant information, such as statistical or supervisory reports, that suggests there may have been a change in the
institution’s financial condition.

23

c. Exempt-from-filing
Institutions that only rarely incur daylight overdrafts in their Federal Reserve accounts
that exceed the lesser of $10 million or 20 percent of their capital measure are excused from
performing self-assessments and filing board of directors resolutions with their Reserve Banks.
This dual test of dollar amount and percent of capital measure is designed to limit the filing
exemption to institutions that create only low-dollar risks to the Reserve Banks and that incur
small overdrafts relative to their capital measure.
The Reserve Banks will review the status of an exempt institution that incurs overdrafts
in its Federal Reserve account in excess of $10 million or 20 percent of its capital measure on
more than two days in any two consecutive two-week reserve-maintenance periods. The Reserve
Bank will decide whether the exemption should be maintained, the institution should be required
to file for a cap, or counseling should be performed (see section II.G.). The Reserve Bank will
assign the exempt-from-filing net debit cap.
d. Zero
Some financially healthy institutions that could obtain positive net debit caps choose to
have zero caps. Often these institutions have very conservative internal policies regarding the
use of Federal Reserve intraday credit. If an institution that has adopted a zero cap incurs a
daylight overdraft, the Reserve Bank counsels the institution and may monitor the institution’s
activity in real time and reject or delay certain transactions that would cause an overdraft. If the
institution qualifies for a positive cap, the Reserve Bank may suggest that the institution adopt an
exempt-from-filing cap or file for a higher cap if the institution believes that it will continue to
incur daylight overdrafts.
In addition, a Reserve Bank may assign an institution a zero net debit cap. Institutions
that may pose special risks to the Reserve Banks, such as those without regular access to the
discount window, those incurring daylight overdrafts in violation of this policy, or those in weak
financial condition, are generally assigned a zero cap (see section II.F.). Recently chartered
institutions may also be assigned a zero net debit cap.
3. Capital measure
As described above, an institution’s cap category and capital measure determine the size
of its net debit cap. The capital measure used in calculating an institution’s net debit cap
depends upon its chartering authority and home-country supervisor.
a. U.S.-chartered institutions
For institutions chartered in the United States, net debit caps are multiples of “qualifying”
or similar capital measures that consist of those capital instruments that can be used to satisfy
risk-based capital standards, as set forth in the capital adequacy guidelines of the federal
financial regulatory agencies. All of the federal financial regulatory agencies collect, as part of
their required reports, data on the amount of capital that can be used for risk-based purposes –
“risk-based” capital for commercial banks, savings banks, and savings associations and total
regulatory reserves for credit unions. Other U.S.-chartered entities that incur daylight overdrafts
in their Federal Reserve accounts should provide similar data to their Reserve Banks.

24

b. U.S. branches and agencies of foreign banks
For U.S. branches and agencies of foreign banks, net debit caps on daylight overdrafts in
Federal Reserve accounts are calculated by applying the cap multiples for each cap category to
the FBO’s U.S. capital equivalency measure. 64 U.S. capital equivalency is equal to the following
• 35 percent of capital for FBOs that are financial holding companies

(FHCs) 65

• 25 percent of capital for FBOs that are not FHCs and have a strength of

support assessment ranking (SOSA) of 1 66

• 10 percent of capital for FBOs that are not FHCs and are ranked a SOSA 2
• 5 percent of “net due to related depository institutions” for FBOs that are

not FHCs and are ranked a SOSA 3

An FBO that is a FHC or has a SOSA rating of 1 may be eligible for a streamlined
procedure (see section II.E.) for obtaining additional collateralized intraday credit under the
maximum daylight overdraft capacity provision.
In the event a Reserve Bank grants a net debit cap or extends intraday credit to a
financially healthy SOSA 3-ranked FBO, the Reserve Bank may require such credit to be fully
collateralized, given the heightened supervisory concerns with SOSA 3-ranked FBOs.
E. Maximum daylight overdraft capacity
The Board recognizes that while net debit caps provide sufficient liquidity to most
institutions, some institutions may still experience liquidity pressures. The Board believes it is
important to provide an environment in which payment systems may function effectively and
efficiently and to remove barriers, as appropriate, to foster risk-reducing payment system
initiatives. Consequently, certain institutions with self-assessed net debit caps may pledge
collateral to their administrative Reserve Banks to secure daylight overdraft capacity in excess of
their net debit caps, subject to Reserve Bank approval. 67 This policy is intended to provide extra
64

