Appendices
The four appendices that follow are reprinted from the fourth edition of Payment Systems in Eleven Developed Countries, published in December 1993 and prepared under the aegis of the Bank for International Settlements by the Central Banks of the Group of Ten Countries and Switzerland. Minor editorial changes have been made to the original texts.
APPENDIX 1 Swiss Interbank Clearing System
The role of the Swiss Interbank Clearing System (SIC) is to execute interbank payments in Swiss francs finally and irrevocably 24 hours a day with funds held at the Swiss National Bank (SNB). SIC is the only system available for the execution of payments between Swiss banks by electronic means. It is a gross payment system, that is, all payments are settled individually on the participants’ accounts (debiting of the account of the bank issuing the payment instruction and crediting of the account of the receiving bank). SIC is both a large-value payment system and a retail payment system; there are no value limits. In 1992 slightly more than 64 million payments were executed for a total value of approximately Sw F 33 trillion, giving an average value of a little over Sw F 500,000 per payment. SIC’s most important objectives are to reduce credit risks, eliminate giro account overdrafts at the SNB, accelerate the payment process, and facilitate banks’ cash management.
SIC was developed between 1981 and 1986 by Telekurs AG in collaboration with the Swiss banks and the SNB and came into operation on June 10, 1987. The start-up phase lasted from June 1987 to January 1989. During this period the systems using vouchers or data media were phased out, the banks were progressively linked directly to SIC, and the transaction volume was gradually increased.
Legal and Policy Framework
There are no special legal provisions governing payment systems in Switzerland. SIC is run by the SNB, while Telekurs AG is under contract to provide the computer center service. Private law agreements between these two parties and with the participating banks form the legal framework for the operation and further development of SIC. The contracts are supplemented with technical instructions and handbooks.
Committees including representatives of the SNB and the participating banks promulgate changes and additions to the instructions and handbooks and take decisions on technical modifications to the application. All changes and additions require the approval of the SNB.
Participants
Participants in SIC must be located in Switzerland and must be banks within the meaning of the Swiss Banking Law. In addition, they must keep a giro account at the SNB. At the end of 1992, 162 participants were connected to SIC. This includes the regional banks’ computer clearing center, to which 151 banks were linked.
Types of Transactions
Only credit transfers in Swiss francs can be carried out via SIC, that is, payments are always initiated by the paying bank. SIC can be used for payments by bank customers to a bank account, payment orders in favor of third parties, provision of cover, and interbank payments. In addition, payments to a postal account or money orders (the amount concerned is delivered to the beneficiary at home by a postman) can be routed via SIC into the post, telegraph, and telecommunications (PTT payment system. Conversely, payments initiated at the PTT for the benefit of bank account holders are transferred from the PTT payment system to SIC.
The underlying transaction, whether it originates from a bank’s own business or is initiated by a customer, is irrelevant. Large-value payments are accounted for mainly by foreign exchange transactions involving Swiss francs, whereas small-value transactions stem predominantly from customer standing orders, individual customer orders, salary payments, and so forth.
Operation of SIC
The prerequisite for participation in SIC is an on-line connection to the central SIC computer. Payment instructions can be submitted for value the same day (for settlement on the day of presentation) or for settlement up to ten bank business days into the future.
A payment is settled only if there are sufficient funds in the sending bank’s SIC account; there is no provision for overdrafts. Settlement is final, and settled payments are delivered immediately to the receiving bank. SIC is thus a gross payment system.
If sufficient funds are not available at the time the payment instruction is submitted, payments are held pending in a queue file. As soon as sufficient funds have accumulated through the settlement of incoming payments, payment instructions are automatically cleared from the queue file. Pending payments are not delivered to the receiving bank and may be canceled at any time by the sending bank (except that the cancellation of a payment order after clearing cutoff time 1, described below, must be agreed with the receiving bank). The receiving bank is notified of any cancellations, since it has knowledge of incoming payments pending and a cancellation signifies a reduction in these pending items.
The payment transactions are processed on a “first-in, first-out” basis. All transactions have the same priority; it is not possible to change the sequence of queued payments. The sending bank can manage its queue of outgoing payments to a limited extent by canceling and resubmitting instructions.
Participants can at any time request an up-to-date statement of their own account balance (total of settled outgoing and incoming items, total of outgoing and incoming items held pending in queue files, and balances). Data can also be obtained concerning the status of outgoing and incoming payments to determine whether these have been settled or not. The SNB, for its part, has access to data for all the banks participating on SIC.
