No. 8910 THE INTERBANK PAYMENTS SYSTEM: A DESCRIPTION OF ITS OPERATION AND RISK MANAGEMENT

by Robert T. Clair* Bank of Dallas June 1989

Research Paper

Federal Reserve Bank of Dallas

This publication was digitized and made available by the of Dallas' Historical Library ([email protected]) t

No. 8910 THE CLEARIIIGHOUSE IIITERBAIIK PAYI,IEI{TS SYSTEII: A DTSCRIPTIOXOF ITS OPERATIOI{AND RISKI.IA}IAGEI{II{T

by

Robert T. Clair* Federal ReserveBank of Dallas

Jurn 198!l

* Theviews expressed .in this article are solely thoseof the authorand shouldnot be attributed to the FederalReserve Bank of Dallas. or the FederalReserve System. The Clearing HouseInterbank Payments System: Descriptionof Its 0perationsand Risk Manaqement

1. General0vervjew of the System

The Clearing HouseInterbank Payment Systenr (CHIPS) is a high-speed

message-s\4itchingnetwork owned and operatedby the Newyork Clearing House Assoc'iation(NYCHA) to clear jnternationaldollar payments.Based 'in Newyork

Cit.y, CHIPSwas developed in the late 1960sas an e'lectronic replacementfor a

paper-basedpayment system, the PaperExchange Payment System (PEPS),

PEPSprovided an effective clearjng arrangementbut the paper-based

strtrcturewas unable to handlethe rapidly growingvolume of paynentsthat

neededto be cleared. Thegrowth in paymentvolume was partial'iy the resu'lt of the growthof the Eurodollarmarket.l Thechange in foreign exchangerate

r For a discussionof the causesfor the surge in the Eurodollar market,see Sarkjs J. Khoury,Dynamics of I nternati ona'lBank ing, Praeger1980,p.24-6. regine from fjxed to floating rates jn lg73 also ljkely jncreasedthe volumeof

internationa.l paymentsthat neededto be cleared.

In responseto the growingvolurne of internationdl paymentsthe NYCHA

developedthe ClearingHouse Interbank Payments System (CHIPS). The crucial

Jifference betweenCHIPS and PEPS, its paper-basedpredecessor, is that CHIPS

is an electronic-basedpayment system cdpable of handljng higher volumesof

payments.CHIPS began operations with only 9 NYCHAparticipants and processed

800,000transactions with a total valueof $1 trillion in 1921,its first full

year of operations. ln 1974,it expandedits operationto 56 participants by

taking in all the formerparticipants of PEPS.Partjcipation continued to rise

during the late 1970s,stabilizing at about140 in the mjd-1980s.2In l9BB,

CHIPSprocessed 34 million transactionsworth $165 trilljon, (SeeAppendix A

for annuaivol unes. ) tsecauseCHIPS originated from a paper-basedsystem, it initially retained

someof the characteristics of that system,such as next-daysettlement. But

as demondof participantsand the ava.ilability of technologyhave changed over

the years, CHIPShas also changed.In 1981,it adoptedsame-day settlement. In

1984,it beganincorporating risk-management measures that are monitoredin real time, somethingonly possibleon an electronjc network.

Il. Legal Frameworkfor the System

TwelveNew York money-centerbanks make up the membership.ofthe NYCHA,

eachof which is representedon the ClearingHouse Committee that establishes

z In 1980, a morator.iumon newparticipants was.imposed. The reasonfor the moratoriumwas the needto expandcomputer capac'ityand to resolve somelegal issues before newpart ici pants could be added. That noratoriumwas lifted in 1983. 3 the ru1esfor the operationof CHIPS.(See Appendix B for a list of members.)

TheCiearing House Committee chooses an executivevice presidentwho enforces the rules andoversees all operationsof the clearing house. Thebasic frameworkfor the operationsof CHIPSis presentedin the Constitutionof the

NewYork Clearinq House Association and in the RulesGoverning the Clearing

HouseInterbank Payment System as adoptedby I{YCHA.I'ionnember of NYCHAmust agreeto abideby CHIPSrules beforebeing allowed to partjcipate in the system,

Anyfinancial institution can applyto participate in CHIPSif it meets severalmlninum requ i renents.

l) Participantsmust be either a commercialbanking institution, an Edge

Act corporation,or a bankingaffiliate of a commercialbanking 'jnstitution locatedin NewYork City. In addition, the parent

companyof an EdgeAct corporation or an lnvestmentCompany as

defined by NewYork State BankingLab, may become a substitute

participant therebyproviding the greaterfinancial strengthof the parent in placeof its eligible subsidiary.

2) Pdrticipantsmust be subjectto regulationby the NewYork Srdte

BankingDepartnent or a federal bankregulator.

3) Participantsnust also agreeto transmjttheir messagesto CHIPS througha primary connectionlocated in NewYork City or a backup

connectionlocated in the greater NewYork metropolitanarea.

4) In addition, there mustbe locatedin NewYork City an officer of the

participant institution whois authorizedto makebindjng

commitnentsto CHIPSwhi.le CHIPS is operating.

5) Final1y, potential participantsmust provide CHIPS with current financial statementsfor themselvesand any parent companies. The

annualfinancial reviewprocess is not specified, but CHIPSseeks to maintainfinancial'ly strongparticipants to mininizeany risks to the associat.ion.

Therules governingthe operationof CHIPSare establishedby the Clearing

HouseCommittee and any changesin these rules mustbe approvedby a majority

0f the membersof the association. Theserules are administratedby the executivevice presidentof the cleaninghouse. Theexecutive vice president can enforce these rules throughhis/her powerto suspendor term.inatea participant fromCHIPS. The decisions of the executivevice presidentcan only be appedledto the ClearingHouse Committee.

All participantsare governedby the sanerules. Thereis no distinctjon nadebetween foreign and domesticbanks. Furthennore,there is no explicit distjnction madebetween members of the NYCHAand other.participants. However, the i2 NYCHAmembers wrjte the rules that governall participants. l4hile the nonmernberparticipants can provideinput to importantcledring housedecisions, ultimately the decisionwilI be madeby the twelvemembers.

III. Structure, operationsand Administration

0n a normalbusiness day, CHIPSoperates from 7:00 a.n. to 4:30 p.m. with settlementusually completedbefore 6:00 p.m. CHIPScloses for bank holidiiys as set by the State of NewYork and observedby the FederalReserve

Bdnkof NewYork (FRB-NY)over whosebooks CHIPS settles, If CHIPSis closed for a holrdaynot celebratedin Europe,CHIPS operates for extendedhours on the next busjnessday, beginningat 5:00 a.m. andending at 5:00 p.m. The extendedhours accommodatethe addjtional volumegenerated by fore.ignbanks on 5

the day that CHIPSwas closed. The hoursof operation mayalso be extendedor

changedby the executivevice presidentas needed.