The term “U.S. capital equivalency” is used in this context to refer to the particular capital measure used to
calculate net debit caps and does not necessarily represent an appropriate capital measure for supervisory or other
purposes.
65
The Gramm-Leach-Bliley Act defines a financial holding company as a bank holding company that meets certain
eligibility requirements. In order for a bank holding company to become a financial holding company and be
eligible to engage in the new activities authorized under the Gramm-Leach-Bliley Act, the Act requires that all
depository institutions controlled by the bank holding company be well capitalized and well managed (12 U.S.C.
1841(p)). With regard to a foreign bank that operates a branch or agency or owns or controls a commercial lending
company in the United States, the Act requires the Board to apply comparable capital and management standards
that give due regard to the principle of national treatment and equality of competitive opportunity (12 U.S.C.
1843(l)).
66
The SOSA ranking is composed of four factors, including the FBO’s financial condition and prospects, the system
of supervision in the FBO’s home country, the record of the home country’s government in support of the banking
system or other sources of support for the FBO; and transfer risk concerns. Transfer risk relates to the FBO’s ability
to access and transmit U.S. dollars, which is an essential factor in determining whether an FBO can support its U.S.
operations. The SOSA ranking is based on a scale of 1 through 3, with 1 representing the lowest level of
supervisory concern.
67
The administrative Reserve Bank is responsible for the administration of Federal Reserve credit, reserves, and
risk-management policies for a given institution or other legal entity.
All collateral must be acceptable to the Reserve Banks. The Reserve Banks may accept securities in transit on the
Fedwire Securities Service as collateral to support the maximum daylight overdraft capacity level. Collateral

25

liquidity through the pledge of collateral to the few institutions that might otherwise be
constrained from participating in risk-reducing payment system initiatives. 68 The Board believes
that providing extra liquidity to these few institutions should help reduce liquidity-related market
disruptions.
1. General procedure
An institution with a self-assessed net debit cap that wishes to expand its daylight
overdraft capacity by pledging collateral should consult with its administrative Reserve Bank.
The Reserve Bank will work with an institution that requests additional daylight overdraft
capacity to determine the appropriate maximum daylight overdraft capacity level. In considering
the institution’s request, the Reserve Bank will evaluate the institution’s rationale for requesting
additional daylight overdraft capacity as well as its financial and supervisory information. The
financial and supervisory information considered may include, but is not limited to, capital and
liquidity ratios, the composition of balance sheet assets, CAMELS or other supervisory ratings
and assessments, and SOSA rankings (for U.S. branches and agencies of foreign banks). An
institution approved for a maximum daylight overdraft capacity level must submit at least once
in each twelve-month period a board of directors resolution indicating its board’s approval of
that level.
If the Reserve Bank approves an institution’s request, the Reserve Bank approves a
maximum daylight overdraft capacity level. The maximum daylight overdraft capacity is
defined as follows:
maximum daylight overdraft capacity =

net debit cap +

collateralized capacity 69

The Reserve Banks will review the status of any institution that exceeds its maximum
daylight overdraft capacity limit during a two-week reserve-maintenance period and will decide
if the maximum daylight overdraft capacity should be maintained or if additional action should
be taken (see section II.G.).
Institutions with exempt-from-filing and de minimis net debit caps may not obtain
additional daylight overdraft capacity by pledging additional collateral without first obtaining a
self-assessed net debit cap. Likewise, institutions that have voluntarily adopted zero net debit
caps may not obtain additional daylight overdraft capacity without first obtaining a self-assessed
net debit cap. Institutions that have been assigned a zero net debit cap by their administrative
Reserve Bank are not eligible to apply for any daylight overdraft capacity.

eligibility and margins are the same for PSR policy purposes as for the discount window. See

http://www.frbdiscountwindow.org/ for information.

