Payments Academy
Clearing House Interbank Payments System PAYMENT OPERATIONS STARTED LIVE 01 Clearing House Interbank Payments System - CHIPS, is the private sector ACTIVE 02 CHIPS prefunded account - bank that wants to send a CHIPS payment QUEUED 03 CHIPS bilateral netting - If Bank A owes Bank B ten million dollars QUEUED 04 CHIPS cutoff visibility - analyst must show the cutoff in the product QUEUED 05 Return happens after receipt - when the receiving bank cannot apply the QUEUED 06 Analyst checklist - therefore practical: confirm the prefunding QUEUED Clearing House Interbank Payments System, or CHIPS, is the private sector system operated by The Clearing House for large value US dollar payments. Step 1 of 6 Clearing House Interbank Payments System STARTED Clearing House Interbank Payments CHIPS, is the private sector system operated ACTIVE CHIPS prefunded account bank that wants to send a CHIPS payment QUEUED CHIPS bilateral netting If Bank A owes Bank B ten million dollars QUEUED CHIPS cutoff visibility analyst must show the cutoff in the product QUEUED Return happens after receipt when the receiving bank cannot apply the QUEUED Analyst checklist therefore practical: confirm the prefunding QUEUED Clearing House Interbank Payments System, or CHIPS, is the private sector system operated by The Clearing House for large value US dollar payments.
CHIPS prefunded account PAYMENT OPERATIONS IN PROGRESS LIVE 01 Clearing House Interbank Payments System - CHIPS, is the private sector DONE 02 CHIPS prefunded account - bank that wants to send a CHIPS payment ACTIVE 03 CHIPS bilateral netting - If Bank A owes Bank B ten million dollars QUEUED 04 CHIPS cutoff visibility - analyst must show the cutoff in the product QUEUED 05 Return happens after receipt - when the receiving bank cannot apply the QUEUED 06 Analyst checklist - therefore practical: confirm the prefunding QUEUED A bank that wants to send a CHIPS payment first makes sure its CHIPS prefunded account at the Federal Reserve holds enough funds, because settlement draws on that prefunded balance. Step 2 of 6 CHIPS prefunded account IN PROGRESS Clearing House Interbank Payments CHIPS, is the private sector system operated DONE CHIPS prefunded account bank that wants to send a CHIPS payment ACTIVE CHIPS bilateral netting If Bank A owes Bank B ten million dollars QUEUED CHIPS cutoff visibility analyst must show the cutoff in the product QUEUED Return happens after receipt when the receiving bank cannot apply the QUEUED Analyst checklist therefore practical: confirm the prefunding QUEUED A bank that wants to send a CHIPS payment first makes sure its CHIPS prefunded account at the Federal Reserve holds enough funds, because settlement draws on that prefunded balance.
CHIPS bilateral netting example PAYMENT OPERATIONS IN PROGRESS LIVE 01 Clearing House Interbank Payments System - CHIPS, is the private sector DONE 02 CHIPS prefunded account - bank that wants to send a CHIPS payment DONE 03 CHIPS bilateral netting - If Bank A owes Bank B ten million dollars ACTIVE 04 CHIPS cutoff visibility - analyst must show the cutoff in the product QUEUED 05 Return happens after receipt - when the receiving bank cannot apply the QUEUED 06 Analyst checklist - therefore practical: confirm the prefunding QUEUED If Bank A owes Bank B ten million dollars and Bank B owes Bank A eight million dollars Step 3 of 6 CHIPS bilateral netting example IN PROGRESS Clearing House Interbank Payments CHIPS, is the private sector system operated DONE CHIPS prefunded account bank that wants to send a CHIPS payment DONE CHIPS bilateral netting If Bank A owes Bank B ten million dollars ACTIVE CHIPS cutoff visibility analyst must show the cutoff in the product QUEUED Return happens after receipt when the receiving bank cannot apply the QUEUED Analyst checklist therefore practical: confirm the prefunding QUEUED If Bank A owes Bank B ten million dollars and Bank B owes Bank A eight million dollars