SIC operates around the clock on bank business days. Settlement is carried out for approximately 22 hours. The day begins at 6 p.m. (Zurich time) on the day before the bank business day in question with the transfer of giro balances from the master accounts at the SNB to the SIC clearing accounts. The day ends in three stages on the bank business day in question. Clearing cutoff time 1 is 3 p.m. From this moment on, payments submitted for same-day settlement are automatically changed to value the next bank business day. The only exception is the provision of cover, which can be submitted up to clearing cutoff time 2, which is 4 p.m., for same-day settlement. After clearing cutoff time 2, only payments submitted by the SNB are accepted for same-day settlement. Day-end processing starts at 4:15 p.m. These cutoff times are fixed, but in exceptional situations (for example, in the event of computer or data communications failures) they can be postponed by the SNB. At the end of the day, totals of debit and credit transactions are transferred from the SIC clearing accounts to the master accounts at the SNB.
The purpose of the hour’s difference between clearing cutoff time 1 and clearing cutoff time 2 is to give banks with queued payments, that is, with insufficient funds, the opportunity to acquire the necessary covering funds on the market or from the SNB. Covering funds from the SNB, so-called Lombard loans, are available only against collateral and at a rate of interest that is at present 2 percent above the money market rate. In the quarter-hour between clearing cutoff time 2 and the start of end-of-day processing, only Lombard loans can be accepted. During end-of-day processing, all the payments that are still queued, that is, which it has not been possible to settle, are deleted. These payments must be resubmitted the next day.
Pending payments that are canceled after clearing cutoff time 1 without the consent of the receiving bank or that are deleted during end-of-day processing are subject to a penalty rate of 3 percent per annum of the amount of the payment for the duration of the delay. The receiving bank is entitled to claim this penalty from the bank that issued the payment instruction. The latter is obliged to pay this penalty without delay, irrespective of any further claims by the receiving bank.
Transaction-Processing Environment
Every bank is connected to the SIC system via the network run by Telekurs AG. This network is available not only for SIC but for all services provided by Telekurs AG. The SIC connection is made to each bank’s own mainframe or a front-end computer; terminal connections are not permitted.
All payment instructions must be authenticated using special equipment to prevent illicit insertion or alteration of data. Encryption of data transmissions is optional.
If a bank is unable to transmit payment instructions to the SIC computer center by normal methods, it must try to find an alternative solution, for example, delivery of data on magnetic tape or by transmission using another system. Payment messages that cannot be transmitted from the SIC computer center to the beneficiary bank before day-end are issued on magnetic tape or, if necessary, on paper.
An active and a backup computer are available at the SIC computer center for production processing. A third computer, which is normally used for development, is available at a second, remote computer center.
The system’s maximum processing capacity is at present approximately 1 million payments a day, with an average hourly throughput of 100,000 transactions. In 1992 over 253,000 payments were processed on the average day. On peak days more than 580,000 payments were processed.
If SIC cannot be used (as a result of software errors, destruction of the infrastructure, etc.), Mini-SIC is available. Mini-SIC is a straightforward data media clearing system by which participants send payment instructions on magnetic tape to a newly designated processing center. All processing for a single day is performed at one time, payments are sorted according to recipient bank, the totals of credits and debits for each bank are calculated, and participants receive payments on magnetic tape. Each bank’s total is posted to its giro account at the SNB.
Settlement Procedures
It is established in the contractual agreements between the SNB and the banks participating in SIC that settled payments are final. Payments are made available to the receiving bank immediately after settlement. The Bankers’ Association recommends that customer accounts be credited for value the same day.
Under the rules governing compensation for payments whose value dates have been altered and for delayed payments, the receiving bank can claim interest at the call-money rate plus 2 percent, or the Lombard rate, whichever is higher, for the duration of the delay. There are also provisions for dealing with misrouted payments.
Since the introduction of SIC in 1987, participants have changed their payment and account management practices in the following ways:
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balances held in giro accounts have been reduced by two-thirds;1
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payment instructions are entered into the system earlier;
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smaller payments are entered before larger ones; and
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very large payments (over Sw F 100 million) are, where possible, split up into smaller transactions.
Pricing Policies
Prices for using SIC are set on a per transaction basis and charged to SIC participants. It is left up to each bank to decide whether and to what extent to pass charges on to its customers. Prices for a given operating year are established to generate revenues that will cover expected operating costs, including the costs associated with the Telekurs network and all line charges, given the expected volume of transactions. If there is a substantial underrecovery of costs during the year, prices can be adjusted in the course of the year.
