Chemical Bank and merger partner Manufacturers Hanover Trust Co. are gearing up to convert to a single funds-transfer system this weekend.

The move would create one of the biggest such operations in the country.

The conversion is being closely watched by risk managers in the wake of last week's systems mishap at the Federal Reserve Bank of New York. Sources said this problem halted all Hanover's funds transfers with other banks,.

The systems problem delayed billions of dollars worth of payments for over four hours June 9 until the Fed finally ironed out the problem. Banks were able to clear their transactions by 11 p.m.

Risk-Management Issues

Bankers' awareness of operations risk in the payments system is growing. It was fueled not only by last week's Fed Wire problem, but also by a major power outage last year that helped bring down Citicorp's funds-transfer system.

And for Chemical, the conversion to a unified funds-transfer system is crucial to its own risk management and the merging of operations with Manufacturers Hanover.

The funds-transfer system communicates with most other systems in the bank on both the wholesale and retail side.

"All the issues of risk-management analysis have to be worked through" in building a unified funds-transfer system "to ensure they are able to manage and execute their transactions on a daily basis," said Lawrence A. Willis, a principal with First Manhattan Consulting Co., New York.

Ahead of Schedule

The Chemical staff seems confident that this weekend all will go as planned. The bank has been testing the software to be used every weekend since early May, with 300-400 employees participating in each test, according to Yawar Shah, senior vice president at Chemical.

The bank has completed the conversion ahead of schedule, moving up its target date to June 19, from the end of the month.

Chemical will have a single feed to the New York Clearing House Association's Chips system, to the Federal Reserve's Fed Wire, and to the international messaging system Swift.

And by Monday, Chemical will be able to pass information from the funds-transfer system to wholesale and retail demand-deposit accounts at both Chemical and Hanover.

Chemical has chosen to build interfaces between its systems and the ones at Hanover, enabling the bank to migrate gradually to a single system in areas such as retail deposit accounts.

The bank has chosen to keep core payment system accounting systems from Hanover; however, customers will continue to use the same software and procedures for initiating funds transfers, such as ChemLink, that they have in the past.

Chemical plans to move commercial customers gradually to new software for accessing the funds-transfer system.

Retail Merger Coming

The bank may decide to develop new software, according to Samuel Newman, senior vice president at Chemical.

Eventually, the funds-transfer system will need to communicate only with a single retail deposit system.

In October, the bank will begin to convert retail systems at Hanover to hardware and software from Systematics Financial Services Inc., Little Rock, Ark. Chemical branches will be converted to Systematics systems at a later date.

Chemical will realize some savings from the wire-transfer conversion.

Employees at Chemical's old funds transfer operation at 55 Water St., which the bank leases, will move to 4 New York Plaza, which it owns.

Staff will be streamlined. Of a current staff of about 675, about 100 will leave through attrition and through an early retirement plan announced this month, Mr. Newman said.

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