THE FEDERAL RESERVE COMMUNICATIONS SYSTEM

by Albert D. Tinkelenberg,

Vice President

Federal Reserve Bank of Richmond

The present Federal Reserve System is a direct result of over thirty years communications system development within the Federal Reserve System. The immediate predecessor of our present system was an 81-D-1 torn tape system at the Federal Reserve Bank of Richmond using M-19 teletype terminals at Federal Reserve Offices throughout the country. The new communications system became operational in August, 1970. The heart of the communications system is an M1000 Communications Switch which serves the teletype network, a magnetic tape network and a computer network. The system is a central store and forward communications system with all traffic routed from the originating location to the store and forward switch at Culpeper and then it is routed to the addressee station. Current system throughput is about 45,000 messages throughput/day (input plus output).

The teletype network includes 77 150 baud circuits with traffic to 40 locations around the country. Approximately 143 M-37 terminals are in use throughout the system. These terminals are the newest Teletype terminal which provides 150 words/minute using 150 baud communication lines. The M-37 terminal has a standard typewriter keyboard and as used in the Federal Reserve Communications System provides a typed copy of each message with the message identification at the originating terminal. The teletype terminals are used for transmission of funds transfers, commonly referred to as wire transfers; security transfers (CPD's); and Admin messages. Percentage-wise these provide 70%, 10% and 20% of the traffic respectively.

The second network included within the communications system is a magnetic tape network which uses thirteen 2400 baud circuits to all Federal Reserve District Head Offices and to the Federal Reserve Board of Governors in Washington. At each of these locations, an IBM 2968-7 tape transmission terminal is used. These terminals and circuits are used for the transmission of economic data from all the Federal Reserve Districts to the Board of Governors and to the Research Department at the Federal Reserve Bank of New York. Transmissions may be routed through the M1000 Communications Switch or they may be routed through circuit patching or via circuit switching directly from one location to the other.

The third network, the computer network, is actually a replacement for selected portions of the teletype network. Communications processors are now in use at several Federal Reserve Banks (FRB) with plans for each of the twelve FRB's to have computer switches installed by 1974. For example, the FRB of Chicago uses a Control Data M1000, FRB of San Francisco uses an IBM 360/30 especially programmed to handle communications, FRB of Cleveland uses twin IBM 360/30's and FRB of New York has an XDS Sigma 5. The communications processors connect to Culpeper and serve local communications networks at the Federal Reserve city. Using the computer network, funds transfers from the Bank of America in San Francisco are sent to the Federal Reserve Bank of San Francisco communications processor which in turn sends the messages automatically to Culpeper. Culpeper then polls the Chicago communications processor and routes the message to Chicago which would route the message from Chicago Bank over to, say, the Continental Bank in Chicago. In this case, the message would be routed automatically through three communications processors without any manual intervention. It is an objective of the Federal Reserve System to have all Federal Reserve District Offices connected in this manner for high speed (approximately 300 characters/second) communication with Culpeper and for automatic handling of message preparation and message processing at each office.

The M1000 Communications Switching System at Culpeper is a specially designed computer, designed to provide very rapid input and output. The system uses four computers called M1000 exchange units. With each exchange unit (EU) are core memory and fast disc plus secondary storage on disc packs and magnetic tape. As a message enters the system through a line group, it is routed into the exchange unit and immediately recorded on disc storage. After it is recorded on the disc, an acknowledgment is sent back to the originating terminal. The addressed terminal is then polled to determine if it is available for receipt of a message. If the polled terminal is in operating condition, and is not already busy with other traffic, the message is sent to it. While the traffic is waiting to be delivered, it may be stored on a fast access disc within the exchange unit; or on disc packs. As traffic is delivered to the addressee, it is recorded on disc packs and on magnetic tape. The disc pack storage provides a capability for rapid retrieval of a message by a receiving station during the day that the message is delivered. The magnetic tape record of the traffic is a permanent history of all traffic delivered. In most cases, Culpeper keeps the magnetic tapes with delivered traffic for thirty days.