CHIPS cutoff visibility PAYMENT OPERATIONS IN PROGRESS LIVE 01 Clearing House Interbank Payments System - CHIPS, is the private sector DONE 02 CHIPS prefunded account - bank that wants to send a CHIPS payment DONE 03 CHIPS bilateral netting - If Bank A owes Bank B ten million dollars DONE 04 CHIPS cutoff visibility - analyst must show the cutoff in the product ACTIVE 05 Return happens after receipt - when the receiving bank cannot apply the QUEUED 06 Analyst checklist - therefore practical: confirm the prefunding QUEUED The analyst must show the cutoff in the product and in the operations manual in Eastern Time Step 4 of 6 CHIPS cutoff visibility IN PROGRESS Clearing House Interbank Payments CHIPS, is the private sector system operated DONE CHIPS prefunded account bank that wants to send a CHIPS payment DONE CHIPS bilateral netting If Bank A owes Bank B ten million dollars DONE CHIPS cutoff visibility analyst must show the cutoff in the product ACTIVE Return happens after receipt when the receiving bank cannot apply the QUEUED Analyst checklist therefore practical: confirm the prefunding QUEUED The analyst must show the cutoff in the product and in the operations manual in Eastern Time
Return happens after receipt PAYMENT OPERATIONS IN PROGRESS LIVE 01 Clearing House Interbank Payments System - CHIPS, is the private sector DONE 02 CHIPS prefunded account - bank that wants to send a CHIPS payment DONE 03 CHIPS bilateral netting - If Bank A owes Bank B ten million dollars DONE 04 CHIPS cutoff visibility - analyst must show the cutoff in the product DONE 05 Return happens after receipt - when the receiving bank cannot apply the ACTIVE 06 Analyst checklist - therefore practical: confirm the prefunding QUEUED A return happens after receipt, when the receiving bank cannot apply the payment, and the funds come back through a return message. Step 5 of 6 Return happens after receipt IN PROGRESS Clearing House Interbank Payments CHIPS, is the private sector system operated DONE CHIPS prefunded account bank that wants to send a CHIPS payment DONE CHIPS bilateral netting If Bank A owes Bank B ten million dollars DONE CHIPS cutoff visibility analyst must show the cutoff in the product DONE Return happens after receipt when the receiving bank cannot apply the ACTIVE Analyst checklist therefore practical: confirm the prefunding QUEUED A return happens after receipt, when the receiving bank cannot apply the payment, and the funds come back through a return message.
Analyst checklist PAYMENT OPERATIONS COMPLETE LIVE 01 Clearing House Interbank Payments System - CHIPS, is the private sector DONE 02 CHIPS prefunded account - bank that wants to send a CHIPS payment DONE 03 CHIPS bilateral netting - If Bank A owes Bank B ten million dollars DONE 04 CHIPS cutoff visibility - analyst must show the cutoff in the product DONE 05 Return happens after receipt - when the receiving bank cannot apply the DONE 06 Analyst checklist - therefore practical: confirm the prefunding ACTIVE The analyst checklist is therefore practical: confirm the prefunding process and the intraday funding alerts Step 6 of 6 Analyst checklist COMPLETE Clearing House Interbank Payments CHIPS, is the private sector system operated DONE CHIPS prefunded account bank that wants to send a CHIPS payment DONE CHIPS bilateral netting If Bank A owes Bank B ten million dollars DONE CHIPS cutoff visibility analyst must show the cutoff in the product DONE Return happens after receipt when the receiving bank cannot apply the DONE Analyst checklist therefore practical: confirm the prefunding ACTIVE The analyst checklist is therefore practical: confirm the prefunding process and the intraday funding alerts

