The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
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The Clearing House Interbank Payments System (CHIPS) is
a bank-owned, privately operated electronic payments system.
CHIPS is both a customer and a competitor of the Federal
Reserve’s Fedwire service.
The average daily value of CHIPS transactions is about
$1.2 trillion a day.
The Clearing House Interbank Payments System (CHIPS) is an electronic
payments system that transfers funds and settles transactions
in U.S. dollars. CHIPS enables banks to transfer and settle international
payments more quickly by replacing official bank checks with electronic
bookkeeping entries. As of January 2002, CHIPS had 59 members,
including large U.S. banks and U.S. branches of foreign banks.
The New York Clearing House Association, a group of the largest
New York City commercial banks, organized CHIPS in 1970 for eight
of its members with Federal Reserve System membership. Participation
in CHIPS expanded gradually in the 1970s and 1980s to include
other commercial banks, Edge corporations, United States agencies
and branches of foreign banks, and other financial institutions.
Until 1981, final settlement, or the actual movement of balances
at the Federal Reserve, occurred on the morning after a transfer.
Sharply rising settlement volumes raised concerns that next-day
settlement exposed funds unduly to various overnight and over-weekend
risks. In August 1981, the Federal Reserve agreed to provide same-day
settlement to CHIPS participants through Fedwire, the Feds
electronic funds and securities transfer network.
The number of CHIPS members has fallen from about 140 in the
late 1980s, mainly because of consolidations in the banking industry.
Membership might have fallen even more sharply if CHIPS had not
acted in 1998 to eliminate a requirement that members maintain
an office in New York City.
CHIPS is governed by a ten-member board consisting of senior
officers of large banks that establishes rules and fees and admits
and reevaluates participants. CHIPS handles about 240,000 transactions
a day with a total dollar value of about $1.2 trillion. Historically,
CHIPS specialized in settling the dollar portion of foreign exchange
transactions, and CHIPS estimates that it handles 95 percent of
all U.S. dollar payments moving between countries. However, the
CHIPS focus has shifted to domestic business since CHIPS introduced
intraday settlement in January 2001.
Until January 2001, CHIPS conducted all of its settling at the
end of the business day. Now, however, CHIPS provides intraday
payment finality through a real-time system. CHIPS settles small
payments, which can be accommodated by the banks available
balances, individually. Other payments are netted bilaterally
(e.g., when Bank A has to pay $500 million to Bank B, and Bank
B has to pay $500 million to Bank A), without any actual movement
of funds between CHIPS participants.
Other payments are netted multilaterally. Suppose Bank A must
pay $500 million to Bank B, and Bank A is also expecting to receive
$500 million from Bank C. Without netting, Bank A would send $500
million to Bank B, and it would thus experience a decline in its
available cash while it was awaiting the payment from Bank C.
Using the CHIPS netting system, however, Bank A submits its $500
million payment for Bank B to a payments queue, where it waits
until Bank Cs offsetting payment is received. The effect
of matching and netting these payments is that Bank As cash
position is simultaneously reduced by its payment to Bank B and
increased by receipt of its payment from Bank C. The overall effect
on Bank As cash position is thus zero.
Payments for which no match can be found are not made until the
end of the day, but each payment is final as soon as it is made.
To facilitate the working of the intraday netting system, each
participant pre-funds its CHIPS account by depositing a certain
amount between 12:30 and 9:00 a.m. The size of this "security
deposit," which is recalculated weekly, is set by CHIPS based
on the number and size of the banks recent CHIPS transactions,
and none of it can be withdrawn during the day. At the end of
the day, CHIPS uses these deposits to settle any still-unsettled
transactions. Any participant that has a negative closing position
at the end of the day (that is, it owes more than what it has
in its security deposit) has 30 minutes to make up the difference.
The 30-minute period is referred to as the final prefunding period.
If any banks do not meet their final prefunding requirement, CHIPS
settles as many of the remaining payments as possible with funds
that are in the system, and any payments still unsettled must
be settled outside of CHIPS.
Banks that have positive closing positions at the end of the
day receive the amounts that they are due in the form of Fedwire
payments. Because the ultimate CHIPS settlements are provided
by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire.
The vast majority of CHIPS members are also Fedwire participants,
and the daily value of CHIPS transfers is about 80 percent of
Fedwires non-securities transfers.
CHIPS has recently added electronic data interchange (EDI) capability
to its payment message format. EDI allows participants to transmit
business information (such as the purpose of a payment) along
with their electronic funds transfers.