The receiving bank pays a flat-rate fee of Sw F 0.20 per transaction. The sending bank pays a fee based on the sum of two components, one of which depends on the time a payment is initiated and the other on the time a payment is settled. In addition, the fee is partly dependent on the value of the payment. The following table shows the 1993 prices, charged to the sending bank.
| Time | Value | Initiation | Settlement |
| Before 8 a.m. | — | 0.06 | 0.11 |
| 8 a.m.–11 a.m. | — | 0.08 | 0.16 |
| 11 a.m.–2 p.m. | Under Sw F 100,000 | 0.10 | 0.20 |
| 11 a.m.–2 p.m. | From Sw F 100,000 | 0.30 | 0.90 |
| After 2 p.m. | Under Sw F 100,000 | 0.20 | 0.40 |
| After 2 p.m. | From Sw F 100,000 | 1.00 | 2.00 |
| Time | Value | Initiation | Settlement |
| Before 8 a.m. | — | 0.06 | 0.11 |
| 8 a.m.–11 a.m. | — | 0.08 | 0.16 |
| 11 a.m.–2 p.m. | Under Sw F 100,000 | 0.10 | 0.20 |
| 11 a.m.–2 p.m. | From Sw F 100,000 | 0.30 | 0.90 |
| After 2 p.m. | Under Sw F 100,000 | 0.20 | 0.40 |
| After 2 p.m. | From Sw F 100,000 | 1.00 | 2.00 |
An example will help illustrate how prices are assessed. Assume that the sending bank initiates a payment amounting to less than Sw F 100,000 before 8 a.m. and that this payment is settled after 2 p.m. The sending bank in this example pays Sw F 0.46 (0.06 + 0.40). This price structure is intended to reward the sending bank for early submission and settlement of payments. In particular, the price structure is designed to ensure that small-value payments (bulk payments) are submitted and settled as early as possible. This also helps prevent bottlenecks in the queue file at day-end.
Management of Credit and Liquidity Risks
Credit risks arise if a receiving bank acts upon information available about pending incoming payments.2 In this case, the receiving bank would de facto be extending credit to the sending bank, either intraday or even overnight. Because the initiating bank can at any time cancel pending outgoing payments, or payment orders for a later value date, and because pending payment orders are automatically deleted by the system at the end of the day, receiving banks are in fact reluctant to act on payment instructions. The staggered close of the clearing day, with clearing cutoff times 1 and 2 and the time in between, give banks the opportunity to acquire liquidity on the interbank market or in the form of Lombard loans from the SNB needed to fund payments held in the queue.
Control Over Payments Held in Queue
The experience with SIC has shown that the first-in, first-out processing rule greatly restricts participants’ ability to execute transactions for which the timing is crucial (examples of time-critical payments would include cash withdrawals and obligations arising from participation in net settlement systems). SIC is therefore being modified so that payment orders can be given priorities. Pending outgoing payments will then be worked through the queue according to priority, and only within a priority category according to the first-in, first-out principle. In this manner, participants will be able to manage their outgoing payments more efficiently. The system modifications necessary to support this enhancement should be completed in the second half of 1994.
APPENDIX 2 Fedwire
Fedwire is the large-value funds and securities transfer system owned and operated by the U.S. Federal Reserve System. The 12 Federal Reserve Banks are linked together and function as an integrated unit for purposes of Fedwire operations. The two basic types of services provided by Fedwire, funds and securities transfers, are described below.
Fedwire Funds Transfer
The Fedwire funds transfer service is a real-time, gross settlement service in which the sender of the funds initiates the transfer (Fedwire funds transfer is a credit transfer system). In general, depository institutions (including U.S. branches and agencies of foreign banks) that maintain a reserve or clearing account on the books of a Federal Reserve Bank may use Fedwire directly to send or receive payments. Approximately 11,000 institutions use the Fedwire funds transfer service.
Fedwire participants may transfer funds to another institution’s Federal Reserve account, either for the benefit of the receiving institution or for the benefit of a third party, such as a respondent institution, a corporation, or an individual. Fedwire funds transfers are primarily used for payments related to interbank overnight loans, interbank settlement transactions, payments between corporations, and settlement of securities transactions. In 1992, 68 million Fedwire funds transfers were made with a value of $199 trillion. The average size of a Fedwire funds transfer is approximately $3 million.
Operation of the Funds Transfer System
The Fedwire funds transfer system operates from 8:30 a.m. to 6:30 p.m. eastern time (ET). The Board of Governors of the Federal Reserve System recently made the decision to open the Fedwire funds transfer system at 12:30 a.m. (ET), beginning in early 1997. Each transfer is settled individually when it is processed and is final (that is, irrevocable and unconditional) at the time of receipt.
