Wanted: a long-term vision for Fed Wire.
That's what the Federal Reserve hopes to glean from a study begun earlier this month on the operation of the electronic funds transfer system that moves about $1 trillion daily.
The review comes in response to industry concerns that the central bank has been tinkering with Fed Wire without having a broader plan for how it wants the payment system to evolve.
The latest manifestation of this concern came after the Fed proposed extending Fed Wire's operating hours, opening a.m. instead of 8:30, to meet the needs of Chicago futures exchanges. Those markets already open early to service their global clientele.
The extended hours for Fed Wire would reduce risk to the system if a futures broker failed before trades could be settled, Fed officials said.
This seemingly simple move generated a storm of protest from the banking industry. Many bankers told the Fed that the risk-reduction benefits of the expanded hours would be too small to justify the added staffing costs. What's more, they said, the proposal was difficult to analyze, given that the Fed has never clearly articulated its long-term plans for the system.
"We think that there should be a plan of action developed if the Fed Wire is to expand its hours," said George M. Hoffman, first vice president of Republic National Bank of New York, a letter to the Fed.
"Studies should be conducted to determine how expanded hours will better serve the market and encourage participants to change their payment and settlement habits", he added.
In response to the complaints, the Fed voted earlier this month to postpone plans to extend Fed Wire's operating hours. Fed officials said they would take no action on that plan until they completed a comprehensive study of Fed Wire and the implications of expanding its hours.
Committee of Bureaucrats
The industry asked for a joint agency-industry task force to develop a long term strategy. While Fed officials say they want to include private-sector input, the committee devising the strategy will be limited to Fed officials.
Bruce J. Summers, senior vice president at the Richmond Fed, will head the "Fed Wire hours working group," which will conduct the study. The 12 members come from the New York, Chicago, San Francisco, and Richmond district banks, as well as the Washington board.
Representatives of the Fed's operations, monetary policy, legal, and discount and payment systems staffs will participate.
The group hopes to complete the study by yearend, an ambitious timetable, many industry officials said.
The effort aims to get a better handle on how Fed Wire fits into the broader architecture of interbank settlement arrangements, such as bilateral foreign exchange dealing and private-sector payment systems like the Chips network, run by the New York Clearing House Association.
The group will also study how and why various financial markets use Fed Wire, and how this use changes during systemwide financial shocks.
"To me, it's almost a study of the interaction of the markets," Mr. Summers said. "The focal point will be asking questions that enhance our knowledge of the role of final settlement in these particular markets."
Not an Easy Task
An important part of this effort will be better understanding the tradeoffs implicit in extending Fed Wire's day. The benefits to futures exchanges of greater certainty in final settlement must be weighed against the costs of changing bank operations to adapt to the new hours.
This sounds like a fairly straightforward issue, but given the broad reach of Fed Wire and the complexity of the payments system, understanding the market interactions and their impact on Fed Wire will not be easy, Mr. Summers said.
And Fed officials aren't likely to find a consensus among Fed Wire users.
Industry officials point out the myriad players -- from small banks to large banks to clearinghouses to the exchanges -- that have vested and often conflicting interests in the evolution of electronic funds transfer.
Fed officials say that until the study is completed, the board will not set a timetable for extending Fed Wire hours.
But Fed Governor Wayne D. Angell made his intentions known at a recent board meeting: "There's no backing away from our long-run plans to move in the 24-hour direction."