68
Institutions may consider applying for a maximum daylight overdraft capacity level for daylight overdrafts

resulting from Fedwire funds transfers, Fedwire book-entry securities transfers, National Settlement Service entries,

and ACH credit originations. Institutions incurring daylight overdrafts as a result of other payment activity may be

eligible for administrative counseling flexibility (59 FR 54915-18, Nov. 2, 1994).

69
Collateralized capacity, on any given day, equals the amount of collateral pledged to the Reserve Bank, not to

exceed the difference between the institution’s maximum daylight overdraft capacity level and its net debit cap.

26

2. Streamlined procedure for certain FBOs
An FBO that is a FHC or has a SOSA rating of 1 and has a self-assessed net debit cap
may request from its Reserve Bank a streamlined procedure to obtain a maximum daylight
overdraft capacity. These FBOs are not required to provide documentation of the business need
or obtain the board of directors’ resolution for collateralized capacity in an amount that exceeds
its current net debit cap (which is based on up to 35 percent worldwide capital times its cap
multiple), as long as the requested total capacity is 100 percent or less of worldwide capital times
a self-assessed cap multiple. 70 In order to ensure that intraday liquidity risk is managed
appropriately and that the FBO will be able to repay daylight overdrafts, eligible FBOs under the
streamlined procedure will be subject to initial and periodic reviews of liquidity plans that are
analogous to the liquidity reviews undergone by U.S. institutions. 71 If an eligible FBO requests
capacity in excess of 100 percent of worldwide capital times the self-assessed cap multiple, it
would be subject to the general procedure.
F. Special situations
Under the Board’s policy, certain institutions warrant special treatment primarily because
of their charter types. As mentioned previously, an institution must have regular access to the
discount window and be in sound financial condition in order to adopt a net debit cap greater
than zero. Institutions that do not have regular access to the discount window include Edge and
agreement corporations, bankers’ banks that are not subject to reserve requirements, limitedpurpose trust companies, government-sponsored enterprises (GSEs), and certain international
organizations. Institutions that have been assigned a zero cap by their Reserve Banks are also
subject to special considerations under this policy based on the risks they pose. In developing its
policy for these institutions, the Board has sought to balance the goal of reducing and managing
risk in the payment system, including risk to the Federal Reserve, with that of minimizing the
adverse effects on the payment operations of these institutions.
Regular access to the Federal Reserve discount window generally is available to
institutions that are subject to reserve requirements. If an institution that is not subject to reserve
requirements and thus does not have regular discount-window access were to incur a daylight
overdraft, the Federal Reserve might end up extending overnight credit to that institution if the
daylight overdraft were not covered by the end of the business day. Such a credit extension
would be contrary to the quid pro quo of reserves for regular discount-window access as
reflected in the Federal Reserve Act and in Board regulations. Thus, institutions that do not have
regular access to the discount window should not incur daylight overdrafts in their Federal
Reserve accounts.
Certain institutions are subject to a daylight-overdraft penalty fee levied against the
average daily daylight overdraft incurred by the institution. These include Edge and agreement
corporations, bankers’ banks that are not subject to reserve requirements, and limited-purpose
trust companies. The annual rate used to determine the daylight-overdraft penalty fee is equal to
the annual rate applicable to the daylight overdrafts of other institutions (50 basis points) plus
70

For example, a financial holding company is eligible for uncollateralized capacity of 35 percent of worldwide
capital times the cap multiple. The streamlined max cap procedure would provide such an institution with additional
collateralized capacity of 65 percent of worldwide capital times the cap multiple.
71
The liquidity reviews will be conducted by the administrative Reserve Bank, in consultation with each FBO’s
home country supervisor.

