The Regulatory Environment PDF

Regulatory Environment Rules are designed to govern some type of processing. Federal Reserve Operating Circulars are specific rules based on regulations and laws: OC1 - Contains the terms for opening, maintaining and terminating a master account with the Fed. It outlines general...

Regulatory Environment Rules are designed to govern some type of processing. Federal Reserve Operating Circulars are specific rules based on regulations and laws: OC1 - Contains the terms for opening, maintaining and terminating a master account with the Fed. It outlines general provisions regarding the Fed’s services applicable to institutions whether they maintain a Reserve Bank account or not. OC4 - Describes the responsibilities of the Federal Reserve as the ACH Operator along with the responsibilities of financial institutions transmitting ACH files through the Fed (i.e., FedACH ®). OC5 - Sets forth terms under which an institution may access certain services and applications provided by a Reserve Bank through an electronic connection (e.g., FedLine ®). OC8 – Governs funds transferred via the FedNow® Service in conjunction with Regulation J, Subpart C. Nacha Operating Rules (ACH Rules) - Primary source for rules and regulations for the Commercial ACH Network. The ACH Rules define the obligations and liabilities of each financial institution, Third- Party Sender, Third-Party Service Provider (processor) and Originator participating in the ACH Network. RTP® Operating Rules - Apply to all payment and network messages processed through the RTP network and outline the responsibilities and liabilities of each network participant and The Clearing House. FedNow Operating Procedures – Procedures manual for participants in the FedNow Service. Card Network Rules - Requirements and responsibilities of a participant (merchants and issuers) in a card network are governed by the rules of the card network, or association, to which the participant belongs (e.g., Visa, Mastercard). Payment Card Industry Data Security Standard (PCI DSS) – PCI DSS is the global data security standard adopted by the card industry applicable to all entities that process, store or transmit Cardholder data and/or sensitive authentication data. It consists of steps that ensure security best practices in Cardholder data handling. © 2024, All Rights Reserved. 1  Law is a rule of conduct developed by the government (i.e., it goes through the legislative process and explains what should be and should not be done in any context). An Act is a ‘chunk’ of law (i.e., specific piece of legislation explaining why and how laws are enforced). An Act can carry many different laws; thus, a law is a subset of an Act. Bank Secrecy Act - A federal law enacted by Congress as a tool to fight drug trafficking, money laundering, and other crimes. It also prevents banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. Office of Foreign Assets Control (OFAC) – Federal government agency who administers economic sanctions and embargo programs that require assets and transactions involving interests of targeted countries, targeted country nationals, and other specifically identified companies and individuals to be frozen. OFAC has developed a list of Specially Designated Nationals and Blocked Persons (SDN List), which contains targeted foreign countries, terrorists, international narcotics traffickers and persons engaged in activities involving weapons of mass destruction. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act – Act establishes a wide variety of ways of combating international terrorism and money laundering. It requires financial institutions to implement customer identification programs (CIPs). Expedited Funds Availability Act (EFAA) - The EFAA is implemented through Regulation CC with a primary objective to speed up availability of deposited funds (i.e., make funds available the next business day following receipt). The act applies to ACH in situations where an RDFI reasonably suspects a credit entry is unauthorized (e.g., fraudulent) and has exercised its right to be exempted from the funds availability requirements under the Nacha Operating Rules. Electronic Fund Transfer Act (EFTA) - Regulation E carries out the purpose of the EFTA, which established the basic rights, liabilities and responsibilities of consumers who use electronic fund transfer (EFT) services. The primary objective is the protection of individual consumers engaging in EFT services, including consumer-initiated international transfers (wires and IAT), ATM, debit card, prepaid card and ACH transactions (applies to both private sector and government-initiated transfers). Uniform Commercial Code (UCC) - UCC is a series of state laws governing commercial transactions, including the sale of goods, commercial paper, bank deposits and collections, lading investment securities and secured transactions. Prior to the development of the UCC, the laws applicable to commercial transactions differed widely. It was conceived as an attempt to create model or uniform laws to be adopted by all states. UCC is not effective in any state until enacted by the state legislature, and each state may adopt the law in its entirety or modify it. UCC Article 4A (UCC 4A) – Article 4A governs “corporate wholesale credit entries,” which include wire transfers and CCD/CTX credit entries in the ACH. Some provisions may be altered by agreement (origination and deposit agreements) while others cannot; therefore, financial institutions and corporations should not rely on favorably negotiated contract terms if they are contrary to the provisions of UCC 4A. Article 4A also addresses commercially reasonable (i.e., covers security procedures and a customer’s duty to report unauthorized transfers; covers responsibilities, allocates risk and establishes limits on liability). © 2024, All Rights Reserved. 