Booklet: Wholesale Payment Systems
Section: Securities Settlement Systems
Subsection: U.S. Government Securities
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The U.S. government securities market encompasses all primary and secondary market transactions in securities issued by the U.S. Treasury, certain federal government agencies, and federal government-sponsored enterprises.additional information. Trading in government securities is conducted over the counter between brokers, dealers, and investors. In over-the-counter trading, participants trade with one another on a bilateral basis rather than on an organized exchange. Nearly all U.S. government securities are issued and transferred through a book-entry system operated by the Federal Reserve.

In the primary market, U.S. Treasury securities are issued through regularly scheduled auctions. The Federal Reserve Banks serve as conduits for the auctions, with the Federal Reserve Bank of New York coordinating much of the auction activity. Individuals, corporations and financial institutions may participate in the auctions. Participation in Treasury auctions, however, is typically concentrated among a small number of dealer firms, known as primary dealers.additional information.

In the secondary market for government securities, trading activity takes place between primary dealers and non-primary dealers. Customers of these dealers are financial institutions, non-financial institutions and individuals. The majority of transactions between primary dealers and other large market participants are conducted through inter-dealer brokers that provide both anonymity and price information to market participants. Approximately 2,000 securities brokers and dealers are registered to operate in the U.S. government securities market.

FIXED INCOME CLEARING CORPORATION (FICC)
FICC,additional information. composed of the Government Securities Division (GSD) and the Mortgage-Backed Securities Division (MBSD), compares and nets trades of U.S. Treasury securities, agency debt securities, and mortgage-backed securities. As the name implies, GSD clears and nets U.S. government securities and agency debt securities. MBSD provides automated post-trade comparison, netting, risk-management, and pool notification services to the mortgage-backed securities market. Securities eligible for MBSD clearing are mortgage-backed securities issued by the Government National Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal National Mortgage Association (FNMA).

FICC uses real time trade matching; trade details are compared and matched as soon as trade information is submitted. Successfully compared trades result in binding and enforceable obligations for settlement. Unmatched trades may be revised to achieve a trade match.

Successfully matched trades of eligible securities, for FICC netting service participants, are netted against offsetting net-receive or net-deliver obligation of the same security. Once the government securities net positions are determined GSD interposes itself between the original trading parties and becomes the legal counter-party to FICC members for settlement purposes. Therefore, GSD members’ net settlement obligations are delivered to or received from GSD. MBSD, however, engages in multilateral position netting and does not stand in the middle of transactions. Final net settlement obligations of GSD and MBSD participants are settled through the Fedwire Securities Service via participants’ settlement bank.

FEDWIRE SECURITIES SERVICE
As fiscal agents of the United States, the Federal Reserve Banks act as the securities depository for all marketable U.S. Treasury securities, many federal agency securities, and certain mortgage-backed securities issued by GSEs.additional information. U.S. government securities are issued in book-entry form through the Federal Reserve’s Fedwire Securities Service using either an auction process or dealer syndicate mechanisms. The Federal Reserve’s Fedwire Securities Service provides for the safekeeping and transfer of these securities. The safekeeping function involves the records of securities balances, and the transfer and settlement function involves the transfer of securities between parties.

When book-entry securities transfers are processed using Fedwire Security Service, the institution sending the transfer receives immediate credit in its Federal Reserve (funds) account for the payment associated with the transfer, and its securities account is correspondingly debited. The Federal Reserve (funds) account of the institution receiving a book-entry securities transfer is debited for the payment amount, and its securities account is credited. There are more than 9,000 participants in the system and they are largely composed of depository institutions.

The Federal Reserve’s Fedwire Securities Service is supported by a real-time, delivery-versus-payment (DVP) gross settlement system that provides for the immediate, final, and simultaneous transfer of securities against the settlement of funds. This system, known as the National Book-Entry System (NBES), provides for the safekeeping and transfer of U.S. Treasury, government agency, and GSE securities as well as securities issued by certain international organizations. The safekeeping function involves the electronic storage of securities records in custody accounts, and the transfer and settlement function involves the transfer of securities between parties.

Financial institutions may access the Fedwire Securities Service via high-speed direct CI, FedLine, or with off-line telephone connectivity with a Federal Reserve Bank. Financial institutions may also access certain Fedwire Securities Service inquiry information via FedLine for the Web. On-line participants, using either a mainframe or FedLine PC connection to Fedwire Securities Service, require no manual processing by the Federal Reserve Banks. Off-line participants provide funds transfer instructions to their Federal Reserve Bank by telephone, and once authenticated, the Federal Reserve Bank enters the transfer instruction into the Fedwire Securities Service system for execution. The manual processing required for off-line requests makes them more costly and suitable only for institutions processing a small number of funds transfer payment orders.