Paymentmessages sent over CHIPSare credit transactions,i.e. the message

directs CHIPSto debit the sender'saccount and credit the receiver's account.

All messagesare initiated by the institution sendingfunds. Thepayment

messageincludes at least the identity of the sender,the identity of the

sendinginstitution, the amountof fundsto be transferred,the identity of the

receiving institutjon andfinally the receiver's beneficiaryaccount identity.3

Moreinformation can be includedif desired, whichmay be importantto the senoerto expla.injn detail the purposeof the paymentto the receiver.4

A paymentmessage can be either sent or stored on CHIPS. A messagecan be

stored on the CHIPScomputers for release later the sameddy, A stored message can be deletedby the sendingparticipant, Alternatively, a paymentmessage

can be sent inmediately. In either case, oncea paymentis sent it is 'irrevocable andrepresents an unconditiondlobligation of the sending

institutjon. Theob.l igation is bindingregardless of enor, settlement

fdilure, on evenbankruptcy of either the senderor the sendinginstitution.5 CIIIPStrti.l izes a two-tier settlementDrocedure. In order to understand

" often participantssend or recejvemessages for their owndccounts. In these casesthe senderand the sendjnginstitution are one in the sameas are the receiver andthe receivinqinst'itution. 4 Conmercia.ipayments ro. it',ip*.nt, receivedare often adjustedfor damagedgoods or other returns. Oetails explaining what invoices are coveredby a particular paymentcan be useful in completingthe transactjon. E 'left ' tlhena paymentis sent in error, it is to the two part.icipants to reach a negotiatedsettlement to resolve the error. The negotiation is outside the CHIPSsystem. Thereare acceptedconventions as to the appropriatecharges paid for errors usually in the form of foregoneinterest. o

the operation of the settlement it is importantto knowthe four basic entities

involvedin clearing andsettling a paymentthrough CHIpS: participants,

sett'ling participants, CHIPSas the processingentitJ andthe FederalReserve

Bankof NewYork (FRB-NY)across whose books settlenent is accomp.lished in a

special settlementaccount. Theparticipants are thosefinancial institutions

that dre perrnittedto sendand receive paymentmessages over the comnunication

networkestablished by CHIPS.CHIpS itself is only a high-speedmessage

switching systen and a set of accounts. An importantsubset of the parLicipantsare the sett'ling participants. Thesesettling participantsare

the only par!icipantsdble to nakeor receivetransfers over Fedwireinto or

oul of the special CHIPSaccount at the FRB-NY.6They act as correspondent

banksrcr the other part.icipantsand makesettlement transfers that settle

thejr ownaccounts and the accountsof other participants that settle through

them. Eachsettling participant either makesa sjngla,.transferjnto or

receivesa single transfer from the special accountmaintained for CHIPSat the FRB-NY.The single transfer settles the entire day,s transactjonsfor the

settl ing participant andall of its respondents.

The participants can be categorizedinto three groups, Themost numerous are the U.S. agenciesand branchesof foreign banks. Theseforeign

participantsaccount for 105of the 140partjcipants in CHIpS. The large

numberof foreign participants reflects the fact that CHIPSwas deve.loped

prinarily to handleforejgn payments,and these paynentscontjnue to makeup

tne vast majonity of paymentssent over CHIPS. The secondcategory are the

fourteenU.S. domesticinstitutions that are nonsettlingparticipants. Manyof

6 .is Fedwire the wire transfer systemoperated by the FederaI ReserveSystem. I these participants are the rnajortl.S. regional banksthat partjcipate through

EdgeCorporations located in NewYork City. Final1y there are the 21 domestic settl ing participants. Thesettling participantsare primarjly Newyork money-centerbanks. Thirteenof the settling participantssettle only their ownaccount and the renaining eight provide set ementservices to as few as rhree or as manyas twenty-sjxnonsettiing particjpants.

TheCHIPS communicatjon network is a single-nodenetwork. All participants are connectedd.irectly to a single message-switchingcenter, CHIPS. Participantsprovide services in turn to third-party custoners includingnonparticipating respondent banks. Messagesare often receivedin a preformattedelectronic formand resent by the participant throughCHIpS.

Edchmessdge sent throughCHIPS causes the sendingparticipant,s account to be debitedand the receivingparticipant,s accountto be credjted. In addition, cHIPSmaintains a sophisticatedset of account.sneeded to enforceits rjsk-managementsystem, which is describedjn detail in sectionVI, andto pl'ovideits participantswith necessaryinformation to monitortheir risk exposures. In particular, accountinginformation is maintainedfor each participant relative to everyother particjpant andfor everythird-party customerof a participant that has beenassigned a benefic'iary account i dent i fi cdti on.

TheCHiPS inquiry systempermits a particjpant to obtain the status of al.l the incomingand outgoing payments wjth respectto an jndjvidual account servicedbJ the participant. In addition, the participant can also obtain the sLatusof its current net credit or debit position vis-a-vis all other CHIpS I

1 participants,' Finally, a participant 'is permittedto obtain the net net debit

or credit pos'itionof any other participant wheneverCHIpS is open.8

Thepayments transferred on CHIPSare prjmarily internationalin nature.

A surveyof oneday's transactionson CHIPSwds conducted by the FRB-Ny,9The

surveyindicated thal over 82 percentof CHIP5,dollar vo1umeof payments

occurredin foreign exchangeand Eurodolldr placement transactions, The

distribution of CHIPSpayments by type of transactjons.is presentedjn Tablel.

The predominanceof international transdctions is not unexpectedsince two-

thirds of CHIPSparticipants are branchesand agenc.ies of foreign banks.

' Theparticipant net debjt or credit position with respect to anotherparticipant is the sunof all the fundsit has receivedfrom thdt panticipantless the sumof all the fundsit has sent to that participant. If this differenceis positive, the participant is in a net credit position, and .if the difference is negative,the participant is jn a net debit position.

" A participant's net net debit or credit position is the sumof dll the funds it has receivedless the sumof all the funds it has sent. If this differenceis positive. the participant is in a net net credit position, and if the difference is negative,the participant is.in a net net debit positi on. - - !.. "Ldrge-dollar PaymentFlows from NewYork,, Quarterly Revieb/Federal Reserve Bank of NewYork, vol, 12 (Winter IggZ+S) p. 9-13 and "A Studyof Large-DolldrPayment Flows Through CHIPS and Fedwjre"(a boundpaper, FederalReserve Bank of Nelvyork, December1987). v

Table l. Distributjon of CHIPStransactions by type ( Percent) Numberof Dollar transactions amounts

Forei gn I xch ange 72.6 54.9 Eurodc,il ar Pldcements 16.8 27 q, Sett lement 3.3 Commercial& Misc. 4.5 6.2 Bankl_oan t.7 Securit ies Purchase/ Redempti on/ Fi nancing 1.0 1A FederalFund s 0.4 0.4

Source: "Large-dollar PaymentFlowsfrom NewYork" Quarterly ReviewFederal ReserveEank of NewYork, vol. 12 (t,linter 1987-88)p. 9.

