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Circular Letters

Circular Letter 5645

December 3, 2004

To: All Member Banks and Others Concerned in the Third Federal Reserve District

Attention: Chief Executive Officer and Chief Compliance Officer

Subject: NOTICE: POLICY ON PAYMENTS SYSTEM RISK

Summary:

The Board of Governors of the Federal Reserve System has announced the approval of proposed revisions to its Policy on Payments System Risk (PSR Policy) addressing risk management in payments and securities settlement systems. The revisions update the policy in light of current industry and supervisory risk management approaches as well as new international risk management standards for payments and securities settlement systems. In addition, they provide further clarification regarding the policy’s objectives, scope, and application.

The key revisions include an expansion of the policy's scope to include those Federal Reserve Bank payments and securities settlement systems that meet the policy's application criteria, revised general risk management expectations for systems subject to the policy, and the incorporation of both the Core Principles for Systemically Important Payment Systems (Core Principles) and the Recommendations for Securities Settlement Systems (Recommendations). Under the revised policy, public- and private-sector payments and securities settlement systems that expect to settle a daily aggregate gross value of U.S. dollar-denominated transactions exceeding $5 billion on any day during the next twelve months are expected to implement a sound risk management framework. A sound risk management framework should: 1) clearly identify risks and set sound risk management objectives; 2) establish sound governance arrangements; 3) establish clear and appropriate rules and procedures; and 4) employ the resources necessary to achieve the system's risk management objectives and implement effectively its rules and procedures. Systems deemed by the Board to be systemically important are also required to meet the Core Principles or Recommendations.

The Core Principles were developed by the Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries. The Recommendations were developed by the CPSS and the Technical Committee of the International Organization of Securities Commissions. Both sets of standards are part of the Financial Stability Forum's Compendium of Standards that have been widely recognized and endorsed by U.S. authorities as integral to strengthening global financial stability.

The Federal Register notice, published December 1, 2004, is available here PDF Icon (121 KB, 36 pages).

Date: The revisions become effective January 2, 2005.

For Further Information: Jeff Stehm, Assistant Director (202/452-2217), or Doug Conover, Senior Analyst (202/452-2887), Division of Reserve Bank Operations and Payment Systems. For users of Telecommunications Device for the Deaf (TDD) only, please call 202/263-4869.