Funds can be transferred over Fedwire only at the request of a sending institution (the payor). A sending institution irrevocably authorizes the Federal Reserve Bank holding its account to debit its account for the amount of the funds to be transferred. The receiving institution authorizes the Federal Reserve Bank holding its account to credit the amount of the funds transfer to its account. In doing so, the receiving institution agrees that, if the funds are designated as payable to a third party, it will credit the third party’s account promptly.
Fedwire payment messages are sent over a communications network that links the 12 Federal Reserve Banks and the depository institutions holding accounts at the Reserve Banks.3 Depository institutions send payment instructions to their local Federal Reserve Bank for processing. If the payment is destined for an institution holding an account at another Federal Reserve Bank, the payment is sent through the communications network to the other Reserve Bank and is ultimately communicated to the receiving depository institution through on-line or off-line notification.
Over 70 percent of the users (representing 99 percent of the volume) of the Fedwire funds transfer system are connected electronically to the Federal Reserve. Institutions originating a high volume of transfers (those with more than 1,000 transfers per day) generally are connected by dedicated leased lines to the Federal Reserve. Medium-to-low-volume institutions (those with fewer than 1,000 transfers per day) generally use shared leased lines or dial-up connections. Less than 30 percent of Fedwire users, accounting for very low volume, initiate funds transfers off-line through telephone instructions to a Federal Reserve Bank. Depository institutions without electronic or off-line access to Fedwire rely on correspondent banks to initiate funds transfers on their behalf.
Pricing Policies
In 1993, the price of a Fedwire funds transfer made electronically was $1.06, with $0.53 paid by the originator and $0.53 paid by the receiver. The price to originate an off-line transfer by telephone was $10.00. Institutions advised of incoming transfers by telephone are charged $10.00 per telephone call. Depository institutions also pay connection fees to cover the cost of establishing and maintaining a data-transmission connection. These electronic connections, however, are used for other Federal Reserve services in addition to Fedwire. In 1993 monthly fees for dedicated, shared-leased line, and dial-up connections were $700.00, $300.00, and $65.00, respectively.
Risk Management Policies
In 1985, the Board of Governors of the Federal Reserve System adopted a policy to reduce the risks that large-dollar payment systems present to the Federal Reserve Banks, to the banking system, and to other sectors of the economy. The Federal Reserve’s payment system risk policy addresses the control of risks in Fedwire funds and securities transfers, ACH, and other payments processed by the Federal Reserve Banks. It also covers private, offshore, dollar clearing and netting arrangements, and private delivery-versus-payment clearance and settlement systems that settle in same-day funds. An integral component of the ongoing policy has been the Federal Reserve’s program to control intraday overdrafts in Federal Reserve accounts.
Because Fedwire funds transfers are final at the time of receipt by the receiving institution, the Federal Reserve effectively guarantees their payment. Thus, any intraday overdraft in a Federal Reserve account incurred by the sender of a Fedwire funds transfer results in a credit exposure for the Federal Reserve to that institution.4 Total peak intraday overdrafts related to Fedwire funds and securities transfers in Federal Reserve accounts amounted to approximately $170 billion per day, on average, during 1992.
Under its payment system risk policy, the Federal Reserve typically provides intraday credit to healthy depository institutions on an uncollateralized basis up to a net debit cap, or limit, which is generally set as a multiple of an institution’s risk-based capital. The Federal Reserve has the ability to monitor institutions’ intraday Federal Reserve account balances. For institutions deemed to pose special risks, the Federal Reserve may reject Fedwire funds transfers that would cause an overdraft in an account. In addition, in certain instances, the Federal Reserve Banks will require collateral to secure the intraday credit they provide.
A fee was imposed for intraday overdrafts incurred in accounts at the Federal Reserve Banks beginning in April 1994. The fee is set initially at an annual rate of 24 basis points. Plans call for raising the fee to 48 basis points and then to 60 basis points in the subsequent two years, although the Board of Governors has indicated that it will be very flexible about when and by how much the fees should change. The intraday rate is quoted on the basis of a 24-hour day and is applied to an institution’s average overdraft incurred in its account during the period that the Fedwire funds transfer system operates, currently 10 hours.
The objective of the intraday overdraft pricing policy is to provide a financial incentive for institutions to control their use of intraday Federal Reserve credit and to recognize explicitly the risks inherent in the provision of intraday credit. In connection with the introduction of fees on intraday overdrafts, the Federal Reserve also implemented a revised methodology for measuring intraday overdrafts in October 1993. This methodology includes a schedule for posting debits and credits from non-Fedwire transactions processed by the Federal Reserve, such as check and ACH transactions, to institutions’ Federal Reserve accounts during the day. Under the new measurement methodology, all Fedwire payments continue to be posted as they occur.
