Q&A About New Formats For Cover Payments And Business Remittance Payments

General Questions

What is the goal of this initiative?

Over the past two years, The Clearing House and the Federal Reserve Banks, the operators of the two U.S. dollar wire payment systems (CHIPS and the Fedwire® Funds Service), have been working closely together on issues that effect financial institutions, including cover payments and business to business ("B2B") remittance information. Although the two wire payment systems are not identical and have some basic differences in functionality, the proposed solutions for cover payments and B2B remittance information were designed collaboratively to minimize the implementation effort for financial institutions and still provide the necessary capabilities to comply with regulatory requirements and meet the needs of corporate customers.

Cover payments

1) Why is this message format enhancement being made?

In April 2007, the Wolfsberg Group (a group of global banks) and The Clearing House (TCH) published a set of principles (Off-site Link) to improve transparency of international transactions, including cover payments.

Additionally, the SWIFT community recently voted to enhance certain financial messages used to facilitate cover payments, effective November 2009 (Off-site Link). The Federal Reserve Banks (FRBs) and TCH, operators of the U.S. dollar wire transfer systems, have developed a strategy to ensure that the transparency of cover payments can be maintained when settled on their respective wire transfer systems, the Fedwire® Funds Service and CHIPS. This message format change is a component of that strategy.

2) How was the cover payment message format selected?

A range of options were considered for addressing the cover payment issue on the U.S. dollar wire transfer systems. The chosen solution reflects preferences expressed by industry participants through a recent formal survey conducted by the FRBs.

3) How will transparency be achieved for cover payments settled in U.S. dollars, and when will the enhanced cover payment message format be implemented on the U.S. dollar wire transfer systems?

Unlike certain SWIFT messages used for cover payments, currently the comparable U.S. dollar wire transfer system messages can carry customer details sufficient to achieve the desired transparency. However, at this time, these messages do not clearly denote that a particular message is related to a cover payment. In addition, cover payment transparency will need to be achieved when U.S. dollar correspondent banks receive incoming extended character SWIFT cover payment messages.

SWIFT will be implementing an extended character (10,000 character) cover payment message in November 2009. SWIFT elected to implement this message size to provide sufficient space in a single message to identify customer details for multiple underlying transactions. U.S. dollar correspondent banks receiving extended character SWIFT messages between November 2009 and approximately fourth quarter 2010 will need to split those into individual underlying transactions to be settled on the U.S. dollar wire transfer systems.

The FRBs and TCH will also recommend a market convention to be used between November 2009 and fourth quarter 2010 to identify certain Fedwire Funds Service and CHIPS messages related to cover payments, so that receiving banks can implement the appropriate internal accounting treatment for these messages.

With this strategy, market participants will be able to achieve the full transparency required by November 2009.

By approximately fourth quarter, 2010, additional enhancements will be available to accommodate multiple underlying transactions within one message.

4) What are the key features of the enhanced cover payment messages to be implemented by the fourth quarter of 2010?

The enhanced cover payment messages on the U.S. dollar wire transfer systems will be designed explicitly to match the data elements and extended character lengths offered in the new SWIFT cover payment messages. This will eliminate the need to split up extended character SWIFT messages when settling the underlying payments on the U.S. dollar wire transfer systems.

Business Remittance Information

5) Why is this enhancement to the payment message format change being made?

In October 2006, the FRBs and TCH published research (PDF) on business to business wire transfer payments. Conclusions of that research were:

  • Corporations want more structured remittance information in the wire transfer payment message to explain the purpose of the payment.
  • Having this information in a standard format would facilitate straight through processing.
  • Including this information in a wire transfer message would be valuable to corporations
  • Enhancing U.S. dollar wire transfer systems in this way would help maintain existing volume on the wire transfer systems and may lead to growth in wire transfer payments, to the extent that this becomes part of a strategy for corporations to move certain high value / urgent checks to electronic payment methods.

6) How were the business remittance information data elements selected?

The chosen data elements culminate more than two years of collaboration among the FRBs, TCH, and other constituencies in the U.S. dollar wire transfer community, including banks, corporations, and software vendors. The decision to implement this enhanced message format is consistent with preferences expressed through a recent FRB survey.

7) When will the enhanced payment message that includes business remittance information be implemented on the U.S. dollar wire transfer systems?

It is anticipated that both the FRBs and TCH will make this functionality available by the fourth quarter 2010.

8) What are the key features of the enhanced business remittance information message format?

The enhanced message will include all the necessary data elements to route and settle the payment plus a standard set of structured data elements designed to explain the purpose of the payment. The remittance information data elements have been explicitly selected so that they can be translated to or from a variety of popular remittance information formats including the EDI STP 820, the globally compatible XML ISO 20022, and certain proprietary / human readable formats.

The enhanced message can carry details for as many invoices as will fit in 9,000 characters of space dedicated to remittance information. It is expected that this will support approximately 25 to 30 invoices in a single wire transfer payment.

Message Format Survey Results

9) How do the message format changes described above relate to the recent FRB survey on possible changes to the Fedwire Funds Service message format?

The message format changes to be implemented on the Fedwire Funds Service are consistent with those described in the survey as "Option B, with the remittance information message add-on".

10) What were the results of the recent FRB message format survey?

Percentage of each customer group described in the first column that expressed a preference described in subsequent columns (percentage reflects only those respondents that provided an answer to the relevant question - blank responses removed from the calculation)
Respondent Category (count) Prefer Option A Prefer Option B Support the Remittance Info Option B add-on
All (366) 43% 57% 84%
Top 50 Fedwire Funds Customer (30) 26% 74% 85%
Process Cover Payments Today (104) 45% 55% 86%
Do not process cover payments today (160) 37% 63% 86%
SWIFT participant (71) 46% 54% 84%
FedLine Direct® Customer (95) 36% 64% 89%
FedLine Advantage® Customer - all (160) 45% 55% 82%
FedLine Advantage customer using Import / Export (130) 43% 57% 83%
Customer of a Bank (77) 43% 57% 86%
Expects multiple originator /beneficiary covers (35) 43% 57% 82%

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