Booklet: Wholesale Payment Systems
Section: Intrabank Payment and Messaging Systems
Subsection: Internally Developed and Off-The-Shelf
Funds Transfer Systems
 

 

 

 

 

 

Action Summary additional information.
Financial institutions rely on internal funds transfer systems and networks to send payment instructions to their correspondents for the transfer of correspondent balances or to initiate Fedwire Funds Service or CHIPS payments. Large financial institutions have either developed their own funds transfer systems or relied on off-the-shelf funds transfer systems. In either case, the internal financial institution funds transfer systems interface with Fedwire Funds Service and CHIPS, supporting the interface and transaction format specifications for the transmission of payment orders. Off-the-shelf funds transfer systems typically support a variety of treasury, cash management, and straight-through-processing (STP) modules, which automate payment order processing.

The Federal Reserve Banks provide the Computer Interface Protocol Specifications (CIPS) that funds transfer and book-entry securities systems need to adopt in order to implement a CI connection successfully. The Federal Reserve provides a website with a list of vendors who have completed the Federal Reserve Banks’ protocol certification process.additional information. The Federal Reserve Banks do not endorse any specific software vendor or product. The Federal Reserve Banks make no warranties or representations with respect to any of the products offered by these vendors except that communication-level software correctly executes systems network architecture (SNA) commands as specified in the CIPS.

PAYMENT MESSAGING SYSTEMS
Financial institutions, corporations, and other organizations employ wholesale payment message systems to originate payment orders, either for their own benefit or for a third party. These systems are indispensable components of funds transfer activities. Unlike payment systems, which transmit actual debit and credit entries, message systems process administrative messages and instructions to move funds. The actual movement of the funds is then accomplished by initiating the actual entries to debit the originating customer's account and credit the beneficiary's account at one or more financial institutions. If the beneficiary's account or the beneficiary institution's account is also with the originator's institution, the institution normally handles the transaction internally through a book transfer. If the beneficiary related accounts are outside the originating customer's institution, the parties will complete the transfer by use of a payments system such as Fedwire Funds Service or CHIPS. The means of arranging payment orders range from manual methods (e.g., memos, letters, telephone, fax, or standing instruction) to electronic methods using telecommunications networks. These networks may include those operated by the private sector, such as SWIFT or Telex, or operated internally by or for the institution. The internal networks can be for inter-company purposes only or connected to customer sites.

Since the payment order is the institution's authorization to act on behalf of the customer, it is imperative that a system is in place to establish the authenticity and time of receipt of the order. These two elements are the primary components cited by the Uniform Commercial Code Article 4A (UCC4A) in establishing responsibility for the execution of a payment order. Even though the transfers initiated through systems such as SWIFT and Telex do not result in the immediate transfer of funds from the issuing institution, they do result in the issuing institution having an immediate liability, which is payable to the disbursing institution. Therefore, the physical and logical controls surrounding payments messaging systems should include:

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 Physical controls limiting access to only those staff members assigned responsibility for managing the payment messaging system;

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 Logical access controls restricting access on a need to know basis;

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 Assigning access to payment messaging application and data based on functional job duties and requirements; and

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 Identification and authentication controls used to authenticate access to payment messaging systems.

IN-HOUSE TERMINALS
Some financial institutions employ terminals, connected via telecommunications networks with customers and the institutions’ operating departments, to execute funds payment orders. These systems may be dial-up or dedicated lines and are often fully interfaced to the institution's funds payments system. The primary security method is the use of unique passwords for each user of the system. Since there is often no intervention by the funds payment operation, it is necessary to establish controls directly in the area employing the terminals. These controls should cover origination, data entry, and release, and should be the same as those associated with an independent funds payment function.

NON-AUTOMATED PAYMENT ORDER ORIGINATION
While in-house terminals are the primary sources for payment order origination, less complex institutions still rely heavily on memos, letters, telephone, fax, or standing instructions. (Note: standing instructions are normally maintained in the automated funds transfer system as recurring transfers and should be subject to the same input/verification controls as wires when first entered into the system). It is imperative that an institution using these payment order methods has a viable security program, which includes:

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 Maintaining signature lists for use with internally and externally generated memos, letters, or fax instructions. As noted in UCC4A Section 201, signature verification alone is not defined as a security procedure; however, institutions may use it with other security devices such as call backs or codes.

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 Call back to authorized individuals for both internally and externally generated telephone instructions.

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 Procedures covering standing instructions protecting against unauthorized change, periodic review to validate accuracy, and ensuring execution under the agreed terms.