Clearing House Interbank Payments System (CHIPS)

What Is the Clearing House Interbank Payments System (CHIPS)?

The Clearing House Interbank Payments System (CHIPS) is the primary clearing house in the U.S. for large banking transactions. Starting around 2015, CHIPS settles more than 250,000 of trades each day, valued in excess of $1.5 trillion in the two domestic and cross-border transactions. CHIPS and the Fedwire funds service utilized by the Federal Reserve Bank consolidate to comprise the primary network in the U.S. for both domestic and foreign large transactions designated in U.S. dollars.

Grasping CHIPS

The Clearing House Interbank Payments System varies from the Fedwire transaction service in several respects. Most importantly, it is less expensive than the Fedwire service, though not as fast, and the dollar sums required to utilize this service are lower. CHIPS is the principal clearing house for large transactions; the average transaction that utilizations CHIPS is more than $3,000,000.

CHIPS acts as a netting engine, where payments between parties are gotten against each other rather than the full dollar value of the two trades being sent. From 9 p.m. to 5 p.m. ET. banks send and receive payments. During that time, CHIPS nets and releases payments. From 5 p.m. until 5:15 p.m. the CHIPS system disposes of credit limits, and releases and nets unsettled payments. By 5:15 p.m., CHIPS releases any excess payments and sends payment orders to banks through Fedwire.

How The Clearing House Interbank Payments System Works

There are two moves toward processing funds transfers: clearing and settlement. Clearing is the transfer and confirmation of data between the payer (sending financial institution) and payee (getting financial institution). Settlement is the real transfer of funds between the payer's financial institution and the payee's financial institution. Settlement releases the obligation of the payer financial institution to the payee financial institution with respect to the payment order. Last settlement is irrevocable and unconditional. The finality of the still up in the air by that system's rules and applicable law.

By and large, payment messages might be credit transfers or debit transfers. Most large-value funds transfer systems are credit transfer systems in which both payment messages and funds move from the payer financial institution to the payee financial institution. An institution transmits a payment order (a message that demands the transfer of funds to the payee) to start a funds transfer. Commonly, large-value payment system operating procedures incorporate identification, reconciliation, and confirmation procedures important to deal with the payment orders. In certain systems, financial institutions might contract with at least one outsiders to assist with performing clearing and settlement activities.

The legal structure for institutions offering payment services is complex. There are rules for large-value payments that are distinct from retail payments. Large-value funds transfer systems vary from retail electronic funds transfer (EFT) systems, which generally handle a large volume of low-value payments including automated clearing house (ACH) and debit and credit card transactions at the point of sale.

Features

• CHIPS works by netting debits and credits across transactions, giving both clearing and settlement services to its customer banks.
• CHIPS is more slow yet more affordable than the other major interbank clearing house known as Fedwire, making it more amiable to larger transactions that can take more time to clear.
• The Clearing House Interbank Payments System (CHIPS) permits large interbank transactions in the U.S. to clear.