Little is knownabout the specific bankcustorners that use CHIpSto

completepayments beyond anecdotal information frorn individual banksdnd the

FRB-NYsurvey. The survey indjcated that approxinately90 percent of the

transdctionsinvolving Eurodollarplacements or foreign exchangeoriginated

from offices outsidethe U.S,10 Thecustomers in thesetransactions were

I;sted as banksbut it is unknown.if thesebanks are carryingout transactions on their ownbehalf or on behalf of their commercialcustoners. In the foreign

exchangetransactions the transfers wereconcentrated in spot contracts for

Germanmarks, Japanese yen and the Britjsh pounds.

the needfor reliability in an electronic paymentnetwork is well

recognizedby CHIPS,which has made extensive efforts to ensurecontinuous

10 Tn. d"finition of originating outsidethe U,S. deserves explanation. The surveyrespondents were instructed to treat foreign offices of all banks(lncluding their own)as being "foreign customers'rand treat U.S. offices of foreign banksas being "domesti c crrstomers.,' t0

operations. In addition to a secondconputer system at its primary site that can maintainoperations at the primarysite in the eventof a single computer

failure, CHIPShas a third ident.icalcomputer located at a back-upsite. CHIpS

uses "remotelogging" dt that site to backup the messagessent on its primary

system,dnd it could activate the back-upsystem and conduct business in a

matter of hours. CHIPSalso mainta.instwo overlappingindependent

communicat'ionnetworks to connectparticipants to the CHIpScomputer.

CHIPSrequires that eachparticipant maintain both a primary and a back-up

site for thejr connectionto CHIPs.Each site is connecteddirectly to both the primaryCHIPS processjng site andthe back-upCHIPS site. AlI connectionsare

throughhigh-speed lines andcommunication multiplexers with ',d.ialback-up,l ijnes offering yet anotherlevel of redundancy.

CHIPSalso has extensivecontingency p1ans. In the event of a power

failure, CHIPShas a battery-basedreserve and a dual d.ieselgenerator system to generateits ownelectrjcal poweras needed.ll By CHIpSown assessment,

"Operationalproblens dre nownear zero; uptjmeis consistentlyin the 99%to

100%range." Durjng 1988,uptime averaged 99.9?/, and operational probjems

,/,ithinCHIPS caused oniy a sing.lejnstance where the CHIPSclosjng hour was delayed(for a total of 90 minutes).

In recoveringits costs, CHIPSacts ljke a cooperative. Tota.lcosts for

the CHIPSoperation are determinedand then allocatedto all participants based

on their usage. Theexpenses are assessednonthly based on the numberof

messdgessent dndreceived during the previousmonth. Thereis a mininum

assessmentof $2,500per month. This nrethodhas resulted in an averagecost of

,- TheCHIPS processjng facility also has environmental controls to prevent or minimizeany problemsresulting fron excessheat or humidity, water leakage,or fire. 11

$.29 per messagesent or received. Consequentlya comp.letetransaction would cost twice that or $.58.

Participantsalso incur costs for participating on CHIPSthat are not part

of the expensescharged by CHIPS. Eachparticipant mustmajntain two locations

for the transmissionof paymentnessages to CHIPSin the NewYork City area and

the staff t0 operatethese offices. In addition, an officer of the

partic.ipatinginstitution that 'is authorizedto take appropriateact'ion on

behalf of the partic.ipantin connectionwith its CHIPSoperation must be

available in NewYork City duringall hoursthat CHIPSis openand until CHIPS settles at approximately6:00 p.m-each business day. Participantsrecover

these riosts either throughprofits generatedfron executingtheir ownpayments

over CHIPSor throughfees, both implicit andexplicit, chargedto their customers.

IV. Settlementand Fi nali ty

CHIPSis a net net settlenentor a multilaterai net settlernentpayment

system." Payrnentmessages are sent al I day but there is no transfer of funds

1) " A single net settlementsystem, also knownas a b.ilateral net settlement system,would require one transfer betweenevery pail'wise combinationof participants on a paymentsystem that dealt with eachother. A net net settlementsysten, also knov.rn as a multilateral net settlementsystem, reduces the nunberof transfers to just one transfer either sent or receivedby each participant to a central dccount. In a t|{o tiered settlement, someparticipants in a net deb.itpositjon sendtheir transfers to the central accountindirectly throughsettling partjcipants. After receivingthese transfers, settling participantsin a net debit position senda transfer to central accountdesignated by the paymentsystem. For a further exposition of different types of settlementsystens see David L. tlengle,',0ay1ight 0verdrafts and PaymentSystem Risks" EconomicReview, Federal Reserve Eank of Richnond,Volume 7113 (May/June 1985) p.15 and Groupof [xperts on PaymentSystems, "Report on ]letting Schemes'rmimeo # BIS/PG/207E,Bank of international Settl ernent(January 1989). t?

until settlementtjme. Duringa norrnalday, CHIPSrnaintains the set of

dccountsand at 4:30 p.m. it closesthe CHIPSsystem to messages.By 4:45 p.m.

ChIPSinforms every participant of its net net position andeach settling

participant of the net net posit'ionsof the participantsfor whichthey

1? se[tle-'" A participant's net net position is the sumof credits receivedless [ne sumof the pdyments(debits) sent. If the net net position is negative,

the participant is said to be jn a net debit posit.ionand is requ'iredto

transfer funds to the CHIPSsettlement account at the FederalReserve Bank of

NewYork in order to settle its accounts. If the participant is a nonsettling

participant then it nakesthis transfeLi ndi rectl y througha settling

participant. Settling participantsin net debit pos.itionsmake their transfers .into directly the CHIPSsettlernent account at the FRB-NY.

By 5:30 p.m. all the settling participantsshould have agreed to settle. Thesettling particjpdnts in a net debit position transfer funds into the

settlement accountby 5:45 p.m- 0nceall the funds havebeen transferred into

the accountby settling participants, CHIPS,actlng as agentof FRB-Ny,

transfers fundsto all settling participantsin a net credit position. Once

the transfers are completed,CHIPS informs all participantsthat settlementis

completedwhich norma.lly occursbefore 6:00 p.rn.

