Welcome » IT Booklets » Wholesale Payment Systems » Interbank Payment and Messaging Systems » Fedwire and Clearing House Interbank Payments System (CHIPS)
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
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, FedwireFedwire® is a registered
service mark of the Federal Reserve Banks. See http://www.frbservices.org/
for fur-ther information on Fedwire Funds and Securities Service,
and NSS. 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).CHIPS is a private multilateral settlement system
operated by CHIP Co., a subsidiary of The Clearing House (formerly
known as the New York Clearing House Association).
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
The legal framework governing payment activity and the
regulatory structure for financial institutions that provide
payment services is complex.See Appendix D
for a discussion of the general legal framework for interbank
payment systems. 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.