Finance

The Clearing House Interbank Payment System (CHIPS)

THE CLEARING HOUSE INTERBANK PAYMENT SYSTEM ( CHIPS ):

What is the Clearing House Interbank Payment System:

  • The Clearing House Interbank Payment System ( CHIPS ) founded in 1970, is the US dollar-based electronic payments mechanism that transfers funds and settles transactions in the U.S.
  • CHIPS is the largest private-sector USD clearing system in the world held for clearing and settling of US dollar foreign exchange.
  • About 1.5 trillion dollars are transacted in domestic international payments per day.
  • It handles more than 95% of US dollar exchange payments.
  • CHIPS provides fast and final payments and the most efficient liquidity savings mechanism available today.

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How does the CHIPS work?

The following example would give a clear picture of the process of CHIPS:
Brett Lee has purchased some goods from David Warner. In return, Warner demands his payment. In this case, Lee goes to Bank A and transfers its money into Bank A. As a result Bank A is held responsible for the payment of goods on behalf of Lee. Thus in order to transfer its payment to Bank B, it uses the system of CHIPS. It needs to open two accounts in CHIPS:

  • Primary Account for funding requirement
  • Supplement Account for additional funding

From 9 pm on the day before until 5 pm on the looking day, participants can transfer money to CHIPS account through FEDWIRE. In this case, Bank A will transfer its money to CHIPS account between 9 pm and 5 pm, and Bank A will have to send a payment message which will be joining the queue in the system for verification by CHIPS. The payment message marked urgent will be sent for verification first and then the remaining. CHIPS will release the payment message and then it will verify it. After verification, it will either approve or reject it. After the payment message is approved, CHIPS will credit Bank A and will debit Bank B. After the transaction, CHIP will return the funding balance to the respective owners.

Drawbacks:

CHIPS suffers from the drawback that it has to face the issues pertaining to payment clearing risks, as it is more of a privately-owned agency than a government institution. The major risks which CHIPS suffer are:

  • Credit Risk
  • Operational Risk
  • Liquidity Risk

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Regulators:

The Clearing House and the law of New York City employes about 1.4 billion people all over. CHIPS participants may be commercial banks, edge act corporations, or any investment companies. CHIPS has 50 Bank participants and it comprises some of the world’s largest Banks: J P Morgan, Deutsche Bank, Hongkong Shangai Banking Corporation, Citigroup, Us Bank Corporation.

The difference in The Clearing House Interbank Payment System and Fedwire:

Though CHIPS in its process requires the intervention and need of FEDWIRE for transferring the money from the accounts of the participants to its own account, it is distinct from FEDWIRE:

  • FEDWIRE is a regulatory body while CHIPS is owned by the financial institutions that use it.
  • CHIPS is less expensive than FEDWIRE both by charges and by funds required.
  • CHIPS is a netting settlement process i.e. it allows payments to be netted while FEDWIRE is Real Time Gross Settlement.

 

Author: Bhagyashree Chandak

About the Author: I aspire to become a research analyst and earn and use the best of my knowledge.

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