'"l? Participantsare also jnformedof their net position $/ith respectto eachother CHIPSparticipant. This informationcan be useful in reconcilingthe participantsaccounts $/jth CHIpS accounts. A settling participantsnet net position js the sumof the credits it has receivedless the paymentsit has sent plus the sumof the net net posjtionsof the participantsfor whichit sett I es. 13

Chart 1. CHIPSSettlement Time Tab I e*

4:30 p.m. CHIPScloses to current day paymenttraffic. 4:45 p.m. CHIPSinforms all participantsof their net net posjtions. 5:30 p.m. By this time all settling participantsagree to settle, 5:45 p.m. Thesettl ing partjcipantsin.fet net debit positions transfer funds into the CHIPSaccount at the FederalReserve Bank of New york. 6:00 p.m. By this time CHIPS,acting as agentof the Federa1Reserve Bank of NewYork, hastransferred funds to all settl ing pdrticipants in net net credit positionsand CHIPS informs a1l participants that settlenent is comDI ete.

* = Thesetimes are approximatewjth eachsuccessive step beginningas soonas the previousone is finished.

Eventhough the settlement is not completeduntjl the end of the day, many

CHIPSparticipants permit their customersreceiving funds to resendthose funds over CIIIPSor Fedwjreprior to settlement, Paymentnessages over CHIpSare irevocable obligatlonsof the participant. If sett.lementwere not to occur and the funds anticipated at sett.lementwere not received, these participants cannotretrieve thesetransfers andare still obligatedfor any funds released over CHIPSor Fedwire.

CHIPShas addressedthe possibility of a participant not being able to settle by a special rule that effectively rerunsthe day,s paymentsnessages removinga1i messagesinitiated or receivedby the participant that is failing to settle. In effect, applicationof this process,'unwinds" that participant from the system. (Theunwind procedure is d'escribedin AppendixD.)

Therehas never beena settlenent failure and unwindon CHIPS. However, settlementfailures havebeen simulated in order to test the ability of the systemto implenentan unw.indand to determinethe impactof an unwindon settlement. The results of these simulatjonsshow that an actual unwindmay be extrernelycompljcated with positionsdiffering substantjallyfrom orig.inal net I4

net positions,14 Indeed,as a result of the unwind,other participantsmay be

unableto settle their revisedposjtions, requiringfurther unwinds. This risk of additional failures is systemicrisk.15

V. FinancialStructure of the System

CHIPSoperates using intraday, interbankcredit. t,lhileCHIPS is not a bank

and hold no depositsr CHIPStransfers represent an extensionof jntraday

credit from the receivingparticipant to the sendingparticipant.16 The

recejvingparticipant acceptsthe paymentmessage realjzing that it wjli not

receivethe fundsuntil settjenentis completedat the endof the day.17

Intradaycredit is essentialto the operationof CHIPS. All participants

begineach day with a zero ba1anceand debits andcredits are Dosted simultaneously.In sucha system,no transactionscould occurunless there

14 SeeDavio B. Humphrey,'rPayment Finality and Rjsk of SettlementFai I ure" in AnthonySaundersand LawrenceJ. l,Jhite, eds., Technol and the ReouI 'ion of Financial lilarkets: Securi utureS , chap. , pp.

The procedurefor dealingwith a settlementfai lure may changejn the near future as CHIPSis vrorkingon an alternative collateralized loss sharingformula. CHIPShas not at this time pubiished the details of nowsuch a formulawould work. Themost importantaspect is that the formulawould reduce the probabiljty of systemicfai I ures.

to CHIPSbegins and ends each day v{ith a zero balancein its accountat the FRB-NY.Consequently, there are no overnight credi t extensionson CHIPS. ''ll As mentionedearlier, a participdnt couldmjnimize the risk of extendjngthis jntradaycredit by treating the fundsas provisional andnot permittingits receivingcustomer access to the funds until settlementis final. CompetitiveDressures have resulted in a commonpractice of permittingreceivers access to the funds i mmedi ately. 15

weresuff.icient credit, j,e. a wil'lingness to acceptpayments messages.18

Thelevel of intradaycredit withln CHIPSis the sumof net credit

positions of all participantsin a positive net credit position, It can rise

and fal.l during the day dependingon the flow of paymentmessages. The average

level of intraday credit !,as calculated for a two-tveekperiod from Febrrlary9-

2?, 1989, Duringthis period, the averagelevel of intradaycredit was$43

lri llion. Theextension of this credjt occursearly in the day. By 8:15 a.m.,

nearly $30biliion of intradaycredit has beenextended. Thelevei of intraday

credit rjses smoothlyuntil late morningwhen at 1l:30 a.rn.it peakedat a.lmost

$5qnjttion. Followingthe peakit declinedsmoothly to less than $34billion

dt 4:30 p.m. (SeeAppend'ix E for the completedata on intradaycredit.)

Sincethe participantson CHIPSutjlize only intradaycredit, it is

difficult to cornparethe treatmentof this type of cred.itto other bankcredit.

The credit extendedthrough CHIPS never dppearson a balancesheet because

Dalancesheets are basedon end-of-dayfigures. In general,credit extendedto

other depository institutions for the purposesof clearing paymentsis treated

differently than other typesof bankcredit. Indeed,credit for clearing

paymentsis not boundby U.S. legal lendinglimjts that restrict credit

extendedto a single entity to not exceed10 percentof capital.

Theamount of intradayinterbank credjt currently utilized to make

paymentsover CHIPSis large. The FederalReserve calculates the day.light

overdraft leve.l on CHIPSas the sumof the rnaxirnumnet debit positions of each 'level pdrticipant during the day. In September1988, the average of .intraddy

18 oft.n referred to as "grease,rrthis credit representsthe willingnessof participants to acceptpayment messages based on the assumpt i on that the senderwill cover any net debjt obligations at settlement. Suchcredit doesnot appearon dny balance sheetsand is not boundby lega1lending ljmits. 16 interbanklending on CHIPSwas $45 billion. Thecomparable credit extended over the FederalReserve System's Fedwjre for fundstransfer was$55 billion.

Thecurrent fjnancial structureof CHIPSsettlenent creates a risk, albeit small, of a substantialpotential loss. If a particjpant wereto unexpectedly fail during the day, it wouldbe unableto settle its CHIPSaccount at the end of the day. |,lhilethere has neverbeen a settlementfajlure, simulationsof .indicate settlementfailure that systernicfailures could result andthe impact of systemicfailures wou.ldbe large. Thesesimulations indicated that d settlementfailure couldresult in the failure of over onethird of the partjcjpants to settle, andthe "unwindrrwould affect 30 to 40 percentof the paymenrmessages senr over CHIPS.19These paynents are still consjdered obligatjonsof the sendingparticipants, but theseparticipants nay not be in a position to meetthese obl igations.

