CUNA Comment Letter

CUNA's Letter to Federal Reserve in Support of Interim Policy

Sent Via E-mail to

August 6, 2001

Ms. Jennifer Johnson, Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, NW
Washington, D.C. 20551

Re: Docket No. R-1110

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the Federal Reserve System's proposal to retain the current $50 million limit on the transaction size of book-entry securities transfers on Fedwire. As a national trade association, CUNA represents more than 90 percent of the nation’s 10,600 state and federal credit unions. This letter was developed under the auspices of CUNA’s Payment Systems Subcommittee, chaired by Terry West, President and CEO of Jax Navy Federal Credit Union, Jacksonville, Florida. CUNA supports this proposal.

The Federal Reserve has a Payments System Risk Policy that establishes maximum limits (net debit caps) and fees on daylight overdrafts in the accounts that depository institutions place with the Federal Reserve Banks. Daylight overdrafts are the credits depository institutions use when they overdraw their Federal Reserve Bank accounts. The Federal Reserve charges fees based on the amount and duration of the daylight overdraft that exceeds the financial institution's net debit cap.

To minimize overdrafts in 1988, the Board imposed a $50 million limit on the par value of individual book-entry securities transfers on the Fedwire system. The $50 million limit was to encourage government securities dealers to split large trades into multiple partial deliveries. This splitting reduced the need for dealers to hoard securities until the end of the day to pay in full. When the Federal Reserve began imposing a fee for daylight overdrafts in 1994, most clearing banks decided to pass on these charges to their securities dealers. In turn, these dealers began to send securities trades earlier in the day instead of stockpiling these trades until later in the day to make a full payment. According to the Federal Reserve, as dealers began to send securities earlier in the day, Federal Reserve daylight overdrafts decreased substantially.

The Federal Reserve requests comments on whether it should keep its current policy limiting the size of individual book-entry security transfers on Fedwire to $50 million in par value. The current limit of $50 million has been effective in controlling the dollar amount of daylight overdrafts. Although this policy has occasionally caused inconvenience and marginally increased transaction costs for some credit unions, CUNA believes it has improved the overall efficiency of processing book-entry securities transfers.

CUNA supports this proposal, which encourages smaller trades earlier in the day and reduces payments system risk. If you have any further questions, please contact me at (202) 682-4200.


Michelle Q. Profit
Assistant General Counsel