|
Booklet:
Wholesale
Payment Systems Section: Appendix D: Legal Framework for Interbank Payment Systems Subsection: |
|||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
State
and federal statutes, regulations, and case law govern the payment systems
in the United States. The relevant legal principles depend on the method
of payment (paper-based or electronic) and in some cases the status of
parties to a payment (consumer, merchant, or financial institution). Several
federal laws apply to payment activities, particularly in the consumer
sector. At the state level, the Uniform Commercial Code (UCC) establishes
a set of model statutes governing certain commercial and financial activities,
including some banking and securities market transactions. Articles of
the UCC pertinent to payment and settlement activities are the following:
Article 3 (negotiable instruments), Article 4 (bank deposits and collections),
Article 4A (funds transfers, including wholesale ACH credit transfers)
and Article 8 (investment securities).
Every state has incorporated these Articles, sometimes with local variations,
into the state laws. In addition, the rules and membership agreements
of private clearing and settlement arrangements provide a contractual
framework for payment activity within the relevant governing law.
Fedwire Funds Service
The Federal Reserve’s Regulation J governs payment transactions
using the Fedwire Funds Service and incorporates the requirements of Article
4A of the UCC. The Regulation, in particular subpart B, defines the rights
and responsibilities of financial institutions that use Fedwire, as well
as the rights and responsibilities of the Federal Reserve Bank. Federal
Reserve Bank Operating Circular 6 covers items such as Fedwire operating
hours, security, authentication, fees, and certain restrictions.
It
also contains time schedules, holidays, and guidelines pertaining to the
extension of Fedwire hours.
Under subpart B of Regulation J and Operating Circular 6, the Federal
Reserve Banks can impose conditions on an institution’s use of Fedwire.
In particular, the regulation and operating circular require each Fedwire
participant to enter into a security procedure agreement with its Federal
Reserve Bank and includes institution responsibilities for information
security, business continuity, and related administrative information.
Federal Reserve Regulation CC, Availability of Funds and Collection of
Checks, also regulates the time within which a depository institution
receiving a Fedwire or CHIPS funds transfer on behalf of a customer must
make those funds available to its customer.
National Settlement Service (NSS)
Federal Reserve Bank Operating Circular 12 establishes the terms and conditions
under which participants using NSS submit settlement files to the Federal
Reserve Banks. The provision of intraday settlement finality is similar
to the Fedwire Funds Service and enables the Federal Reserve Banks to
manage and limit settlement risk by incorporating risk controls on extensions
of daylight credit.
Messaging Systems
Payment messaging systems allow financial institutions to initiate payment
orders, providing that the institution is authorized to act on behalf
of its customers. It is important for financial institutions to establish
the authenticity and time of receipt of payment order messages. UCC4A
establishes responsibility for the execution of a payment order and requires
financial institutions to agree to the terms and conditions established
by the responsible messaging system with respect to security procedures.
CHIPS
Funds transfers made through CHIPS are subject to CHIPS rules and procedures.
The CHIPS rules stipulate that the laws of the state of New York, which
include Article 4A of the UCC, also apply to CHIPS transactions. CHIP
Co. is not responsible for losses resulting from system errors. Each participant
agrees to indemnify and to hold harmless CHIPS from such losses. Any participant
losses are settled by a loss sharing agreement, and if a participant commits
a fraud, that participant will bear the loss. CHIP Co. maintains a financial
institution bond for possible employee fraud. Losses exceeding CHIPS's
bond coverage are shared on a pro rata basis of each participant's average
daily CHIPS usage for the 30-day calendar period preceding the notice
of loss to the underwriters of the bond.