Fedwire Securities Transfer
The Federal Reserve is the depository for all marketable U.S. Treasury securities, many federal agency securities, and certain mortgage-backed securities issued by government-sponsored enterprises.5 These securities are almost exclusively in book-entry form. Depository institutions may maintain book-entry securities accounts at the Federal Reserve, in which they hold their own securities and those of customers.
Settlement for most government securities occurs over the Fedwire book-entry securities transfer system. The Fedwire securities transfer service is a real-time, delivery-versus-payment gross settlement system that supports the immediate and simultaneous transfer of securities against funds. Transfers are initiated by the sender of the securities and result in a simultaneous debit and credit to the sender’s book-entry securities and funds accounts, respectively, and a credit and debit to the receiver’s securities and funds accounts, respectively. The Fedwire securities transfer system normally operates between 8:30 a.m. and 2:30 p.m. eastern time. There are more than 8,500 participants in the service. Approximately 12 million securities transfers valued at $142 trillion were processed in 1992.
APPENDIX 3 The Bank of Japan Financial Network System
The Bank of Japan Financial Network System (BOJ-NET) is an on-line system introduced in October 1988 for electronic funds transfers among financial institutions, including the Bank of Japan (BOJ), which manages it. The system has reduced the use of paper-based services provided by the Bank of Japan, such as BOJ checks. In 1992, the daily transaction volume and value settled through BOJ-NET averaged 14,961 and
The Bank of Japan establishes rules on the use of BOJ-NET. To be eligible for the BOJ-NET funds transfer services directly, financial institutions must hold accounts with the Bank of Japan. Banks, securities companies, and money brokers (the so-called Tanshi brokers), including foreign banks and foreign securities companies in Japan, participate in the system. As of the end of June 1993, 371 financial institutions participated in BOJ-NET funds transfer services.
Most of the payment services provided by the Bank of Japan can be handled by BOJ-NET. The system is used to conduct
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(1) funds transfers among financial institutions associated with interbank money market and securities transactions;
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(2) funds transfers within the same financial institution (in-house funds transfers);
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(3) settlement of the positions resulting from privately managed clearing systems; and
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(4) funds transfers between financial institutions and the Bank of Japan (including treasury funds transfers).
Funds transfers handled by BOJ-NET are generally credit transfers, but in the case of in-house funds transfers, debit transfers can also be made. A sending bank can transmit a payment instruction with information on the sending and/or receiving banks’ customers. The minimum value for a third-party transfer is set at
Operation of BOJ-NET
Participants make funds transfers from one BOJ account to another by sending payment instructions from BOJ-NET terminals located at the individual participants’ installations. Funds transfers are settled either on a real-time gross basis (from 9 a.m. to 5 p.m. Tokyo time) or on a designated-time basis, depending on the choices made by the participant. There are four designated settlement times: 9 a.m., 1 p.m., 3 p.m., and 5 p.m. Payment instructions can also be sent on the day before settlement, with a 5:20 p.m. cutoff time for such settlements.
Funds transfers made through BOJ-NET are final. In the case of designated-time settlement, payment instructions can be revoked before they are executed. Real-time gross payments are instantaneously final.
Processing Environment
BOJ-NET is an on-line network system that links the BOJ-NET center of the Bank of Japan to financial institutions, the Bank of Japan head office, and its branches. Although the basic function of the BOJ-NET system is to provide on-line transactions between participants and the BOJ-NET center through terminals installed by the participants, a direct CPU-to-CPU link is available in the Foreign Exchange Yen Clearing System.
The host computer systems at the BOJ-NET center are duplicated for the purpose of contingency backup. Two systems, systems A and B, are virtually identical, and each system comprises an operating machine and a hot stand-by machine. Thus, four host computers are always ready for operation. Most of the peripheral equipment, such as the communication control unit and the data bases, are also duplicated to ensure safety.
The system network is based on leased lines and DDX (digital data exchange) packet-switching lines, both of which are provided by Nippon Telegraph and Telephone Corporation (NTT), a Japanese common carrier. These two types of lines are connected with computers in the BOJ-NET center; leased lines are used for linkages with participants’ BOJ-NET terminals located in Tokyo and for all direct CPU-to-CPU linkages, while DDX packet-switching lines are used for linkages with BOJ-NET terminals outside Tokyo. To ensure backup, lines connecting the BOJ-NET center and the telephone exchanges are duplicated. Similarly, to forestall system malfunctions owing to accidents at a telephone exchange, lines connecting the BOJ-NET center and major branches of the Bank of Japan are housed in two different telephone exchanges. Contingency measures are incorporated into hardware and software operations as well. Operation of the system is constantly monitored at the BOJ-NET center to detect problems as early as possible.