2  Regulations are a rule or order issued by executive departments and agencies of the federal government and are designed to regulate conduct. Regulation E - Regulation carries out the purpose of the Electronic Fund Transfer Act (EFTA). The primary objective of this regulation is the protection of individual consumers engaging in electronic fund transfer services, including ATM, debit card, prepaid card and ACH transactions (applies to both private sector and government-initiated transfers). Subpart A addresses the responsibilities of consumers and financial institutions as it relates to stop payment requests and disputes of unauthorized debit transactions (error resolution process). Subpart B implements the Remittance Transfer Rule under Dodd- Frank, which addresses consumer-initiated international remittance transfers for personal, household or family purposes (i.e., consumer-initiated international wire transfers and IATs over $15). Regulation J – Regulation provides the legal framework for financial institutions to collect checks and other items and to settle balances through the Federal Reserve. Subpart A defines how the FRB will process/clear checks and establishes the duties and responsibilities of participants in the check payment system (i.e., FRB, payers of checks). Subpart B governs the processing of wire transfers establishing procedures, duties, and responsibilities of the FRB, senders and recipients of wire transfers (i.e., Fedwire®). Subpart C is a new section governing how the FRB will process funds transfers via FedNow. Regulation CC - The Expedited Funds Availability Act is implemented under Regulation CC, which speeds up the availability of deposited funds. Specifically, under Subpart B, it establishes funds availability schedules. The regulation applies to ACH in situations where an RDFI reasonably suspects a credit entry is unauthorized (e.g., fraudulent) and has exercised its right to be exempted from the funds availability requirements under the Nacha Operating Rules. © 2024, All Rights Reserved. 3 Code of Federal Regulation (CFR) is the codification of the general and permanent rules published in the Federal Register by the executive departments and agencies of the federal government. It is divided into 50 titles that represent broad areas subject to federal regulation: 31 CFR 205 - Prescribes rules for transferring funds between the federal government and states for federal assistance programs. The rules are intended to minimize the time between the transfer of funds to the states and the payout for program purposes and to ensure federal funds are available when requested. 31 CFR 210 - Provides the regulatory foundation for use of the ACH Network by federal government agencies, specifically, defining the rights and liabilities of agencies, Federal Reserve Banks, financial institutions and the public in connection with ACH entries. 31 CFR 212 - Implements restrictions on the garnishment of certain exempt federal benefit payments and establishes procedures financial institutions must follow when receiving a garnishment order against an account holder receiving federal government benefit payments via ACH. 31 CFR 240 - Governs the indorsement and payment of checks drawn on the United States Treasury, including the allocation of loss between the government and endorsers of the check. In October 2011, it was amended to authorize the Treasury’s Bureau of Fiscal Service to direct Federal Reserve Banks to debit a financial institution's Master Account for all federal benefit payments made via check against the financial institution that the financial institution had not protested. Office of the Comptroller of the Currency (OCC) Bulletin 2021-49 – Bulletin requires banks to identify, measure, monitor and control risk by implementing an effective risk management program appropriate to the bank’s size, complexity and risk profile across all payment systems. Basel III - An internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-2009. The measures aim to strengthen the regulation, supervision and risk management of banks. Basel III includes both liquidity and capital reforms and is designed to help ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns. Key principles of Basel III include: Minimum capital requirements for banks, which was raised from 2% to 4.5% of common equity, as a percentage of the bank’s risk-weighted assets; Introduction of a non-risk-based leverage ratio to serve as a backstop to the risk-based capital requirements (banks are required to hold a leverage ration in excess of 3%); and Use of two liquidity ratios. o Liquidity Coverage Ratio requires banks to hold sufficient highly liquid assets that can withstand a 30-day stressed funding scenario as specified by the supervisors. o Net Stable Funding Ratio requires banks to maintain stable funding above the required amount of stable funding for a period of 1 year of extended stress. © 2024, All Rights Reserved. 4