V1. Liquidity andCredit Risk Issues

Paymentscan be madeby a variety of means:cash, checkor wire transfer.

0ften, tne choiceto utilize a wire transfer or other ldrge-dollar payment systemis basedon the high degreeof finaiity of payment.Finality requires three characteristics. F'irst, the paymentsmust be irrevocable; payment messagessent on CHIPSrneet this criteria, Second,the settlementof the paymentmust be timely. CHIPSutjlizes same-daysettlement, which reduces the possibiiity of a participant failing betweenthe time that a paymentmessage is sent dnd whensettlement is completed. The possjb'ility--however remote--of an un'i/inddoes raise somequestions as to whethersettlement will indeedbe time.ly. Third, if any eventshould disrupt settlement,there mustbe a clear

19 S.u Humphrey( 1986) . L7 determinationof which parties will bear any loss and whetherthere are sufficient resourcesavailable to absorbthe loss. CHIPShas a well-defined systen for howsettlenent is to be completedin the event of a participant fail'ing to settle, but the ability to determinehow losses wilt ultimately be 'in spread the eventof a settlementfajlure is not certain. It is the uncerrainty$/ith respectto theselast two characteristicsthat CHIPSis current)y addressingjn order to improvefinality.

Liquidity risk in a paymentsystem is the poss.ibilitythat a participant will not havesuffjcient fundsin liquid assetsneeded to settle its position. lt.is importantto note that liquidity risk doesnot jmp'lythat a participant is insolvent, but only illiquid at that particular moment'in time. Each participant is responsiblefor its ownl'iquidity in order to settle. Settling particjpants are not requiredto provideliquidity to the part.icipantsfor whichthey settle, As a practical matter, the settl'ing participantsmay provideiiquidity to other participantsto expeditethe settlementprocess, but this is a businessand credit decisionnot addressedby CHIPSrules and procedures.

liquidity problemsusually result from suddenand unexpected events that are often conpletelyunrelated to the financiai soundnessof the illiquid partjcipant. For example,il'l iquidity can result frornoperational problems. A computerfailure could preventa participant from transfeffing or receiving funds. If the participant wasin a large net debit position at the tjme and the computerproblem prevented the participant from borrowingliquid assets, then the partic'ipantcou'ld be illiquid at settlementtime. It is atso possible that illiquidity could result frornunexpected financial demands.If a customer directed the banklate in the day to transfer a large-dollarvolume of funds 1B andif after sendingthe funds,the bankdjscovers it could not buyfunds in the marketto cover its position, then the bankwould be iiliqu.id.

Liquidjty risk amongCHIPS participants can be managedin severa'lways. .l Thefirst approachto dealingwith jquidity nisk js to require participants to

maintaina reasonablelevel of liquidity, Theexecutive vice presidentof the

NYCHAhas the powerto reviewthe financial statenentsof d participant andto

require that the participant improveits liquidity if it is percejvedthat

there is any problem. A secondapproach is to avoid unexpecteddemands on

liquidity. TheCHIPS system is excel.lentin providinga on-ljne, real-time

inquiry systemthat permitsa participant to monitorits liquidity needs

constantly. It wouldalso permita settling participant the ability to

monitorthe net net positionsof the participantsfor whichit set es. Third,

the maximumamount of liquidity neededby a participant is'l imited by a CHIpS-

imposedlimit on the mdximunnet debit position allowed,forthat participant.

This limit, a net debit cap, is discussedin detail below. Furthermore,CHIpS requirementsfor back-upterminals and operatjonal reliability help minimize

the liquidity risks that mightresult fromoperational failure.

Themost direct solution to a liquidity problemfor CHIPSparticipants is

to borrow liquid assets. The primary sourceof settlementassets is the

market. The depthof the federal funds market in the U.S. providesa large pool of iiquidity.20

Credit risk differs from liquidity risks in that it js the risk that a participant willbe unableto settle at the endof the ddy becduseit has

failed during the day. Thezero starting ba.lancenature of CHIPSdictates that

20 Fo. ,or. of the CHIPSparticipants, an aIternat ive source of Iiquid assetswould be to request a loan from the Federal Reserve' s discountwindow. 19

credit must be extendedamong participants in order for paymentsto be

possible. However,each CHIPS participant timits its exposureto everyother

pairticipantby a series of bilateral ljmits on the maximumnet paymentsit will

accept from any other particjpant. CHIpSrequires a'lI part.icipantsto set

these limits referred to as bilateral credit limits. A participant's bilateral net credit linits can be changedat any time andcan differ for every

participant, As a practical matter, thesebjlateral ljmits can be set at zero ano sometimesare for smaller particiDants.

Sincethe bilateral net credit limit is set by eachpartjcipant, the

participants can enter into private agreementsto limit risk further or ro

accommodateanother participants, needs. For jnstance,a riskjer participant

mayprovide col.lateral to anotherparticipant in order to havea higher limit,

Thecollateral maytake the formof compensatingbalances. Alternatively, jt

is possiblefor a very soundparticipant to reachits.bj lateral credjt l.imit

with respect to anotherparticipant for somereason such as a large infrequent

payment. In these cases, the participant extendingthe credit can at its

discretion temporarilyincrease the bilaterdl credit limit jn order to facilitate transmissionof the payments.

In addition to the bilateral credit limits, CHIPSimposes a net debit cap

on eachparticipant. This cap lirnits a participant's net net debjt position.

The cap is a proportion of the sumof bilateral credit limits extendedto a

participant by the other participants.2l Thenet debit cap v.ri1l changewith a

rl In its simplestform, the formulais 5 percentof the sum of all bi lateral credit Iimits extendedto this participant by other CHIPSparticipants. If other participantsfeel that an institution has becomeriskier andhave lowered their bildteral credit Iimits, the next day the net debit cap is automatically I owered. one-day1ag any tine the bilateral credit ljmits change. Thenet debit cap

limits the risk exposureof all CHIPSparticipants collective'ly to a s'ingle parli cj pant.

CHIPSmonitors all transactionsagainst these caps constantly. If a 'is paymentmessage sent thdt wouldresult in the violation of a cap, CHIPS stops the message.The message is queueduntil the net posit.ionschange

sufficiently to permitthe paynentto be sent without vjolating the cap. This .is real-time monitoring extremelyeffective, becausecredit risk is primarily a

problemof an unexpectedfailure of a participant. No other measuresare

currently beingconsidered to further reducecredit risk within the system;

however,CHIPS is developingproceeds to impiovesettlement finality. Any improvementin finality reducessystemic risk,

VII. Audit andoversjght

The FederalReserve System has stated that 'jt has three responsibilities

with regardto the U.S. paymentsystem. It mustensure the reiiability and

efficiency of the paymentsystem. In additjon it must ensurethat depository .l institutions of al sizes haveaccess to the interbankpayment system.