Pricing Policies
Participants pay variable charges to the Bank of Japan for use of BOJ-NET. The charge is
Credit and Liquidity Risk
The Bank of Japan does not extend intraday credit. If a BOJ-NET participant does not have sufficient funds in its account for a real-time funds transfer, the payment instruction is automatically rejected. In the case of designated-time funds transfers, the Bank of Japan monitors the positions of participants so that they will not have negative balances in their BOJ accounts and that designated-time settlement will thereby be executed.
APPENDIX 4 Clearing House Interbank Payments System
The Clearing House Interbank Payments System (CHIPS) is a private sector payment system owned and operated by the New York Clearing House Association (NYCHA). CHIPS began operation in 1971 as an electronic replacement for an existing paper-based clearing arrangement. Like Fedwire, CHIPS is a credit transfer system. Unlike Fedwire, however, CHIPS nets payment transactions multi-laterally and settles the net obligations at the end of the day.
CHIPS participants may be commercial banks, Edge Act corporations, investment companies as defined by New York state banking law, or banking affiliates of a commercial banking institution with an office in New York City. A nonparticipant wishing to send payments over CHIPS must employ a CHIPS participant to act as its correspondent or agent. At the end of 1992, the CHIPS network had 122 participants. Of these, 19 were settling participants involved in the settlement of CHIPS transactions at the end of each business day. Eleven of these settling participants settled only for their own account and 8 settled for as few as 2 or as many as 32 nonsettling participants. Of the 103 nonsettling participants in 1992, 86 were U.S. branches or agencies of foreign banks and 22 were U.S.-chartered institutions.6 Settling participants must maintain funds and book-entry securities accounts at the Federal Reserve Bank of New York.
The payments transferred over CHIPS are primarily related to interbank transactions of an international nature, including the dollar payments resulting from foreign currency transactions (including spot and currency swap contracts) and Eurodollar placements and returns. Payment instructions are also sent over CHIPS for the following purposes: settling obligations on other payment or clearing systems, adjusting correspondent balances, and making payments associated with commercial transactions, bank loans, and securities transactions. In 1992, nearly 40 million payments valued at $240 trillion were made through CHIPS.
CHIPS participants are subject to the supervision of state or federal banking supervisors, and CHIPS itself has been subject to annual examinations by state and federal banking authorities. Eleven New York money center banks make up the membership of the New York Clearing House Association, each of which is represented on the Clearing House Committee that establishes the rules for the operation of CHIPS. Nonmembers must agree to abide by the CHIPS rules before being allowed to participate in the system.
Operation of CHIPS
CHIPS normally operates from 7:00 a.m. to 4:30 p.m. eastern time and settlement is usually completed before 6:00 p.m. The CHIPS communications network is a single-node network with all participants connected directly to a single message-switching center. CHIPS maintains a primary and a backup processing site. Participants are connected directly to both the primary CHIPS processing site and to the CHIPS backup site. All connections have additional dial-up lines for contingency purposes. CHIPS participants must maintain data communications circuits and two computer processing facilities in the New York City area, a primary processing facility and a contingency processing center.
During operating hours, CHIPS acts as a payment message switching and accounting center between its participants. Each participant begins the business day with a starting balance of zero. CHIPS calculates the net position of each participant relative to each other participant continuously during the day based on payment messages sent and received. Payment messages can be entered for same-day or future-day value. Same-day messages are processed immediately upon release by the sender, unless they would cause the sender to exceed its credit limit or net debit cap (described below in the section “Risk Management Policies”). Once a payment message is released to the receiver, it cannot be revoked by the sending institution.
Settlement occurs through designated settling participants. Nonsettling participants must rely on the settling participants as correspondents to settle for them. Soon after 4:30 p.m. each day, the clearinghouse informs every participant of its net position and each settling participant of the overall net positions of the participants for which it settles (the net-net position).7 If the net-net position of a settling participant is a net debit, the settling participant is required to transfer funds to the CHIPS net settlement account at the Federal Reserve Bank of New York via a Fedwire funds transfer by 5:45 p.m. Once all net debit obligations have been paid, the clearing house transfers funds via Fedwire to all settling participants in a net-net credit position and notifies all participants, typically before 6:00 p.m., that settlement is complete.
Pricing Policies
In recovering the costs of operating CHIPS, the NYCHA acts like a cooperative, allocating its total costs for operations among the participants according to CHIPS usage (the number of messages sent and received during the previous month). There is a minimum charge of $1,500 per month. High-volume users (over 80,000 messages a month) are charged $0.13 for each message sent or received. Other users are charged for the type of message sent. If a message is coded (or “qualified”) with the receiver’s identification using the CHIPS Universal Identification File, the sender is charged $0.40.8 All receivers, except high-volume receivers, are charged $0.18.
