Introduction to the 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. As of 2015, CHIPS settles over 250,000 of trades per day, valued in excess of $1.5 trillion 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.

Understanding 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; the average transaction that uses CHIPS is over $3,000,000.

CHIPS acts as a netting engine, where payments between parties are netted against each other instead of the full dollar value of both 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 eliminates credit limits, and releases and nets unresolved payments. By 5:15 p.m., CHIPS releases any remaining payments and sends payment orders to banks via Fedwire.

How The Clearing House Interbank Payments System Works

There are two steps 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 with respect to the payment order. Final settlement is irrevocable and unconditional. The finality of the payment is determined by that 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 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 requests the transfer of funds to the payee) to initiate a 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 offering payment services is complex. There are rules for large-value payments that are distinct from retail 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 and credit card transactions at the point of sale.