27

100 basis points multiplied by the fraction of a 24-hour day during which Fedwire is scheduled
to operate (currently 21.5/24). The daily daylight-overdraft penalty rate is calculated by dividing
the annual penalty rate by 360. 72 The daylight-overdraft penalty rate applies to the institution’s
daily average daylight overdraft in its Federal Reserve account. The daylight-overdraft penalty
rate is charged in lieu of, not in addition to, the rate used to calculate daylight overdraft fees for
institutions described in this section.
Institutions that are subject to the daylight-overdraft penalty fee are not eligible for the
$150 fee waiver and are subject to a minimum fee of $25 on any daylight overdrafts incurred in
their Federal Reserve accounts. While such institutions may be required to post collateral, they
are not eligible for the zero fee associated with collateralized daylight overdrafts.
1. Edge and agreement corporations 73
Edge and agreement corporations should refrain from incurring daylight overdrafts in
their Federal Reserve accounts. In the event that any daylight overdrafts occur, the Edge or
agreement corporation must post collateral to cover the overdrafts. In addition to posting
collateral, the Edge or agreement corporation would be subject to the daylight-overdraft penalty
rate levied against the average daily daylight overdrafts incurred by the institution, as described
above.
This policy reflects the Board’s concerns that these institutions lack regular access to the
discount window and that the parent company may be unable or unwilling to cover its
subsidiary’s overdraft on a timely basis. The Board notes that the parent of an Edge or
agreement corporation could fund its subsidiary during the day over Fedwire or the parent could
substitute itself for its subsidiary on private systems. Such an approach by the parent could both
reduce systemic risk exposure and permit the Edge or agreement corporation to continue to
service its customers. Edge and agreement corporation subsidiaries of FBOs are treated in the
same manner as their domestically owned counterparts.
2. Bankers’ banks 74
Bankers’ banks are exempt from reserve requirements and do not have regular access to
the discount window. Bankers’ banks should refrain from incurring daylight overdrafts and must
post collateral to cover any overdrafts they do incur. In addition to posting collateral, a bankers’
bank would be subject to the daylight-overdraft penalty fee levied against the average daily
daylight overdrafts incurred by the institution, as described above.
The Board’s policy for bankers’ banks reflects the Reserve Banks’ need to protect
themselves from potential losses resulting from daylight overdrafts incurred by bankers’ banks.
The policy also considers the fact that some bankers’ banks do not incur the costs of maintaining
72

Under the current 21.5-hour Fedwire operating day, the effective daily daylight-overdraft penalty rate is truncated
to 0.0000373.
73
These institutions are organized under section 25A of the Federal Reserve Act (12 U.S.C. 611–631) or have an
agreement or undertaking with the Board under section 25 of the Federal Reserve Act (12 U.S.C. 601–604(a)).
74
For the purposes of this policy, a bankers’ bank is a depository institution that is not required to maintain reserves
under the Board’s Regulation D (12 CFR 204) because it is organized solely to do business with other financial
institutions, is owned primarily by the financial institutions with which it does business, and does not do business
with the general public. Such bankers’ banks also generally are not eligible for Federal Reserve Bank credit under
the Board's Regulation A (12 CFR § 201.2(c)(2)).

28

reserves as some other institutions and do not have regular access to the discount window.
Bankers’ banks may voluntarily waive their exemption from reserve requirements, thus
gaining access to the discount window. Such bankers’ banks are free to establish net debit caps
and would be subject to the same policy as other institutions that are eligible to incur daylight
overdrafts. The policy set out in this section applies only to those bankers’ banks that have not
waived their exemption from reserve requirements.
3. Limited-purpose trust companies 75
The Federal Reserve Act permits the Board to grant Federal Reserve membership to
limited-purpose trust companies subject to conditions the Board may prescribe pursuant to the
Act. As a general matter, member limited-purpose trust companies do not accept reservable
deposits and do not have regular discount-window access. Limited-purpose trust companies
should refrain from incurring daylight overdrafts and must post collateral to cover any overdrafts
they do incur. In addition to posting collateral, limited-purpose trust companies would be subject
to the same daylight-overdraft penalty rate as other institutions that do not have regular access to
the discount window.
4. Government-sponsored enterprises and international organizations 76
The Reserve Banks act as fiscal agents for certain GSEs and international organizations
in accordance with federal statutes. These institutions, however, are not subject to reserve
requirements and do not have regular access to the discount window. GSEs and international
organizations should refrain from incurring daylight overdrafts and must post collateral to cover
any daylight overdrafts they do incur. In addition to posting collateral, these institutions would
be subject to the same daylight-overdraft penalty rate as other institutions that do not have
regular access to the discount window.
5. Problem institutions
For institutions that are in weak financial condition, the Reserve Banks will impose a
zero cap. The Reserve Bank will also monitor the institution’s activity in real time and reject or
delay certain transactions that would create an overdraft. Problem institutions should refrain
from incurring daylight overdrafts and must post collateral to cover any daylight overdrafts they
do incur.

