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Booklet:
Wholesale
Payment Systems Section: Interbank Payment and Messaging Systems Subsection: Fedwire and Clearing House Interbank Payments System (CHIPS) |
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In
the United States, payment and securities settlement systems consist of
numerous financial intermediaries, financial services firms, and non-bank
businesses that create, distribute, and process large-value payments.
The bulk of the dollar value of these payments are processed electronically
and are generally used to purchase, sell, or finance securities transactions;
disburse or repay loans; settle real estate transactions; and make large-value,
time-critical payments, such as payments for the settlement of interbank
purchases and sales of federal funds, settlement of foreign exchange transactions,
or other financial market transactions.
There are two primary networks for interbank, or large-value, domestic,
funds transfer payment orders. The first, Fedwire® Funds Service,
is operated by the Federal Reserve Banks, and is an important participant
in providing interbank payment services as well as safekeeping and transfer
services for U.S. government and agency securities, and mortgage-backed
securities. In addition, Fedwire
Funds Service and the Federal Reserve’s National Settlement Service
(NSS) are critical components used in other payment systems’ settlement
processes.The
Clearing House Interbank Payments Company L.L.C. (CHIP Co.) operates the
second, the Clearing House Interbank Payments System (CHIPS).
Processing large-value funds transfers involves two key elements: 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 initiates a funds transfer
by transmitting a payment order (a message that requests the transfer
of funds to the payee). Payment order processing follows the predefined
rules and operating procedures of the large-value payment system used.
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
on behalf of the institution.
The legal framework governing payment activity and the regulatory structure
for financial institutions that provide 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 clearinghouse (ACH) and debit and
credit card transactions at the point of sale.
FEDWIRE FUNDS SERVICE
Fedwire Funds Service is a real-time gross settlement system (RTGS) enabling
participants to transmit and receive payment orders between each other
and on behalf of their customers. Real-time gross settlement means that
the clearing and settlement of each transaction occurs continuously during
the processing day. Payment to the receiving participant (payee) over
Fedwire Funds Service is final and irrevocable when the Federal Reserve
Bank either credits the amount of the payment order to the receiving participant’s
Federal Reserve Bank reserve account or sends notice to the receiving
participant, whichever is earlier.
Fedwire Funds Service participants must maintain an account with a Federal
Reserve Bank. Because of this requirement, non-financial organizations
are not permitted direct access to Fedwire Funds Service, although these
entities may use these services indirectly as customers of deposit-taking
financial institutions.
Certain payment and securities settlement systems, such as CHIPS and CLS,
also rely upon Fedwire Funds Service to allow participants or their correspondents
to provide necessary funding.
Financial institutions sending a Fedwire Funds Service payment order irrevocably
authorize their Federal Reserve Bank to debit (charge) their Federal Reserve
account for the transfer amount and to give credit in the same amount
to the payee. Only the originating financial institution can have funds
removed from its Federal Reserve account using the Fedwire Funds Service.
Depository institutions that maintain a reserve or clearing account with
a Federal Reserve Bank may use Fedwire Funds Service to send payments
to, or receive payments from, other account holders directly. Once the
Federal Reserve Bank credits the receiving institution’s account,
it will not reverse the transaction at the request of the originating
institution.
Financial institutions may access the Fedwire Funds Service via high-speed
direct computer interface (CI), FedLine, or with off-line telephone connectivity
with a Federal Reserve Bank. Financial institutions may also access certain
Fedwire Funds Service inquiry information via FedLine for the Web.
On-line participants, using either a CI or FedLine PC connection to Fedwire
Funds Service, require no manual processing by the Federal Reserve Banks.
Off-line participants provide funds transfer instructions to one of two
Federal Reserve Bank customer support sites by telephone, and after authenticating
the participant, the Federal Reserve Bank enters the transfer instruction
into the Fedwire Funds Service system for execution. The manual processing
required for off-line requests makes them more costly and suitable only
for institutions processing a small number of funds transfer payment orders.
