The Federal Reserve appears to be making progress on addressing a long- simmering risk in the automated clearing house system.
The Fed, which is the dominant processor of ACH transactions, is expected to propose a solution in mid-May to a problem with the finality of ACH payments. It has gone unresolved since the Fed issued recommendations in 1986 that were never acted upon. The Fed is currently analyzing formal comments on the issue.
Risk arises from the fact that ACH credits are settled and available to corporations and consumers a day before they are considered truly final. The failure of a payment-originating bank could cause havoc among recipients and undermine corporate and consumer confidence in the system, said David Smay, general credit manager and treasurer of Chevron Products Co.
"Most corporations do not realize that finality is a day later," said Mr. Smay, who also is chairman of the Treasury Management Association's payments advisory group.
The Fed is considering recommending that ACH credits become final at the time they are settled. To protect itself, the Fed would require riskier originators to "prefund" reserve accounts or ensure they have enough money in reserve accounts to cover their ACH credits.
The central bank would use its real-time monitoring system to track about 700 banks with potential credit problems. This would give the Fed a degree of risk control similar to what it has with Fed Wire, its large- dollar, real-time funds transfer system.
The Fed wants to deal with a type of risk that is sure to cause more concern as larger-value transactions move into the ACH. Though the system was built to accommodate relatively small-dollar recurring payments, such as payroll deposits, the ACH transaction ceiling is $99.9 million.
"While the probability of loss is very small, the fact that the risk is there has been a concern for years," said Barbara Konecky, a vice president at BankAmerica Corp. "Banks want the Fed to close the gap."
Under standard industry practice, corporate customers typically can draw funds from their accounts when settlement occurs. National Automated Clearing House Association rules require banks to make funds available to consumers receiving direct deposits on settlement day.
The Fed proposed in December 1986 to grant finality at settlement for ACH credits valued at less than $5,000. Many bankers viewed that as an arbitrary ceiling, said Ian Macoy, senior director of government relations at Nacha.
Another idea, floated in March 1989, would have granted finality at 6:30 p.m. on settlement day, which "left a whole day of temporal risk when market practice was to grant availability at settlement," Mr. Macoy said. Louise Roseman, associate director of Federal Reserve operations and payments systems, said comments to the Fed generally favored the notion of prefunding. But she added, "I don't think the issues are clear-cut."
People are assuming no adverse effects, such as payroll files' being withheld from processing due to an originating bank's inability to prefund, she said.
In a comment, the Treasury Management Association recommended allowing collateral, which would let originating banks use assets such as marketable securities. The corporate group's other suggestion was to prohibit riskier banks from originating ACH credits.