CHIPS (Clearing House Interbank Payments System)

CHIPS (Clearing House Interbank Payments System) is a privately owned system for clearing and settling large-value US dollar payments between banks. It is operated by The Clearing House Payments Company, which is owned by a group of large commercial banks. CHIPS handles a large share of the dollar leg of international transactions, including payments arising from foreign exchange trades, trade finance and cross-border commercial transfers, with daily values well above US$1 trillion.

The defining feature of CHIPS, in contrast to the Federal Reserve's Fedwire Funds Service, is that it nets. Instead of settling each payment in full as it arrives, it continuously matches and offsets payments between participants, so a bank needs only a fraction of the gross value of its payments in funding.

CHIPS was launched in 1970 by the New York Clearing House Association to replace paper-based clearing of interbank dollar transfers among New York banks, many of which acted as correspondent banks for foreign institutions. For most of its history it settled on a deferred net settlement basis at the end of each day, which left participants exposed to the risk that a failing bank could not cover its net position.

In January 2001 CHIPS moved to a real-time final settlement model, combining prefunding with a continuous matching algorithm, so that each released payment is final when made. In 2012 the US Financial Stability Oversight Council designated The Clearing House Payments Company, as operator of CHIPS, a systemically important financial market utility under Title VIII of the Dodd-Frank Act. CHIPS adopted the ISO 20022 messaging standard in 2024.

At the start of each day, each participant funds a prefunded balance by sending a Fedwire transfer into a CHIPS account held at the Federal Reserve Bank of New York. Payments sent by participants enter a central queue. The CHIPS algorithm repeatedly searches for sets of payments that offset one another, bilaterally or multilaterally, and releases them simultaneously whenever every participant's resulting balance stays at or above zero. Each released payment is settled with finality at that moment, debiting and crediting participants' positions in the CHIPS account, which holds central bank money.

Because offsetting payments cancel out, a modest prefunded amount supports a very large volume of payments, a liquidity saving that is the core benefit of netting. Toward the end of the day, any payments still in the queue are settled after participants send any additional funds required through Fedwire; remaining balances are returned to participants. The result is payment finality without the end-of-day unwind risk of traditional net settlement.

• Operator — CHIPS is private, owned by banks; Fedwire is operated by the Federal Reserve Banks.
• Settlement method — CHIPS uses continuous multilateral netting with prefunding; Fedwire is a real-time gross settlement system that settles each payment individually.
• Participation — CHIPS has a relatively small membership of large US and foreign banks with US operations; Fedwire is open to a much wider range of depository institutions.
• Liquidity — CHIPS requires less liquidity relative to value cleared; Fedwire may use intraday credit from the Federal Reserve.

Many international dollar payments are routed partly through both. A typical international wire transfer in dollars arrives as a SWIFT MT103 or ISO 20022 message to a US correspondent, which may then clear the interbank leg through CHIPS to the beneficiary's bank, as described in the global dollar transfer process.

Because almost all dollar payments ultimately settle in the United States, CHIPS sits at the center of dollar-based correspondent banking. Foreign banks that do not participate directly hold dollar nostro accounts with participants, which send and receive CHIPS payments on their behalf. The system's equivalents in other currencies include CHAPS for sterling and CIPS for the renminbi, though both settle on different models. For the operator's profile, see The Clearing House Payments Company regulator profile.

• The Clearing House