The Federal Reserve Bank’s FedLine for the Web currently offers
access to low-risk Federal Reserve Bank financial services. FedLine Advantage,
which should begin a graduated rollout by year-end 2004, will allow depository
institutions access to additional Federal Reserve financial services,
including the Fedwire Funds Services and the Fedwire Securities Service,
via a secure Internet Protocol (IP) gateway to Federal Reserve Bank financial
services. Residing on a secure Web server, FedLine Advantage will be accessible
to customer financial institutions with authenticated credentials using
digital certificates.
CHIPS
CHIPS is a privately operated, real-time, multilateral, payments system
typically used for large dollar payments. CHIPS is owned by financial
institutions, and any banking organization with a regulated U.S. presence
may become an owner and participate in the network. The payments transferred
over CHIPS are often related to international interbank transactions,
including the dollar payments resulting from foreign currency transactions
(such as spot and currency swap contracts) and Euro placements and returns.
Payment orders are also sent over CHIPS for the purpose of adjusting correspondent
balances and making payments associated with commercial transactions,
bank loans, and securities transactions.
Since January 2001, CHIPS has been a real-time final settlement system
that continuously matches, nets and settles payment orders. This system
provides real-time finality for all payment orders released by CHIPS from
the CHIPS queue. To achieve real-time finality, payment orders are settled
on the books of CHIPS against participants’ positive positions,
simultaneously offset by incoming payment orders, or both. This process
is dependant on up to two rounds of required prefunding.
To facilitate this prefunding, CHIP Co. members jointly maintain a pre-funded
balance account (CHIPS account) on the books of the Federal Reserve Bank
of New York. Under the real-time finality arrangement, each CHIPS participant
has a pre-established opening position (or initial prefunding) requirement,
which, once funded via a Fedwire Funds Service funds transfer to the CHIPS
account, is used to settle payment orders throughout the day.
A participant cannot send or receive CHIPS payment orders until it transfers
its opening position requirement to the CHIPS account. Opening position
requirements can be transferred into the CHIPS account any time after
the opening of CHIPS and Fedwire Funds Service at 9:00 p.m. Eastern Time.
However, all participants must transfer their requirement no later than
9:00 a.m. Eastern Time.
During the operating day, participants submit payment orders to a centralized
queue maintained by CHIPS. Participants may remove payment orders from
the queue at any time prior to the daily cutoff time for the system (5:00
p.m. Eastern Time). When an opportunity for settlement involving one,
two or more payment orders is found, the system releases the relevant
payment orders from the central queue and simultaneously marks the CHIPS
records to reflect the associated debits and credits to the relevant participant’s
positions. Debits and credits to the current position are reflected only
in CHIPS records and are not recorded on the books of the Federal Reserve
Bank of New York. Under New York law and CHIPS Rules, payments orders
are finally settled at the time of release from the central CHIPS queue.
This process, however, typically will be unable to settle all queued messages.
Soon after 5:00 p.m. Eastern Time, CHIPS tallies any unreleased payment
orders remaining in the queue on a multilateral net basis. The resulting
net position for each participant is provisionally combined with that
participant’s current position (which is always zero or positive)
to calculate the participant’s final net position; if that position
is negative, it is the participant’s “final position requirement.”
Each participant with a final position requirement must transfer, via
Fedwire Funds Service, this second round of prefunding to the CHIPS account.
These requirements, when delivered, are credited to participants’
balances. Once all of the Fedwire Funds Service funds transfers have been
received, CHIPS is able to release and settle all remaining payment orders.
After completion of this process, CHIPS transfers to those participants
who have any balances remaining the full amount of those positions, reducing
the amount of funds in the CHIPS account to zero by the end of the day.
In the event that less than all final position requirements are received,
CHIPS settles as many payments as possible, subject to the positive balance
requirement, and deletes any remaining messages from the queue. Participants
with deleted messages are informed of which messages were not settled,
and may choose, but are in no way required, to settle such messages over
Fedwire Funds Service.