N.Y. Clearing House Adopts Fed's Settlement System

settlement system developed by the Federal Reserve.

The enhanced system, applicable to any multilateral netting scheme, was unveiled in March and makes automated clearing house transactions final on the day payments are settled.

The service addresses a seldom-discussed technical risk tied to the fact that ACH and check payments that are settled and made available to corporations and consumers are not truly final until the day after settlement. The failure of an originating bank could leave recipients holding the bag if the transaction sequence has to be reversed.

"We have been fighting for this for a long time," said Paul Enright, a vice president at Bankers Trust Co., a subsidiary of Deutsche Bank. "It significantly reduces the systemic risk within the ACH payments system."

Using the new service, multilateral netting systems would transmit accounting entries to the Fed. Finality is achieved on settlement day when the Fed posts entries to reserve accounts.

Bankers Trust's cash management sales force will boost its ACH marketing efforts to large corporate customers, Mr. Enright said, especially to those that have shied away from using that network for large-value, business-to-business transactions.

The New York Clearing House had lobbied the Fed for same-day finality since 1992, and officials there said they are extremely happy to have won this concession. "It gives us national settlement capabilities, which we never had before," said senior vice president George Thomas.

To a degree, private-sector clearing houses have delivered services with same-day finality. To speed up finality and to expand nationally, groups such as the National Clearinghouse Association have based their systems on Fed Wire for settlement.

Under Fed rules, all participants with net credit positions must send Fed Wires to the clearing house before banks in net debit positions can get their funds.

"The only way we could do a national, final ACH settlement was to do the wire transfer, which was too cumbersome for us operationally to implement," Mr. Thomas said.

Electronic Payments Network, the ACH unit of the New York Clearing House, has been adapting to the same-day service for the last six months. Much of the work required legal reviews of new settlement agreements with its 229 participants in the second Federal Reserve district.

Dara Hunt, senior vice president at the Federal Reserve Bank of New York and a manager of the Fed's wholesale payments product office, said the enhanced service resulted from the Fed's increased willingness to work with the private sector for the benefit of the entire financial system.

The Fed, which still provides the bulk of payment system services to the banking industry, has recognized that multilateral netting is a powerful tool that banks can use to reduce intraday liquidity requirements.

The enhanced service could be appropriate for the 130 clearing houses the Fed deals with. "Participants can be located across our boundaries, and we can provide the service to a much wider array of clearing arrangements," Ms. Hunt said. "You don't have to clear through us, but you can still achieve settlement through us."

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