What Is the Clearing House Interbank Payments System (CHIPS)?
The Clearing House Interbank Payments System (CHIPS)isthe primary clearing house in the U.S. for large banking transactions. As of 2024,CHIPS has settled over $1.8 trillion per day in both domestic and cross-border transactions. CHIPS and the Fedwire funds service used by the Federal Reserve Bank combine to constitute the primary network in the U.S. for both domestic and foreign large transactions denominated in U.S. dollars.
Key Takeaways
- The Clearing House Interbank Payments System (CHIPS) allows large interbank transactions in the U.S. to clear.
- CHIPS is slower but less expensive than the other major interbank clearing house known as Fedwire, making it more amenable to larger transactions that can take longer to clear.
- CHIPS works by netting debits and credits across transactions, providing both clearing and settlement services to its customer banks.
Understanding the Clearing House Interbank Payments System (CHIPS)
The Clearing House Interbank Payments System differs from the Fedwire transaction service in several respects. First and foremost, it is cheaper than the Fedwire service, albeit not as fast, and the dollar amounts required to use this service are lower.CHIPS is the main clearing house for large transactions.
CHIPS acts as a netting engine, where payments between parties are netted against each other instead of the full dollar value of both exchanges being sent.From 9 p.m. to 6 p.m. ET, banks send and receive payments. During that time, CHIPS nets and releases payments. At 3 p.m., CHIPS raises the limit on the maximum position a participant can have on CHIPS. However, at 6 p.m., no more payments are accepted and the CHIPS closing process begins. Third-party transfers are completed by 6:45 p.m., and Fedwire Funds Service closes at 7 p.m.
Howthe CHIPS Works
There are twosteps to processing funds transfers: clearing and settlement. Clearing is the transfer and confirmation of information between the payer (sending financial institution) and payee (receiving financial institution). Settlement is the actual transfer of funds between the payer's financial institution and the payee's financial institution. Settlement discharges the obligation of the payer financial institution to the payee financial institution concerning the payment order. The final settlement is irrevocable and unconditional. The finality ofthe payment is determined by the system's rules and applicable law.
In general, payment messages may be credit transfers or debit transfers. Most large-value funds transfer systems are credit transfer systems in which payment messages and funds move from the payer financial institution to the payee financial institution. An institution transmits a payment order (a message that requests the transfer of funds to the payee)to initiatea funds transfer. Typically, large-value payment system operating procedures include identification, reconciliation, and confirmation procedures necessary to process the payment orders. In some systems, financial institutions may contract with one or more third parties to help perform clearing and settlement activities.
The legal framework for institutions offeringpayment services is complex. There are rules for large-value payments that are distinct fromretail payments. Large-value funds transfer systems differ from retail electronic funds transfer (EFT) systems, which generally handle a large volume of low-value payments including automated clearing house (ACH) and debit andcredit cardtransactions at the point of sale.
From time to time, CHIPS hours may change. The network hours may be shortened or extended.
Types of Payments Processed Through CHIPS
CHIPS processes a wide range of payment types, primarily focusing on large-value, time-sensitive domestic and international transactions. Here are the main types of payments processed through CHIPS:
Interbank Transfers
Interbank transactions involve the transfer of large sums of money between banks, often to settle interbank debts or fulfill client transactions. They are used for maintaining liquidity and stability within the banking system. For example, Bank A might transfer $10 million to Bank B to balance their end-of-day settlements, ensuring that both banks meet their financial obligations and maintain their required reserve levels.
Corporate Payments
Corporations frequently use CHIPS to make high-value payments to settle large invoices, purchase bulk goods, or transfer funds between their own accounts in different locations. These transactions require rapid and secure settlement to keep business operations running smoothly. An example would be a multinational corporation transferring $5 million to a supplier to pay for raw materials essential for production.
Foreign Exchange Transactions
Foreign exchange transaction payments involve exchanging different currencies, a cornerstone of international trade and investment. CHIPS facilitates these transactions by settling them quickly and efficiently, minimizing exchange rate risks. For instance, a currency exchange transaction might involve converting $2 million from USD to EUR to finance a trade deal between American and European companies.
Securities Transactions
Payments related to the purchase and sale of securities, such as stocks and bonds, are handled by CHIPS to ensure precise timing and coordination. An investment firm, for example, might use CHIPS to pay $15 million for newly issued government bonds, ensuring timely settlement and accurate record-keeping.
Bank Loan Payments
Transfers related to the repayment of large-scale loans such as syndicated loans are processed by CHIPS to ensure accuracy and timeliness. These payments are often scheduled and need to be executed precisely to maintain financial stability. For instance, a borrower might repay $10 million to a syndicate of banks as part of a structured loan agreement, requiring secure and reliable payment processing.
Clearing and Settlement Payments
Payments related to the clearing and settlement of financial transactions, including derivatives and other instruments, are processed by CHIPS to ensure these transactions are completed accurately and on time. An example might be clearing $20 million in securities being exchanged between financial institutions, requiring precise and secure settlement.
Government Payment
Large payments made by or to government entities, such as tax refunds, grants, or inter-governmental transfers, are handled by CHIPS to ensure they are also processed efficiently and on time. For example, a government might disburse $50 million in disaster relief funds to various state agencies, necessitating a secure and rapid transfer to ensure timely aid distribution.
What Is the Clearing House Interbank Payments System (CHIPS)?
CHIPS is a U.S.-based private sector real-time gross settlement system that processes large-value domestic and international payments.
How Does CHIPS Operate?
CHIPS operates as an electronic payment system that processes large-value transactions. It utilizes a process known as multilateral netting to aggregate and offset payment obligations among its participants, allowing for more efficient use of liquidity. Transactions are submitted by participating banks and are queued until they can be settled.
How Does CHIPS Differ From Fedwire?
Fedwire is a real-time gross settlement system run by the Federal Reserve that processes payments individually and settles them immediately. In contrast, CHIPS uses a netting mechanism to aggregate and offset payment obligations, allowing for a more efficient use of liquidity.
How Are Fees Structured in CHIPS?
Fees for using CHIPS are based on a combination of transaction volume and value, as well as fixed fees for participation. These fees are designed to cover the operational costs of the system. The Clearing House sets the fee structure, and it is reviewed periodically to ensure it remains competitive and aligned with market needs.
The Bottom Line
The Clearing House Interbank Payments System (CHIPS) is a U.S. real-time gross settlement network that processes large-value domestic and international payments. Run by The Clearing House Payments Company, CHIPS ensures secure and timely settlements for high-value interbank transfers, corporate payments, and other financial transactions
