Fed Announces Fully Automated Settlement Plan

The Federal Reserve Board on Tuesday unveiled a service to help banks that use clearing houses to settle checks and other types of payments.

Effective March 29, the Fed will offer a fully automated settlement service that completes payments the day they are made without requiring participating banks to initiate Fed Wire transactions.

To use the product, known as the enhanced settlement service, a clearing house would submit to the Fed an electronic list of how much, on net, participating banks owe each other. The Fed would then deduct those sums from each bank's reserve account. When all the accounts are debited, the Fed would go back through the list and credit each account the amount due. The payments are final when made.

This service differs from the two settlement products now offered by the Fed. For the so-called traditional settlement service, the Fed processes all debits and credits but retains the right to reverse a payment the next day if a bank fails to cover its debts.

For the so-called Fed Wire settlement service, a clearing house notifies participating banks how much they need to send via Fed Wire to a special settlement account to cover payments presented that day. When all Fed Wire transfers have been made, the clearing house pays each bank the amount it is owed.