75

For the purposes of this policy, a limited-purpose trust company is a trust company that is a member of the
Federal Reserve System but that does not meet the definition of “depository institution” in section 19(b)(1)(A) of the
Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
76
The GSEs include Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), entities of the Federal Home Loan Bank System (FHLBS), the Farm Credit System, the
Federal Agricultural Mortgage Corporation (Farmer Mac), the Student Loan Marketing Association (Sallie Mae),
the Financing Corporation, and the Resolution Funding Corporation. The international organizations include the
World Bank, the Inter-American Development Bank, the Asian Development Bank, and the African Development
Bank. The Student Loan Marketing Association Reorganization Act of 1996 requires Sallie Mae to be completely
privatized by 2008; however, Sallie Mae completed privatization at the end of 2004. The Reserve Banks no longer
act as fiscal agents for new issues of Sallie Mae securities, and Sallie Mae is not considered a GSE.

29

G. Monitoring
1. Ex post
Under the Federal Reserve’s ex post monitoring procedures, an institution with a daylight
overdraft in excess of its maximum daylight overdraft capacity or net debit cap may be contacted
by its Reserve Bank. Overdrafts above the cap for institutions with de minimis, self-assessed,
and max caps may be treated differently, depending on whether the overdraft is collateralized. 77
If the overdraft is fully collateralized, the Reserve Bank may choose not to contact the institution
for up to two incidents per two consecutive two-week reserve-maintenance periods (the total of
four weeks).
Each Reserve Bank retains the right to protect its risk exposure from individual
institutions by unilaterally reducing net debit caps, imposing (additional) collateralization or
balance requirements, rejecting or delaying certain transactions as described below, or, in
extreme cases, taking the institution offline or prohibiting it from using Fedwire.
2. Real time
A Reserve Bank will apply real-time monitoring to an individual institution’s position
when the Reserve Bank believes that it faces excessive risk exposure, for example, from problem
banks or institutions with chronic overdrafts in excess of what the Reserve Bank determines is
prudent. In such a case, the Reserve Bank will control its risk exposure by monitoring the
institution’s position in real-time, rejecting or delaying certain transactions that would exceed the
institution’s maximum daylight overdraft capacity or net debit cap, and taking other prudential
actions, including requiring (additional) collateral. 78
3. Multi-District institutions
An institution maintaining merger-transition accounts or an Edge or agreement
corporation that accesses Fedwire through master accounts in more than one Federal Reserve
District is expected to manage its accounts so that the total daylight overdraft position across all
accounts does not exceed the institution’s net debit cap. One Reserve Bank will act as the
administrative Reserve Bank and will have overall risk-management responsibilities for an
institution maintaining master accounts in more than one Federal Reserve District. For domestic
institutions that have branches in multiple Federal Reserve Districts, the administrative Reserve
Bank generally will be the Reserve Bank where the head office of the bank is located.
U.S. branches and agencies of the same foreign bank (also referred to as an FBO family)
are assigned one net debit cap per FBO family. FBO families that access Fedwire through
master accounts in more than one Federal Reserve District are expected to manage their accounts
so that the daylight overdraft position in each account does not exceed the capacity allocated to
that account from the FBO family’s net debit cap. The administrative Reserve Bank generally is
77
For monitoring exempt institutions, overdrafts above the exempt cap limit, regardless of whether such overdrafts
are collateralized or uncollateralized, should occur no more than twice in two consecutive two-week reservemaintenance periods (the total of four weeks).
78
Institutions that are monitored in real time must fund the total amount of their ACH credit originations through the
Reserve Banks in order for the transactions to be processed by the Federal Reserve, even if those transactions are
processed one or two days before settlement.