Finaliy, and perhapsmost importantly, the FederalReserve must protect the

paymentsystem against systemjc disruptions.22 It i. the opinionwithjn the

Federal ReserveSystem that a systemicdisruption of the paymentsystem could

hinder the abi.lity of the econonyto conducttransdctions and reducereal growth and employmentas a result.

22 SeeBoard of Governorsof the FederalReserve System, Contro'lljnq Risk in the PaymentSystem, Report of the TaskForce on Controlling PaymentSystem risk to the PaymentSystem Po1 icy Committeeof the FederalReserve System (August 1988) , p. 12. 2I

Supervisoryoversight of CHIPSis the joint responsibility of the Federal

ReserveSystem, Federal Deposit InsuranceCorporatjon, 0ffice of the

Comptrollerof the Cuffency,and the NewYork State Departmentof Banking.

CHIPShas beenexamined annually on sucha joint basis as a bankservice corporation every year since 1979. The NYCHAhas cooperatedin these examinat i ons,

Not only is CHIPSexamined, but all the CHIPSparticipants are examinedas depositoryinstitutions. Oneof the requirementsof a CHIPSparticipant is thar it be subject to regulation by the NewYork State BankingDepartment or a federal bankregulator. As a result, the financial conditjonand operational 'integrity of eachparticipant is reviewedon a regular basis by one or more banksupervisors to assurethe safety andsoundness of the institution. These examinatjonsinclude reviewing wire transfer operationsincluding links with ChIPS.

The NYCHAas the operator of CHIPSalso close.lymonjtors the operatjonsof

CHIPS"As an assocjation,the membersthat control CHIP5are also usersof

CHIPS.As such, they havea vestedinterest in guaranteeingthat CHIPS continuesto operatesmoothly. To guardagajnst disruptions that might occur on CHIPS,the NYCHArequires that CHIPSpart.icipants regularly file financial statements.23 Furthermore,the executivevice president hds the powerto s\rspendany participant on CHIPSat any tjme.24

In addition to the NYCHAmonitoring the financial health of the parti(ripants,allthe participantshave an interest in monitoringthe findncial condition of all other participants that njght senda paymentto them, As

23 SeeCHIPS Rule 19, section i. 24 SeeCttIPS Rule 19, sectiond. 22

discussedabove, accepting a paymentrequjres extendingintraday credit. Each

participant mustevaluate the financial condjtionof other partjcjpantswhen

it determinesthe bilateral credit Iimit jt will extendto that participant.

Thebilateral limits offer perhapsthe mostdynanjc forn of financial review

since they can be changedat any time and are not subject to any appeal DroceSs.

VII I. MonetaryPol icy Issues

fhe clearing of large-dollarpayments over CHIPShas relatively little effect on monetarypolicy issues,primarily becauseit has little or no impact

on bankreserves, through which monetary po1 icy is implemented,First, CHIPS

is only a message-switchingsystem. CHIPSdoes not hold any assets,

particularly bankreserves. Nordoes CHIPS hold deposjtsor other liabilities.

CHIPSooes maintain an accountfor settlementpurposes" at the FRB-NY,but the

accountbegins and endseach day with a zero balance.25

Interbank lending norrnally takes the form of federal funds lending and

does havean impacton nonetarypolicy. However,only intraday, interbank credit is extendedover CHIPSand not by CHIPS. As long as there is no private

market for intraday credit-- no exp'licit price is chargedfor intraday credit--

2E The eff ic'iencyof a large-do11ar payrnentsystem may affect the demandfor deposits, which could havean effect on monetarypolicy. CHIPS,because of its same-daysettlement, greatly reducesfloat in the paymentsystem relative to payment by check. Consequently,to the extent that CHIPStransactions displace checks it reducesf loat and therefore reducesdemand for monetary balances. If on the other hand, CHIPS.l transactions are not goodsubstitutes for checksand are more ikely the substitute for wjre transfers on Fedwire,then there is no reductjonin f.loat. In either case,the effect wouldbe very stable and predictable andwarrant little concernby monetary poli cymakers. 23

the interaction betv'reenthe marketfor intraday and overnight interbank lending is likely to be minimal.

tlepositsheld at the FRB-ilY,however, are usedto settle CHIPS,creating

somedemand for suchreserves. The CHIPSaccounting system has a net ba'lance

of zero at all times. Consequently,as oneparticipant flay be facing a growing .larger net net debit position and therefore needa deposit at the Federal

Reservein order to enactsettlement, there are other participantsthat are

facing a growingnet net credit position and can lend funds from their Federal Reserveaccounts,26

IX, CompetitiveIssues

CHIPSboth conpeteswith and is a conplementto the FederalReserve

System'sFedwire funds transfer systern.0n a technical level, Fedwireis

capableof handling any transact'ionthat is cuffentiy being transmitted over

CHIPS.Similarly accessto Fedwjreis opento all the participantsof CHiPS

althoughnot all CHIPSparticipants currently use Fedwireserujces.2T Key

differences betweenthe two systemsare jn the degreeof finaljty offered (althoughCHIPS ptans to inprovefinality rndymake this differenceeven less

significant than it might be nowfor someparticipants) and jn the cost

)R A participant monitoringits liquidity position may perceive the needto build reserves in order to meetits settlement. Many.loan.participants are permitted to request a The effect on nonetarypolicy, however, wouldbe no greater than any other depositoryinstitution borrowingfrom the discount wjndow, Furthermore,the monetary policy effect could be offset easily with an appropriateopen narket operation.

27 Eachapplication to join Fedwirewould be judgedon its ownmeflits on a cdse-by-casebasis. ?4 structure for part I c.ipants.

tlith respect to the cost structure, CHIPSrequirements for connecti on/back-up facilities generallyplaces a higherup front fjxed-cost burdenon participantsthan Fedwirewhich is offset by a generallylower per transaction cost. Lowvolume users wouldthus tend to havea preferencefor Fedwire .

Perhapsmore significantly, however,is the strikingly different usesfor the two systems,with CHIPSservjng an international and offshore market for dollar paymentsand Fedwirevery muchfocused on domesticU.S. pdyments, For major institutions with both internationaland U.S. business,the conplementarityof the two systemsseems to be supportedby dual participation. Indeed,the foreign bankparticipants in CHIPSthat do not participate jn Fedwireare largely those$rjth little domesticU.S. businessor limited needsfor dollar fundingwithin the U.S. narket.

Theexistence of the two systenalso has beneficial inplications for operatjonalflexibility andreliability. If an institution with links to both

CHIPSand Fedwjre were experiencing operational difficulties with one systen but not the other, the ability to use an alternative path for paymentscould provevaluable. Indeed,substantial cooperation exists at all leve'lsbetween the FederalReserve and CHIPS. 25

AppendixA.

