Planning for Fedwire’s Expanded ACAP Service

The Fedwire Securities Automated Claims Adjustment Process (ACAP) is a service that enables Fedwire participants to redirect principal and interest payments related to repo transactions or to failures to deliver or return securities by an agreed-upon date.  The Fedwire Securities Service currently offers the ability to automate fail-tracking, interim-accounting, and repo-related adjustments to P&I payments between participants through ACAP only for mortgage-backed securities issued or guaranteed by government agencies and government-sponsored enterprises (Agency MBS).

• Firms are able to automate existing manual claims processes to exchange income in the event of fail to deliver or repo transactions.
• Beneficial owners secure payments due faster though automated claims reducing their risk to the counterparty of the transaction and improving their liquidity position.
• Positions are reconciled with the depository daily confirming the Repo balance and making income tracking and projections easier to manage.

Fedwire will expand the ACAP service offering in a number of areas:

• Expands the service from Agency MBS securities to Treasury and Non-Treasury securities (debt securities issued by other governmental agencies, government-sponsored enterprises, and international organizations).
• Adds the capability for Fedwire participants to identify transfers related to securities lending activity in addition to repo with a new tracking code.
• Increases operational and technology efficiencies for industry participants.

Reduces the time (and thus risk) between when P&I payments are made and their repatriation by moving payment from NSS to Fedwire securities service and aligning with the security income payment.

• The payment process will move from the National Settlement Service (NSS) application to Fedwire securities service, allowing close alignment of the payments to the underlying income events.
• New claim messages will be introduced for credit and debit entries, while payments will be made on a gross basis for each security.
• Payments for Government Securities and Agency MBS will be made significantly earlier (approximately 8 a.m. EST) and other securities shortly after the corresponding income payment.

• Securities that do not pay interest for the life of the security, i.e., discount securities will remain excluded from ACAP.
• Final redemptions and maturities of securities will continue to be excluded from claim tracking for all security types.
• Securities settling at FICC must be excluded from tracking codes as an alternate mechanism is in place.

The Federal Reserve Banks has confirmed that implementation of ACAP’s enhancements will occur no earlier than the fourth quarter of 2022. However, a more concrete date has not yet been announced.

SIFMA is coordinating an industry effort to plan for the launch of the expanded ACAP service. We have formed a regular working group drawing on broker-dealers, asset managers, custodians, and key vendors and third parties to discuss the preparations for the launch of the expanded functionality.  Please contact Charles DeSimone if you would like to be involved.

Customer testing of the ACAP enhancements in Fedwire’s Depository Institution Testing (DIT) environment remains closed. The Federal Reserve Banks will announce the resumption of ACAP enhancement-related testing in the DIT environment along with the announcement of the new ACAP enhancements implementation date. Such testing in the DIT environment will resume at least six months prior to the new implementation date.

While the new ACAP offering will provide additional functionality and allow for more efficient operations in the future, industry planning and coordination are necessary to prevent any operational disruptions during the implementation process.

Two key issues the industry is facing are:

• The communication of the new service functionality to clients and counterparties with agreed standards to ensure universal adoption, and
• How to handle in-flight transactions (i.e., existing on-leg loans/repos) which have a close leg following the go-live date. Coordination between all industry participants will be required to ensure Stock Loan and Repo positions are in alignment across firms to prevent settlement rejects post go live.

The industry will get the greatest benefits from the new ACAP functionality if adoption is universal across users. If adoption is not universal at launch, firms could face fails and operational challenges if some clients and counterparties do not adopt the new functionality even as the bulk of the industry does. SIFMA recommends that all users plan to adopt the new functionality when it goes live. As ACAP is a service provided by Fedwire to its customers, it is not possible to formally mandate that firms use the new ACAP functionality. Instead, we recommend it as a best practice for market participants.

All Firms should be aware that ACAP tracking is driven by the delivering party, so a firm can still be impacted by ACAP events if they are not themselves transmitting the messages and will receive the adjustment credits/debits and associated messages.

As the fail and interim accounting tracking are based on a contractual date, these adjustments are not optional, repo and securities lending tracking requires the addition of new message codes.

We encourage all users to inform clients and counterparties that you will be using the new ACAP functionality when it goes live, and where you handle transactions on behalf of clients, to work to have them opt-ed into its use before go-live. SIFMA is developing model language to communicate this opt-in to clients, which we will post here when complete.

When the expanded ACAP functionality launches, market participants will have a number of in-flight transactions (i.e., existing on-leg loans) which have a close leg following the go-live date. As a result, firms may face operational challenges if, following go-live, new transactions use the tracking functionality while a remaining group of close-leg transactions does not. The resulting mismatch has the potential to cause significant settlement fail issues for market participants as they update their trade matching logic to include the ACAP tags. These matching issues would need to either be managed as exceptions on a consistent basis until they are closed out, or would need to be modified to add tracking on the close-leg to bring them into harmony with the rest of the transactions.

SIFMA’s current recommendation is that the industry work to modify these close-leg transactions to add tracking functionality to avoid operational complications. However, currently, there is no functionality to allow for bulk conversion of these close-leg transactions.

SIFMA is in dialogue with Fedwire and key third parties supporting this space to explore ways to modify these on-leg transactions add tracking functionality on the close leg ahead through a more structured process, and to explore any compliance and communications issues surrounding this process.