Working Paper 88-2 LEGAL AND REGULATORY REFORM IN ELECTRONIC PAYMENTS: AN EVALUATION OF FINALITY OF PAYMENT RULES

and do not necessarily reflect the views of the Federal Reserve Bank of Richmond or the Board of Governors of the Federal Reserve System. Each day, approximately $1.3 trillion changes hands by means of wholesale wire transfers. Of this total, about $638 billion is exchanged on Fedwire, the Federal Reserve wire transfer network, while just under $622 billion moves over the privately-owned Clearing House Interbank Payment System (CHIPS). On Fedwire, the average transfer is $2.9 million, while transfers on CHIPS average $4.6 million. With such substantial amounts involved in virtually instantaneous trans-actions, it is not surprising that concern has arisen over risks that a large network participant will fail to settle its obligation to the network. Consequently, the Board of Governors of the Federal Reserve System has adopted risk control measures designed for both Fedwire and CHIPS. But despite the measures in place, further changes have been suggested. On Fedwire, for example, explicit pricing of daylight overdrafts has been proposed in order to make network participants aware of the risks they incur.3 On private net settlement networks like CHIPS, however, explicit pricing of net debits would be more complex. As a result, risk allocation rules, known as finality of payment rules, have been proposed for CHIPS. Finality rules specify when payment between particular parties to a transaction is irrevocable. The purpose is to assign risks to the parties in such a way as to give them incentives to reduce the risks they face. In the language of the economist, they seek to internalize the costs of a settlement failure in order "'Wholesale " wire transfer and the wholesale wire transfer networks are described in the Appendix. Network payment volumes are for March 1988