Annual Volumesand DolIar Values0riginated by CHIPS

Year Total-Dollar Total Paynent AveragePaynent Volune Volume (trlllions) (mi11ions) 1970* $ .s .5 $r,o?9,782 I97I I R I ,410,762 1972 4 2 2,349,033 1973 9 ? 3, 387,959 L974 10 I 3,081,103 Lvt5 10 6 1,819,960 1976 13 7 1,844 ,453 1977 16 I 1,963,089 1978 20 9 2,123,267 1979 ?6 10 2,453,896 1980 37 IJ 2,802,775 1981 40 15 2,526,910 1982 52 18 2,841,497 1983 60 TU 2,987,304 1984 69 22 3,029.283 1985 7A 24 3,154,917 1986 I07 29 3,689,655 I9B7 140 32 4,375,000 1988 165 34 4,852,941

* CHIPSbegan operat i onson April 6, 1970and operatedfor only 180 year. 26 AppendixB. The Membersof the l',lewYork ClearingHouse Association The Bankof NewYork TheChase Manhattan Bank (National Association) , N.A. ChemicalEank MorganGuaranty Trust Companyof I'le!,york ManufacturersHanover Trust Company Irv i ng Trust Company* BankersTrust Company Marine MidlandBank, N.A. United States Trust Companyof l{ewYork Nationdl tJestninsterBank USA EuropeanAmerican Bank

* The acquisition of Irving Trust Companyby TheBank of NewYork maycause the numberof membersto decreaseby one if the banksare merged. 27 AppendixC. List of CHIPSParticipants (to be addedas of March1, 1989)

lett I inq Participants (numberof participantsfor whichthis participantssettles is in paraenthe se s )

Bankof NewYork (1) ChaseManhattan Bank, N.A. (16) Cit i bank,N.A. (11) ChemicalBank (10) MorganGuaranty Trust Company (24) ManufacturersHanover Trust Company (27) llational l,lestminsterBank USA (1) Irvi ng Trust Company (16) BankersTrust Company (19) MarineMjdland Bank, N.A. (4) EuropeanAmeri can Bank (1) Fidelity Bank,N.A. (1) Mellon EankN.A. (l) Philadelphia National Bank (1) M&TBank (1) IBJ SchroderBank & Trust Company (1) First NationalBank of Boston (1) Bankof America,N.T. & S.A. (1) First interstate Bankof California (1) Fjrst NationdlBank of Chicago (1) Continental Bank,N.A. (1) 'l Nonsettjng Participants

AmericanExpress Eank Ltd. StandardChartered Bank l.lestdeutscheLandesbank Girozentral e Bankof China The SumitomoTrust & BankCo.. Ltd. Arab Banking Corporati on RoyalBank of Canada Hypo-Bank SwissBank Corporati on DresdnerBank AG First WachoviaInternational Banking Corp. Extebank Credi t Suisse BancaNaz ionaIe Del Lavoro BfG:Ne$, York BankLeu Ltd. 'Agri 'lheBanca Nazionale Del I co.ltura YasudaTrust & BankingCo., Ltd. BanqueI ndosuez DenDanske Bank 28 Societe Generale State Bankof l{ewSouth llales TheSaitama Bank, Ltd. TheKyowa Bank, Ltd. TheMirsubi shi Bank,Ltd. Gulf InternationalBank, 8.S.C. Skandinavi ska EnskildaBanken Bancomer,S-N.C. BancoPortugues do Atlantico BancoReal Bankof California, N.A. BancoNacional de Mexico Bdnkof NewEngland, N.A. Bdncodo EstadoDe Sao Pau1o, S.A. 0sterrei chi sche LanderbankAK BancoBi lbaoVizcaya, 5.A. FrenchAmerjcan Banking Corporati on 'loronto-DomiAmroBank ni on Bank BanestoBank i ng Corporation DeutscheBank AG State Bankof Vi ctori a Nederlandsche l'l i ddenstandsbank, N. V. ProvinsbankenA/S The National Bankof Canada Arab BankL.imi ted 085 Bank National Australia Eank The Industrial Bankof Japan,Limited Credito Ital i ano ConmonwealthBank of Austra.lia Bankof NewZeal and Bankof Tokyo, Li rnited SumitomoBank, Lirni ted TheMitsuj Bank,Limited TheFuj i Bank,Linited Australia & NewZealand Bkg. GroupLtd, NorthernTrust Intrl BankingCorp. The National Bankof KuwaitSAK Pittsburgh Nat ional Bank NorwestBank M inneapol i s, N.A. Dai-Ichj KangypBank, Ltd. TheTaiyo KobeBank, Ltd. TheTokai Bank,Li mi ted RepublicNational Bank of NewYork State Street Bankand Trust Company TheDaiwa Bank Limited Securjty Pacifi c National Bank Eancodi Sicilia Hamis Trust and Savings Bank ComnerzbankAG TheHokkaido Takushoku Bank, Ltd. 29

UMBBank and Trust Company 0.G. Bank NCNBNational .la Bank of NorthCarolina Bancode Nacion,Argentina EangkokBank Limited The Long-TermCredit Bankof Japan,Ltd. State Bankof India SanwaBank Li mited OverseasUnion Bank, Ltd. BanqueFrancaise du ComnerceExt. Bankof BermudaInt'1, Ltd. CanadianIrnperial Bankof Commerce National WestminsterBank PLC WestpacBanking Corp. Dennorske Cred'itbank PrivatbankenA/S The National CommercialBank First AmericanBank of NewYork Bancodi Napoli BHF-Bank BanqueNationale de Parjs Credit Lyonnais Kredietbank NV [Jnion Bankof Switzerland Bayerische Vereinsbank AG BankHapoal im, B.11. The Bankof NovaScotia Barc.laysBank PLC BankLeumi Trust Co. of t{.Y. Bancodo Brasi.l, 5.A. BrownBrothers Haffiman& Cornpany BancoCommerciale Ital i ana Midland Bank plc United 0verseasBank TheNippon Credjt Bank,Ltd. Bancodi Roma TheMitsubjshi Trust & BkgCorp. CIC-UnionEuropeenne, Intl et C.ie BancoHi spano Ameri cano Intrl ConmercialBank of China AlgemeneBank Nederland, N. V. Israel DiscountBank of NewYork BanquePanibus TheToyo Trust & BankingCo,, Ltd. HongKong & ShanghaiBkg. Corp. Bankof Hawaii KoreaExchange Bank 30 AppendixD. Proceduresfor a SettlementFai lure on CHIPS:An ,'Unwind,,

