Along with its public sector counterpart, Fedwire, CHIPS forms the primary network for transferring and settling payments in US dollars. According to The Clearing House, CHIPS settles around $1.8T daily in domestic and international payments.
CHIPS is privately operated by The Clearing House, owned by the approximately 50 financial institutions that participate in its system, and governed by Article 4A of the Uniform Commercial Code.
CHIPS allows transactions to be netted, so it doesn’t process every transaction instantly in real-time. For payments that are not time-sensitive, CHIPS is a less expensive option to Fedwire, which is a real-time gross settlement system.
How CHIPS works
CHIPS operates from 9 a.m. to 6 p.m. Eastern Time. The extension to 6 p.m. was announced in March 2021 to help support late-day payments, especially from the West Coast. During operating hours, CHIPS nets and settles payments. Afterhours, CHIPS releases and nets unresolved payments and sends payment orders to Fedwire to settle. That’s right—CHIPS is not just a competitor, but also a customer of Fedwire.
CHIPS is a netting engine, which means the system allows multiple payments between the same parties to be aggregated. Let’s say that Modern Bank wants to send $2.5M to Card Network X. At the same time, Card Network X is paying Modern Bank $1.5M. Instead of allowing two transactions for the full amounts, CHIPs would consolidate these into a single payment of $1M from Modern Bank to Card Network X. Though this means that CHIPS payments take longer than real-time transactions, most payments still settle intraday.
History of CHIPS
CHIPS was organized in 1970 by the New York Clearing House Association, a group of the largest commercial banks in New York City. Originally for 8 of its bank members, CHIPS participation expanded in the 1970s and 80s to additional commercial banks, as well as Edge corporations, US branches of foreign banks, and other financial institutions. In 1981, to prevent risk exposure that could occur from waiting overnight or through a weekend to settle large volumes, the Federal Reserve agreed to provide same-day settlement to CHIPS participants through Fedwire.
In 1998, CHIPS eliminated the requirement that members have an office in New York City. Today, CHIPS has around 50 direct participants.