30

the Reserve Bank that exercises the Federal Reserve’s oversight responsibilities under the
International Banking Act. 79 The administrative Reserve Bank, in consultation with the
management of the foreign bank’s U.S. operations and with Reserve Banks in whose territory
other U.S. agencies or branches of the same foreign bank are located, may recommend that these
agencies and branches not be permitted to incur overdrafts in Federal Reserve accounts.
Alternatively, the administrative Reserve Bank, after similar consultation, may recommend that
all or part of the foreign family’s net debit cap be allocated to the Federal Reserve accounts of
agencies or branches that are located outside of the administrative Reserve Bank’s District; in
this case, the Reserve Bank in whose Districts those agencies or branches are located will be
responsible for administering all or part of this policy. 80
H. Transfer-size limit on book-entry securities
Secondary-market book-entry securities transfers on Fedwire are limited to a transfer size
of $50 million par value. This limit is intended to encourage partial deliveries of large trades in
order to reduce position building by dealers, a major cause of book-entry securities overdrafts
before the introduction of the transfer-size limit and daylight overdraft fees. This limitation does
not apply to either of the following:
a. Original issue deliveries of book-entry securities from a Reserve Bank to an

institution

b. Transactions sent to or by a Reserve Bank in its capacity as fiscal agent of

the United States, government agencies, or international organizations.

Thus, requests to strip or reconstitute Treasury securities or to convert bearer or registered
securities to or from book-entry form are exempt from this limitation. Also exempt are pledges
of securities to a Reserve Bank as principal (for example, discount-window collateral) or as
agent (for example, Treasury Tax and Loan collateral).

79

12 U.S.C. 3101–3108.
As in the case of Edge and agreement corporations and their branches, with the approval of the designated
administrative Reserve Bank, a second Reserve Bank may assume the responsibility for administering this policy
regarding particular foreign branch and agency families. This would often be the case when the payments activity
and national administrative office of the foreign branch and agency family is located in one District, while the
oversight responsibility under the International Banking Act is in another District. If a second Reserve Bank
assumes management responsibility, monitoring data will be forwarded to the designated administrator for use in the
supervisory process.
80

31

APPENDIX – CPSS-IOSCO PRINCIPLES FOR FINANCIAL MARKET
INFRASTRUCTURES
Principle 1: Legal basis
An FMI should have a well-founded, clear, transparent, and enforceable legal basis for each
material aspect of its activities in all relevant jurisdictions.
Principle 2: Governance
An FMI should have governance arrangements that are clear and transparent, promote the safety
and efficiency of the FMI, and support the stability of the broader financial system, other
relevant public interest considerations, and the objectives of relevant stakeholders.
Principle 3: Framework for the comprehensive management of risks
An FMI should have a sound risk-management framework for comprehensively managing legal,
credit, liquidity, operational, and other risks.
Principle 4: Credit risk
An FMI should effectively measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes. An FMI should maintain
sufficient financial resources to cover its credit exposure to each participant fully with a high
degree of confidence. In addition, a central counterparty that is involved in activities with a
more-complex risk profile or that is systemically important in multiple jurisdictions should
maintain additional financial resources sufficient to cover a wide range of potential stress
scenarios that should include, but not be limited to, the default of the two participants and their
affiliates that would potentially cause the largest aggregate credit exposure to the central
counterparty in extreme but plausible market conditions. All other central counterparties should
maintain additional financial resources sufficient to cover a wide range of potential stress
scenarios that should include, but not be limited to, the default of the participant and its affiliates
that would potentially cause the largest aggregate credit exposure to the central counterparty in
extreme but plausible market conditions.
Principle 5: Collateral
An FMI that requires collateral to manage its or its participants’ credit exposure should accept
collateral with low credit, liquidity, and market risks. An FMI should also set and enforce
appropriately conservative haircuts and concentration limits.
Principle 6: Margin
A central counterparty should cover its credit exposures to its participants for all products
through an effective margin system that is risk-based and regularly reviewed.
Principle 7: Liquidity risk
An FMI should effectively measure, monitor, and manage its liquidity risk. An FMI should
maintain sufficient liquid resources in all relevant currencies to effect same-day and, where
appropriate, intraday and multiday settlement of payment obligations with a high degree of
confidence under a wide range of potential stress scenarios that should include, but not be limited
32