Risk Management Policies
Because each CHIPS participant begins the day with a zero balance, credit must be extended among participants in order for them to make payments to one another. However, each CHIPS participant limits its credit exposure to every other participant, in part by setting a limit, known as a bilateral credit limit, on the net amount of credit that it will extend to another participant in the course of sending and receiving payments. A participant can set a bilateral credit limit at zero and may change its bilateral limits at any time.
In addition to the bilateral credit limits, the clearinghouse imposes a binding CHIPS net debit cap on each participant. This cap limits a participant’s overall (multilateral) net debit position vis-à-vis all other CHIPS participants. For each participant, the net debit cap is equal to 5 percent of the sum of the bilateral limits set for it by the other participants; the cap changes with a one-day lag whenever the bilateral credit limits change.
The CHIPS operating system continuously and automatically monitors payment messages that participants attempt to release to receiving institutions, in relation to the sending participants’ bilateral credit limits as well as their net debit caps. The system will not permit the release of any attempted transfers that would cause a sending participant to violate any of these limits.
Liquidity risk among CHIPS participants is managed by the following means. First, participants are required to maintain a reasonable level of liquid assets. The president of the NYCHA has the authority to review the financial statements of a participant and to require that the participant improve its liquidity if it is perceived that there might be a liquidity problem. Second, CHIPS provides an on-line, realtime inquiry system that permits a participant to monitor its net position and its potential need for liquidity. Third, the clearinghouse limits the maximum amount of liquidity that a participant could potentially require by imposing caps on participants’ net debit positions. Fourth, back-up terminals and operational reliability are required to minimize the liquidity risks that might result from operational failure.
Last, should a participant fail to settle, CHIPS loss-sharing rules will allocate “additional settlement obligations” to the remaining participants, based on their bilateral credit limits with a defaulting participant, in order to cover the settlement shortfall.9 These contingent settlement liabilities must be collateralized. Should a nondefaulting participant be unable to meet its additional settlement obligation, its collateral could be used to obtain liquidity. CHIPS procedures ensure that sufficient collateral will be available to cover a default by the largest system net debtor at any time.
There has also been a change in liquidity requirements, effective January 1, 1988.
Information that the system gives to the receiving banks concerning pending payments is not legally binding and, as expressly laid down in the SIC technical instructions, is not to be regarded as a binding assurance that funds will be transferred.
The Federal Reserve’s communications system is an ANSI X.25 packet-switching system. Each Reserve Bank is connected by multiple communications paths to every other Reserve Bank, and these paths can be dynamically changed to maintain system availability in the event of operational failures.
The Federal Reserve requires that intraday overdrafts be extinguished by the end of the day.
The Federal Reserve also acts as agent and depository for the securities of certain international organizations, such as the World Bank.
As of October 29, 1993, CHIPS had 120 participants, 18 of which settled for themselves and others and 10 of which settled only for their own account.
Participants are also informed of their net position with respect to every other participant in order to assist participants in reconciling their accounts with CHIPS.
As of October 1, 1993, the sender of a message is charged $0.25 if the message is coded either with a SWIFT receiver identification code or with the receiver’s routing and account numbers (that is, “partially qualified”).
CHIPS rules provide certain limits, however, on the amount of such losses that may be allocated to remaining participants.
Biographical Sketches
Hans J. Blommestein
Hans J. Blommestein is Senior Economist at the Organization for Economic Cooperation and Development (OECD) and the CSCE (Center for Security and Cooperation in Europe) Professor of Economics, Department of Public Administration and Public Policies, University of Twente, Enschede, Netherlands. Before joining the OECD, he served as Deputy Head of the International Monetary Affairs Division of the Netherlands Ministry of Finance and as an advisor to the Chairman of the Interim Committee of the International Monetary Fund. Mr. Blommestein has been the Netherlands member of the OECD Committee on Capital Movements and Invisible Transactions and a temporary alternate member of the Monetary Committee of the EU. He has organized several OECD seminars and training programs addressing financial sector issues in emerging market economies and has participated in technical assistance missions to Central and Eastern Europe.
Raj Bhala
Raj Bhala is Assistant Professor of Law, Marshall-Wythe School of Law, College of William and Mary, Williamsburg, Virginia. He specializes in international business and financial law and is the author of the recent book Foreign Bank Regulation After BCCI and articles on the law of electronic funds transfers, Mr. Bhala joined the law faculty in 1993 after working as an attorney in the legal department of the Federal Reserve Bank of New York for four years. He has participated in educational programs on the payment system for bankers from the former Soviet Union and served as a consultant to the International Monetary Fund on banking law matters in developing countries.