If a settl ing participant is unwilling to settle the net net balanceof oneof the participantsfor whichit settles, the settling participant must notify the executivevice presidentof the NYCHAby 5:30 p.m. Theexecutive vice presidentnotifies the participant that it has onehour to arrangewith either its settling participant or a new.settlingpartjcipant to settle its net net balance. if that participant is unableto find a set ing participant to settle folit, then a newrevised settlement is calculated,j.e. an "unwind." CHIPSrecalculates the day's transactionsbut eliminatesany payrnent nessageseither sent by or receivedby the participant that is unableto settle. Their transactions are unwoundfrom the other transactions of the day. Revisednet net positions are calculated and reported to the remaining participants. Settlernentthen proceedsas it normallywould with nonsett.ling participants transfening fundsto their settling participantsand the settljng participants in a net net debit position transfeminqfunds over Fedwjreinto the CHIPSsettlenent account. Finally, CHIPSwould lransfer fundsour of the settlementaccount to the settling partjcipants'in a net net credit position anddeclare the settlementcomplete. Therecalculation of the settlementjn no wayrelieves the participant that wasunable to settle of its obligation to pay the receivi ng part'icipants. ?1

Appendix E AggregateIntraday InterbankCredjt Extendedover CHIPS (averagesof total net credit positions over the period February9, 1989to February ?2, 1989\ Time Amount (Mil l ionsof dollars) 8:15 a,m. 29,823 8:30 32,830 8:45 36,r47 9:00 38,302 9: i5 40,824 42,226 9:45 43,443 l0:00 45,329 10:15 46,3?4 10:30 48,776 l0: 45 50,195 1l:00 5t.497 1l:15 53,576 li:30 53,982 1l:45 53,790 12:00noon 53,535 12:15p.m. 52,7tL 12:30 51,636 12:.45 51,315 I :00 50,242 1:15 48,653 I :30 48,192 1 . AE 46,t37 2:00 45,351 2:15 44,390 2:30 43,529 ).AE 42,021 3:00 40,732 ?.1F 38,703 ?. ?n 38,310 3:45 37.020 4:00 34,678 /r.la 33,797 4:30 33,609 4,45 3?,705 5:00 3?,557 5:15 32,340 32 Bibliography

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Baxter, ThomasC. Jr. "TheClearing HouseInterbank Payment System." mimeo, PaymentSystems Studies, FederalReserve Bank of NewYork, September26, 1986,

Belton, TeffenceM. and others. "Daylight overdrafts and PaymentsSystem Risk," FederalReserve Bul let.ln, vol. 73 (November1987), pp,839-52.

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ChicagoClearing House Association. Dayliqhtoverdrafts: A manaqementreport on marketand paynentsystem risks related to larqe dollar funds transfers. Chicago:CCHA, 1984.

Federal ReserveBank of NewYork, "Large-DollarPayment Flob/s from NewYork," QuarterlyReview, vol. 12 (t.linter1987-88), pp.6-13.

"A Study of Large-DoliarPayment Flows through CHIPS and Fedwire," a mimeo,Federal Reserve Bank of NewYork, December1987.

Humphrey,David Burras. The U.S. PaymentsSystem: Costs, Pricing, Competition and Risk. MonographSeries in Financeand Economics1984-I/?, NewYork City: SalomonBrothers Center for the Studyof FinancialInstitutions, Graduate Schoo.lof EusinessAdministration New York University, 1984.

. "PaymentsFinality andRisk of SettlenentFailure" in AnthonySaunders and LawrenceJ.l,Jhite, eds., Technol and the I ati on of FinancialMarkets: i t'ies. Futures ngton, a lomon on Fi nanci al Instituti ons andMarkets, 1986.

Juncker, Georgeand Henryl,liener. "CHIPSand Fedwire:An Introduction and Overview,r'presentation slides, Federal ReserveBank of NewYork, october 5, 1988.

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Available, at no charge,from the ResearchDepartment FederalReserve Bank of Dallas, Station K Dall as, Texas 752??

8801 Estimatingthe imlact of MonetarJPoIicy.on.Short-Tenn lnterest Ratesin a Ratjonal Expectati ons--Eff j c i ent MarketsMode'l : Further Evidence (KennethJ. Robinsonand EugenieD. Short)

8802 Exchangeand Interest RateManagement and the Internat'ionai Transmissionof Disturbances(1,1. Michael Cox and DouglasI'lcTaggart)

8803 TheoreticalMacroeconomic Modell ing andQualitative Specifications of the BondMarket (l,liliiam R. Russelland Joseph H. Haslag)

8804 AugmentedInformation in a Theoryof Ambiguity,Credibility and Inflation (NathanBalke and Joseph H. Haslag)

8805 lnvestmentdnd the NominalInterest RdteThe Variable Velocity Case (EvanF. Koenig)

8806 Tax Policy and TexasEconomic Development (Stephen P.A. Brown)

8807 Unionizationand Unemploynent Rates: A Re-Examinationof 0lson's Labor CartelizationHypothesis (lli1liam C. Gruben)

8808 The Developmentand Usesof RegiondlIndexes of LeadingEconomic Indicators(Keith R. Philtips)

8809 The Contr.ibutionof NonhomotheticPreferences to Trade (Linda Hunter)

8EL0 Evidenceon the TwoMonetary Base Measures and EconomicActivity (JosephH. Haslagand Scott E. Hein)

88ll The Incidenceof SanctionsAgainst U.5. Employersof Illegal Ajiens (JohnK. Hill andJames E. Pearce)

8901 An [conometricAnalysis of u.S.0il Demand(Stephen P.A. Brownand Keith R. PhiI I ips)

8902 FurtherEvidence on the Liquidity Effect Usingdn Effi ci ent-Markets Approach(Kenneth J. Robinsonand Eugenie D. Short)

8903 AsymmetricInformation and the Role of Fedl.{atching (Nathan Balke and JosephH. Has1ag)

8904 FederalReserve System Reserve Requirements: 1959-88--4 Note (JosephH. Haslagand Scott E. Hein)

8905 Stock Returnsand Inflation: Further Tests of the Proxyand Debt- MonetizationHypothesis (David E1y and Kenneth J, Robinson) 8906 RealMoney Balances and the Timingof Consumptjon:An Empirical Investigation (EvanF. Koenig)

8907 TheEffects of FinancjalDeregu.lation on Infiation, Velocity Growth, MonetaryTargeting (ll. MichaelCox and JosephH. Haslag)

4908 Dayiight0verdrafts: llho ReallyBears the Risk? (RobertT. Clair)

8909 l"lacroeconomicPolicy and IncomeInequality: An Error-Correct j on Representation(Joseph H. Haslagand Danjel J. Slottje)

8910 TheClearing House Interbank Payments System: A Descriptionof Its 0perationsand Rjsk Management(Robert T. Clair)