1227

The M1000 system is especially designed to prevent loss of a message in case of failure and to continue communications service in spite of failure of key components. There are four exchange units in the M1000 system. In the case of an EU failure the communications system will continue to serve all terminals connected to the network. In fact, all three EU's can fail and communication service is still provided to all terminals in the network. Of course, in this case, the overall throughput will be reduced.

The Operators Console for the M1000 is especially designed to provide the information necessary for operator awareness of the transmissions through the system. While each message is routed automatically through the system, the operator needs to have information on the system operation. Circuit activity is shown by blinking lights for each circuit or a steady red light appears in case of circuit or terminal problems. Also, status lights are provided for each EU to show cases where an EU or a part of it, such as a disc, has failed and the function is assumed by the neighboring computer. The status indications from the control panel are supplemented by teletype terminals positioned at the operators console. Periodically, status reports pertaining to the communications through the system are provided at these terminals. Status reports include such things as number of messages delivered to each station, list of circuits and terminals which are inoperative, number of messages handled by each EU within a certain period and number of messages awaiting delivery on each line throughout the system. Also, the console terminals can be used to provide instructions to the M1000 computer to deliver traffic to an alternate terminal or to stop delivery of traffic terminals that have failed. Special commands to request special status reports may be inserted into the M1000 using these terminals.

Routing in the Federal Reserve Communications System uses the Bank ABA number in a standard message format. The last two digits of the routing number are a type code that indicates whether the message is a funds transfer, securities transfer, administrative, research, and so on. By this means, receiving terminals or automatic processors may call up a special processing program depending on the type code appearing in the message.

As a message is transmitted from a M-37 terminal to the communications switch at Culpeper, it is printed out on the copy at the M-37 terminal. After the communications switch has stored the message in the disc pack, it sends back to the originating terminal an input message acknowledgment (IMA) at the bottom of the message. The IMA contains an input station identifier, an input date time group, and an input message sequence number. As the message is delivered to the addressed station, these same fields are retained in the message ender and additional fields pertaining to the delivery are added. Additional fields are the message file number which is the location of the message on the M1000 disc pack, the output date time group, the output station identifier and the output message sequence number. With these identifying numbers, the message originator had an identification of the message as part of his acknowledgment from the communications switch. The same numbers are sent to the message addressee. Also the time that the message was received at the communications switch and the time that it was outputed are noted on the message. Over 90% of the traffic through the system is delivered within two minutes from time of receipt in the communications switch. The output numbers in the ender may be used by the addressee to retrieve a copy of the message from the communications switch should this be necessary.

The Federal Reserve Communications System is in a constant state of change; over forty new circuits have been added since it came in use, and there have been a continual series of additions to the communications switch program. With the present drive to connect communications processors at all Federal Reserve Head Offices, the evolutionary characteristics of the communications system will continue to be challenged. The field of data communications is advancing very rapidly and at Culpeper we enjoy our position in the forefront of this technology. It is our intention to keep the Federal Reserve Communications System well advanced in the data communications state-of-the-art.

20-306 O 748 pt. 5

APPENDIX III-BANK WIRE

In addition to the FRS Wire Network, discussed above, instructions for the transfer of funds can be handled with the Bank Wire. The Bank Wire is a switching network connecting over 230 banks, as shown below. This network switch is based on a four character alphabetic code (NXXX for New York banks, CXXX for Chicago banks, etc.) but the messages are not formatted in any standard as FRS messages are. Bank Wire is managed by banks in Chicago and New York, but an Ad Hoc Committee is now considering broader ownership of this network.

APPENDIX IV-CLEARING HOUSE INTERBANK PAYMENTS SYSTEM (CHIPS)

In 1970, the New York Clearing House Association (NYCHA) installed an automated clearing house through which international payments could be switched by means of a central computer located at the NYCHA. This system, referred to as the Clearing House Interbank Payments System, or CHIPS, has been expanded from the nine participating NYCHA banks to include one new NYCHA member and five Edge Act and foreign agency banks. In addition, forty other banks involved in international transactions participate through a Paper Exchange Payment System, or PEPS, with transactions printed centrally at NYCHA. PEPS may be viewed as an interim or "staging" phase for these forty organizations. When the switching computer system at NYCHA is expanded in 1974 to allow installation of terminals at the PEPS participants' locations, they will become part of CHIPS.

