Booklet: Wholesale Payment Systems
Section: Wholesale Payment Systems Risk Management
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Action Summary additional information.

Wholesale payment systems risk management should include the identification, measurement, mitigation, and management of risks related to a financial institution’s wholesale payments and securities settlement activities. These risks arise in the process of originating wholesale payment or securities settlement transactions and in the process for clearing and settling these transactions. Financial institutions should employ sound risk-management processes to identify and control these risks.

In identifying its potential risks, the financial institution should consider the risks it may be exposed to from the process of creating and transmitting payment orders or securities delivery instructions; from participating in wholesale payments and securities settlement systems directly, including any loss-sharing or liquidity provision procedures associated with these systems; from participating in such systems indirectly through a correspondent; and, for some institutions, from providing operational or other supporting services to a wholesale payments or securities settlement system, including any credit or liquidity facilities the institution provides to the system beyond those associated with participation in the system (either directly to the system operator or indirectly though the system’s participants).

Sound risk management involves a combination of policies, processes, people, and reporting systems that address the credit, liquidity, operational, and legal risks borne by an institution as a result of its wholesale payments and securities settlement activities. For example, the institution should have credit policies and controls, such as limits on customers’ daylight overdrafts. The appropriate staff should have a clear understanding of the normal, abnormal, and contingent liquidity demands that may arise from the institutions participation in wholesale payment systems, and liquidity management and treasury procedures should take these demands into consideration.

Operational policies and controls should cover the critical and core systems that support an institution’s wholesale payment activities and address areas such as business continuity planning, crisis management, physical and logical information security, and vendor management. Finally, an institution should use appropriate measures to identify and mitigate its legal risks, including risk arising from compliance with federal and state laws, customer agreements, counterparty agreements, relevant payments laws, rules and regulations, and wholesale payment system policies and procedures.
Management and the board of directors should also oversee the implementation of the risk management strategy, policies, and controls through appropriate governance arrangements, effective external and internal audits, and appropriate management information systems.

PAYMENTS SYSTEM RISK (PSR) POLICY
Given the role of payments and securities settlement systems as critical components of the nation’s financial system, the Federal Reserve Board has developed a policy to foster the safety and efficiency of these systems.additional information.

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

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

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