Along with its private sector counterpart, CHIPS, Fedwire forms the primary network for transferring and settling payments in US dollars. Fedwire processes trillions of dollars per day, settling transactions individually and immediately; once settled, the transaction is permanent and irrevocable. In processing payments individually, it differs from CHIPS, which is a netting engine that aggregates payments.
Fedwire Funds Services is owned and operated by the twelve Federal Reserve Banks, along with 2 other payment systems, Fedwire Securities Service and the National Settlement Service. Eligible participants for Fedwire Funds Services include depository banks and other financial institutions that have an account with a Federal Reserve Bank. During a wire transfer, both sending and receiving participating institutions pay a fee to help the Fed recoup costs.
Fedwire is governed by the Uniform Commercial Code, to ensure domestic wire transfers settle within one business day. Regulation J requires banks to process a wire transfer on the same business day it was received by the Federal Reserve; Regulation CC determines that wire transfers are received upon delivery of account and credit information.
When and How Fedwire Operates
Fedwire operates weekdays, from 9 p.m. the prior calendar day, to 7 p.m. Eastern Time. The system is closed during weekends and federal holidays, with the exception being that service for Mondays are operational from 9 p.m. on the preceding Sunday. Though operational until 7 p.m. ET, the deadline for initiating a payment on behalf of a third party, such as a bank’s customer, is 6 p.m. ET.
Fedwire is a real-time gross settlement transfer system, which means that it processes each transaction individually and in full. Here’s how it works:
A payment is initiated when the sender provides payment instructions to their bank. The bank debits the account and sends an instruction to its Federal Reserve Bank to transfer funds to the recipient. If the sender and receiver both have accounts with that particular Federal Reserve Bank, that Federal Reserve Bank can debit the sender’s account and credit the receiver’s account, and notify the recipient’s bank of the credit. When the recipient’s bank gets the notification, it can credit the recipient’s bank. Once the payment settles, it is irrevocable.
History of Fedwire
The Federal Reserve Banks started using wire transfers in 1918, using the telegraph. In the 1980s, to better support banking computer operations, the Fed updated its internal systems so that the maximum downtime would be just a few hours. Today, three processing centers support Fedwire—the primary processing environment and two “backups” located far apart to mitigate disrupting effects such as weather, power outages, and other interruptions.