The CHIPS system determines the net position of each participating bank daily. The following morning at the 10:00 a.m. exchange, the NYCHA bank receives a credit or debit to its balance account on deposit at the Federal Reserve Bank of New York similar to the method of settling the exchange of checks.

This CHIPS capability conceivably can be expanded when the new computer switch is installed in early 1974 to include securities transactions. However, at present, it does not seem that this system has sufficient capacity to handle securities transactions in addition to its present volume. The NYCHA recently had a Funds Settlement Committee analyzing the feasibility of international payments being settled in funds valued today rather than funds valued tomorrow in an attempt to aid the Federal Reserve System in removing uncollected funds from the payment mechanism. This committee had three subcommittees concerned with Operations, Credit and Money Market.

This group has concluded that settlement should continue to be based on funds valued tomorrow because of operating limitations of the payment mechanism to effect transactions under limited times. In addition, there are severe credit problems caused by the settlement in good funds and the difficulty of unraveling erroneous transactions settled in funds valued today or cash. On a funds valued tomorrow basis, error conditions are corrected in funds valued today, so that the beneficiary of the transaction does not suffer a loss.

While solutions to all the problems mentioned regarding international payments being settled in funds valued today seem to be technically feasible, the benefit of settling transactions on a value today basis does not appear to be worth the severe peak demand it places on the payment mechanism.

Mr. Moss. We will now hear from our next witness. Mr. Bevis?

STATEMENT OF HERMAN W. BEVIS

Mr. BEVIS. Yes, Mr. Chairman, I will speak next.

Mr. Chairman, gentlemen, I appreciate the opportunity again to appear before you on behalf of BASIC to discuss legislation having to do with securities depositories. As has been noted, I am accompanied by Hamilton F. Potter, Jr., of Sullivan and Cromwell, counsel to BASIC.

Under date of May 11, 1973, we submitted a "Memorandum of Comment" containing our views, which we still hold, on title IV of H.R. 5050. This memorandum is attached as an appendix; a supplement updates it as to some of the figures and more important recent developments. [See p. 1876.] All my comments are confined to provisions of title IV concerning securities depositories. I offer no comments, pro or con, with regard to provisions having to do with clearing agencies, transfer agents, and other matters covered by title IV.

A PRIMARY ROLE FOR BANK REGULATORY AGENCIES TO ASSURE SAFETY FIRST

I believe that additional legislation is not needed for regulation of bank depositories at this time. However, if we assume that such legislation is to be enacted, we are concerned that title IV provides no realistic steps to inspire confidence that the securities and funds in depositories will be carefully safeguarded.

We believe that a securities transaction processing bill should have two objectives: (1) the prompt and accurate processing and settlement of securities transactions and (2) the financial and physical integrity of the processing institutions so as to assure that they will be able to answer for funds and securities on deposit or in process of settlement. Our concern is that if there is to be legislation it should make clear that the first objective should not be achieved at the expense of the second.

Title IV gives the SEC sole jurisdiction over a depository's registration, rulemaking, examination, and enforcement. It directly refers to bank regulatory agencies only twice and those instances almost have the appearace of afterthoughts. In section 17A (p) (1), if the appropriate bank regulatory agency so requests, it shall receive a copy of an SEC report on its examination of a bank depository; and section 17A (p) (2) provides that the SEC shall consult and cooperate with the agencies on mutual regulatory needs and responsibilities. That is all.

Mr. Chairman, banks and other non-broker-dealer fiduciary financial institutions, whose participation in any nationwide system of depositories is essential, want "safety first" as the regulatory cornerstone before they relinquish possession of assets they hold for others. They consider that "safety first" as a regulatory matter is something to be addressed before the event; the approach should be preventive and precautionary rather than remedial. To them, this means that depositories should not only look like banks and act like banks, but be regulated like banks.

I think the Congress should recognize this desire for assurance of safety-I believe the Congress shares it-and, if it is decided there