Understanding FX Rails: What is CHIPS?

CHIPS is a system for settling high-value, domestic and cross-border USD payments between financial institutions. Unlike Fedwire, it is privately operated by The Clearing House.

What is CHIPS

CHIPS, also known as the Clearing House Interbank Payments System, is a critical part of the infrastructure that U.S. banks use to move large dollar payments.

CHIPS operates between financial institutions at institutional scales, and is primarily used for: commercial transactions, treasury operations, and correspondent banking. Banks that do not have direct access to CHIPS can access it through correspondents or third-party relationships with participating institutions.

What problem does CHIPS address?

Banks moving large payments need a reliable source of liquidity to settle transactions. If every payment had to be fully, independently funded, banks would need to maintain massive cash and credit positions to sustain operations.

This would become incredibly inefficient as banks must send money back and forth between one another regularly. CHIPS is designed to make these transactions more efficient, allowing payments to be offset against one another. This reduces the overall on-hand liquidity required to make a payment, allowing for much larger total value to be settled.

How does CHIPS work?

At the start of the day, participating banks send funds to a dedicated CHIPS account at the Federal Reserve in New York.

CHIPS records each bank's contributions, providing each a balance that can be used to settle payments.

When Bank A needs to send a payment to Bank B, CHIPS receives the request and checks whether it can be settled with cash already available in the system. If Bank A has a sufficient balance, the payment is released to Bank B and the ledgers are adjusted accordingly.

In the case that these banks need to send money in both directions, the system becomes even more efficient. If Bank A needs to pay Bank B $5 million, while Bank B needs to pay Bank A $3 million, these transfers can offset against one another. The result is that only $2 million in liquidity is required to complete the transaction, reducing the overall need for available capital.

Payments that cannot be settled remain in queue until CHIPS finds transactions to offset them. In this way, combinations that may have been possible with the available balances across bank participants can be supported through netting.

At day's end, CHIPS settles remaining obligations and returns leftover funds to participants through their Federal Reserve accounts.

Where is CHIPS used?

CHIPS is used for large USD payments between major financial institutions. A significant share of these payments are related to cross-border conversions.

As an example, a U.S. bank might use CHIPS to settle a correspondent banking obligation or to complete the U.S. leg of an international commercial payment.

The network can also be used for large domestic payments including: treasury operations, and certain commercial transactions.

CHIPS reference table