to, the default of the participant and its affiliates that would generate the largest aggregate
liquidity obligation for the FMI in extreme but plausible market conditions.
Principle 8: Settlement finality
An FMI should provide clear and certain final settlement, at a minimum by the end of the value
date. Where necessary or preferable, an FMI should provide final settlement intraday or in real
time.
Principle 9: Money settlements
An FMI should conduct its money settlements in central bank money where practical and
available. If central bank money is not used, an FMI should minimize and strictly control the
credit and liquidity risk arising from the use of commercial bank money.
Principle 10: Physical deliveries
An FMI should clearly state its obligations with respect to the delivery of physical instruments or
commodities and should identify, monitor, and manage the risks associated with such physical
deliveries.
Principle 11: Central securities depositories
A central securities depository should have appropriate rules and procedures to help ensure the
integrity of securities issues and minimize and manage the risks associated with the safekeeping
and transfer of securities. A central securities depository should maintain securities in an
immobilized or dematerialized form for their transfer by book entry.
Principle 12: Exchange-of-value settlement systems
If an FMI settles transactions that involve the settlement of two linked obligations (for example,
securities or foreign exchange transactions), it should eliminate principal risk by conditioning the
final settlement of one obligation upon the final settlement of the other.
Principle 13: Participant-default rules and procedures
An FMI should have effective and clearly defined rules and procedures to manage a participant
default. These rules and procedures should be designed to ensure that the FMI can take timely
action to contain losses and liquidity pressures and continue to meet its obligations.
Principle 14: Segregation and portability
A central counterparty should have rules and procedures that enable the segregation and
portability of positions of a participant’s customers and the collateral provided to the central
counterparty with respect to those positions.
Principle 15: General business risk
An FMI should identify, monitor, and manage its general business risk and hold sufficient liquid
net assets funded by equity to cover potential general business losses so that it can continue
operations and services as a going concern if those losses materialize. Further, liquid net assets
should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations
and services.

33

Principle 16: Custody and investment risks
An FMI should safeguard its own and its participants’ assets and minimize the risk of loss on and
delay in access to these assets. An FMI’s investments should be in instruments with minimal
credit, market, and liquidity risks.
Principle 17: Operational risk
An FMI should identify the plausible sources of operational risk, both internal and external, and
mitigate their impact through the use of appropriate systems, policies, procedures, and controls.
Systems should be designed to ensure a high degree of security and operational reliability and
should have adequate, scalable capacity. Business continuity management should aim for timely
recovery of operations and fulfilment of the FMI’s obligations, including in the event of a widescale or major disruption.
Principle 18: Access and participation requirements
An FMI should have objective, risk-based, and publicly disclosed criteria for participation,
which permit fair and open access.
Principle 19: Tiered participation arrangements
An FMI should identify, monitor, and manage the material risks to the FMI arising from tiered
participation arrangements.
Principle 20: FMI links
An FMI that establishes a link with one or more FMIs should identify, monitor, and manage linkrelated risks.
Principle 21: Efficiency and effectiveness
An FMI should be efficient and effective in meeting the requirements of its participants and the
markets it serves.
Principle 22: Communication procedures and standards
An FMI should use, or at a minimum accommodate, relevant internationally accepted
communication procedures and standards in order to facilitate efficient payment, clearing,
settlement, and recording.
Principle 23: Disclosure of rules, key procedures, and market data
An FMI should have clear and comprehensive rules and procedures and should provide sufficient
information to enable participants to have an accurate understanding of the risks, fees, and other
material costs they incur by participating in the FMI. All relevant rules and key procedures
should be publicly disclosed.
Principle 24: Disclosure of market data by trade repositories
A trade repository should provide timely and accurate data to relevant authorities and the public
in line with their respective needs.

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