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An EFT network formed and shared by different types of financial institutions (i.e., commerical banks and credit unions).

Regardless of the type EFT service being performed, some arrangement must be made to allow a shared terminal or computer to commumicate with other terminals and/or computers. Network switching is an economical arrangement that allows temporary connection between any two stations. There are two types of switched networks:

Line-switched--Commonly used in real time environments. Messages are directly sent from one station to another when the central switching site establishes the connection.

• Store-and-forward--The central switching site stores incoming messages and retransmits the messages to their destination at a later time.

The primary concern whenever an EFT facility is shared by two or more financial institutions is security and confidentiality of customer data. This concern becomes critical when part of the switch is inoperable or when line problems develop which could interrupt the normal transfer of information through the switch. Therefore, adequate audit trails must exist for all transactions and should include traceability to the originating terminal. All rejected items should be properly reported, including reason for rejection, and accounted for. The use of consecutive transaction numbers as an integral part of the massage is essential in shared systems. Program validation of transaction numbers makes system subversion more difficult and is valuable in tracing transactions during settlement procedures.

There must also be adequate procedures for what the merchant clerk and/or customer must do in the event that the shared system goes down during a transaction. Steps to prevent double or incomplete posting should be documented. From a control stand point it would appear to be better for the switch to discontinue operation in the event of any break in communication thus eliminating potential problems of PIN security, account verification, and re-entry of the transaction at a later time when the customer is not present. If the switch continues to operate, adequate store and forward procedures should be considered.

The process of balancing and settlement should be thoroughly documented. Each participant in the switch should

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receive adequate transaction journals, by terminal location for their institution. Exceptions and rejections should be specifically documented if the final settlement is affected.

Agreements between or among participants, financial in-
stitutions, EFT servicers, or others must contain pro-
per control points. These control points will vary
from case to case, but in any event, the financial in-
stitution must be adequately protected against gross
negligence. Items
Items concerning normal and contingency
processing must be detailed and responsibility for cor-
rection must be stated.

Financial institution blanket bond companies normally
exclude certain types of EFT from the standard coverage.
Such exclusions generally include any use
include any use of plastic
cards i.e., debit, access, convenience or identification
cards. The use of As may also require the attachment
of a restrictive rider which may exclude any
loss due to use of access cards. In any event, each
ATM location must be scheduled with specific amounts
of coverage. On the other side, many retailer commer-
cial fidelity bonds have similar exclusions for EFT
which will, in effect, leave the store clerk unbonded.
If in fact store personnel are unbonded, alternative
means must be considered to ensure the repayment of
misappropriated funds. One alternative would be the
regular review of the financial statements of merchants
which would show if any capacity existed for such repay-

ment.

Recently separate coverage for ATMs and POSS has become available and should be suggested to management particularly if potential exposure exists with PIN compromise or other weaknesses. Specialized EFT insurance coverage can be extended to include imposter terminals and losses by errors and omissions in regard to telephone transfers, automatic transfers, or bill paying. If the financial institution decides that it is to be self-insuring, then the board should be fully informed of this decision, especially if undue exposure exsits from, for example, store personnel being able to effect transactions without the customer being there.

A rider commonly known as the Electronic Funds Transfer System Rider is now normally included in blanket bonds of financial institutions involved in Automated Clearing House (ACH). This rider, at an additional cost, will provide coverage for transactions to customer accounts originiated at "another banking institution or automated clearing house" which were fraudulently transmitted. It is noted that this rider does not cover inter-bank transfers or customer activated EFT transactions.

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FRCS-80

FEDWIRE Network

O Local District Network

Bulk Data Network

The FEDWIRE network, installed between 1969 and 1974,
links the twelve Federal Reserve Banks through a store
and forward message switch located in Culpeper, Vir-
ginia (see figure 10.1). To accomodate large volumes
of transactions the Federal Reserve Banks of New York
and Chicago are also linked through a direct communi-
cation line (see figure 10.2). The Federal Reserve
Banks use the FEDWIRE to transfer funds and securities
and to transmit administrative messages.
All messages
sent on this network are generally short in length.

The Local District network links approximately 500 financial institutions and 25 Federal Reserve Bank branches to the Federal Reserve Banks. A wide variety of local district networks can be found throughout the U.S. Most of them consist of host-to-host networks or host-to-terminal networks. Financial institutuions that are not online use the FEDWIRE service by telephoning or wiring instructions to a Federal Reserve Bank or branch.

The Bulk Data network, implemented in 1976, is used by the Federal Reserve Banks to transfer large volumes of data between offices. Commonly this network is used to transmit research data as well as ACH and settlement data. Essentially this network is used to transfer large files of data.

In 1982 the Federal Reserve will upgrade the FRCS-70 system to a packet switching network known as FRCS-80 (see figure 10.3). The initial network configuration will consist of 14 packet switching devices, one at each Federal Reserve Bank, the Treasury Department in Washington, D.C. and the Network Management Control center (NMC) in Culpeper, Virginia. Each office with a switching device will be able to transmit data to one of three other offices; which in turn will be the end point of transmission or an intermediary relay station. Through dial up facilities any one office could support any other office in the event of significant outages or heavy demand. Upon installation, the Federal Reserve will no longer rely on three separate networks to meet its communication needs.

During 1979, FEDWIRE handled over 28 million transactions valued in excess of $50 trillion. Approximately 175,000 money wire transfers are processed each day valued at

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