Akinari Horii
Mr. Horii is Chief Manager and Head of the Economic Research Division, Research and Statistics Department, The Bank of Japan. His previous position was Head of the Payment System Division of the Bank’s Financial and Payment System Department, where he was responsible for organization and management of the Bank’s technical assistance in the payment system area for the former Soviet Union and developing countries. Mr. Horii has participated as a lecturer in seminars for bankers from the former Soviet Union held at the Bank for International Settlements and the Joint Vienna Institute.
Jeffrey C. Marquardt
Jeffrey C. Marquardt is Assistant Director in the Division of Reserve Bank Operations and Payment Systems at the Board of Governors of the Federal Reserve System in Washington, D.C. He is responsible for the Board’s payment system risk program and for a variety of special projects dealing with the economic analysis of payment and banking system risk and efficiency. Mr. Marquardt has served on international working groups responsible for analyzing payment and settlement issues in the international financial system. Mr. Marquardt, who worked for a number of years in the Board’s Division of International Finance, holds a PhD in Economics and JD in law from the University of Wisconsin. He has participated in technical assistance initiatives organized by the International Monetary Fund directed at payment system reform in the Russian Federation.
Jürgen C. Pingitzer
Jürgen C. Pingitzer is Head of the Division for Banking Statistics and Minimum Reserves at the Austrian National Bank. Trained in law and economics, he has served in various central banking functions, including credit and banking system analysis. Mr. Pingitzer has served as a consultant to the International Monetary Fund, providing technical assistance on payment system matters in Romania, Belarus, and Ukraine.
Robert W. Price
Robert W. Price is Vice President at the Federal Reserve Bank of Cleveland, where he is responsible for day-to-day operation of the Bank’s large- and small-value electronic payment systems (Fedwire and Automated Clearing House), as well as the paper check system. He has led various Federal Reserve System working groups to improve nationwide payment system services and operational efficiency. Mr. Price has served on several International Monetary Fund technical assistance missions to the Russian Federation aimed at reform and modernization of the payment system.
Israel Sendrovic
Israel Sendrovic is Executive Vice President at the Federal Reserve Bank of New York in charge of the automation and systems services group. His responsibilities include the development and operation of the technology that supports Fedwire. Mr. Sendrovic has worked extensively on international technology and related payment system issues affecting central banks and has been actively involved in providing technical assistance to the People’s Bank of China.
J. Andrew Spindler
J. Andrew Spindler is Managing Director of the Financial Services Volunteer Corps (FSVC), a not-for-profit organization with headquarters in New York that channels volunteer technical expertise of U.S. financial services professionals to countries making the transition to market-oriented economies in Central and Eastern Europe, the former Soviet Union, and other areas. Before joining FSVC in 1993, Mr. Spindler was Senior Vice President of the Federal Reserve Bank of New York. He served as a Business Fellow at the Brookings Institution during 1980–82 and is the author of The Politics of International Credit: Private Finance and Foreign Policy in Germany and Japan.
Bruce J. Summers
Bruce J. Summers is Senior Vice President of the Federal Reserve Bank of Richmond where he is currently chief financial officer. For three and a half years he served as Deputy Director of the Division of Reserve Bank Operations and Payment Systems at the Board of Governors of the Federal Reserve System in Washington, D.C., where he was responsible for payment system policy development and for overseeing the banking operations of the 12 Federal Reserve Banks. Mr. Summers has assisted in the reform of the Russian banking system under the aegis of the Russian-American Bankers Forum and has worked extensively with the International Monetary Fund and the World Bank, providing technical assistance to the financial and banking systems of emerging market economies.
Paul Van den Bergb
Paul Van den Bergh is the Secretary of the Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries. He joined the Bank for International Settlements as an economist and for a number of years was involved in the analysis of monetary policy issues. Mr. Van den Bergh has organized a number of courses on payment and settlement systems for officials from East European countries and states of the former Soviet Union at the Joint Vienna Institute.
John M. Veale
John M. Veale is Chief Manager, Financial System Department, Reserve Bank of Australia, where his responsibilities include the development and implementation of payment system policy. Before assuming these responsibilities with the Reserve Bank of Australia, he worked in macroeconomic analysis and forecasting and from June 1991 to 1993 served as Deputy Chief Representative in the Reserve Bank’s office in London. Mr. Veale has been a consultant to the International Monetary Fund on payment system matters and has participated in technical assistance missions to Moldova and Armenia.