Key points of this lesson, in order.

0:00 / 4:15 Step 1 of 6

CHIPS: private sector netting for large payments

US: Fedwire, FedNow, ACH, CHIPS, Lesson 5 of 8, Narration 4:15, D05 Domestic payment systems

Correspondent bankingMultilateral nettingSettlement

What you will learn

Your objective. By the end of this lesson, you will be able to explain CHIPS: private sector netting for large payments. Clearing House Interbank Payments System, or CHIPS, is the private sector system operated by The Clearing House for large value US dollar payments.

Why it matters. The analyst must show the cutoff in the product and in the operations manual in Eastern Time, and must design the queue view so operations can see which payments are waiting and what funding is needed to release them.

Chapter objective: Learner compares Fedwire, FedNow, ACH, and CHIPS in the United States, explaining settlement timing, finality, value limits, and the business cases each system serves. Learner applies this skill in realistic banking scenarios, with clear examples and correct terminology throughout.

Key learning points

  • Clearing House Interbank Payments System
  • CHIPS prefunded account
  • CHIPS bilateral netting example
  • CHIPS cutoff visibility
  • Return happens after receipt
  • Analyst checklist

Key terms

Correspondent banking: A service where one bank holds accounts for another bank so the second bank can make payments in currencies or countries where it has no branch.

Multilateral netting: Netting across many participants in a clearing system, where each participant settles only its net position against the system.

Settlement: The final movement of funds between banks to discharge obligations created by cleared payments. Settlement is usually made in central bank money or through correspondent accounts.

Payment flow diagram showing CHIPS: private sector netting for large payments.

Practise this lesson

Exercise

Work out the net settlement position for the clearing cycle described in this lesson.

Use the clearing rules and the netting logic in this lesson.

  1. What to do. List the payments in the cycle, calculate the net position for each bank, and state what settles.

Correct result. Clearing validates, sorts, matches and nets the instructions, then produces a net position per bank. Only the net position settles, which needs far less liquidity than settling every payment individually.

Why. Netting is what makes high volume payments possible. Without it, every payment would need full liquidity at the moment it is sent.

Check your understanding

Practice question

Which of the following best describes CHIPS: private sector netting for large payments?

Takeaway and next step

What to remember

A payment that stays in the queue past the cutoff because the sending bank never funded its position will not settle that day, and operations must decide whether to fund it or reroute it through Fedwire.

Follow a payment through every stage, from instruction to beneficiary credit, and note where it can stop.

Open the Payment Lifecycle Simulator →

Builds on "ACH: the batch network that pays America".

Transcript and full text

Show transcript

Clearing House Interbank Payments System, or CHIPS, is the private sector system operated by The Clearing House for large value US dollar payments. It is the main alternative to Fedwire for wholesale payments, and it is used heavily for international payments, because many cross border US dollar payments are settled through CHIPS after arriving in the United States through correspondent banking. It is also used for domestic large value payments between banks, for securities settlement, and for corporate treasury movements. While Fedwire settles each payment individually in central bank money, CHIPS settles payments through netting that is designed to save liquidity. It processes around 500,000 payments a day with a value of around 1.8 trillion dollars. The happy flow starts with a payment instruction and a prefunded position. A bank that wants to send a CHIPS payment first makes sure its CHIPS prefunded account at the Federal Reserve holds enough funds, because settlement draws on that prefunded balance. The sending bank then sends the payment instruction to CHIPS as an ISO 20022 message, and CHIPS places the payment in its queue. CHIPS continuously looks for payments that can be offset against each other, and when a match is found, it releases the payments. The receiving bank is notified, credits the beneficiary, and the payment status moves from queued to settled, with final settlement in central bank money through the prefunded accounts. The netting model is what makes CHIPS different, and a worked example shows why it saves money. During the operating day, CHIPS collects payment instructions and holds them in a queue, and it continuously looks for payments that can be offset against each other. If Bank A owes Bank B ten million dollars and Bank B owes Bank A eight million dollars, the system can settle the net two million dollars rather than moving eighteen million dollars in two separate gross payments. This multilateral netting reduces the liquidity banks need to hold, which is a real saving when trillions of dollars move every day. At the end of the day, any payments not yet netted are settled through the participants' prefunded accounts at the Federal Reserve, so the final settlement is still in central bank money, and no payment is left unsettled overnight. Follow one payment end to end. A US bank receives a cross border payment instruction for a corporate customer: 4 million dollars to be paid to a supplier's bank, and the funds are already sitting in the US bank's correspondent account. The bank sends a pacs.008 customer credit transfer message to CHIPS, and CHIPS places it in the queue. During the morning, CHIPS finds offsetting payments from the receiving bank back to the sending bank worth 3.2 million dollars, and it releases the payments together: the net 800,000 dollars moves between the prefunded accounts at the Federal Reserve, and both banks are notified. The receiving bank credits the supplier 4 million dollars in full, and returns a pacs.002 payment status report confirming settlement. The customer sees a single payment of 4 million dollars; the netting that saved 3.2 million dollars of liquidity is invisible to them, and that invisibility is the point. The prefunding mechanics are the part an analyst must understand best. Each CHIPS participant holds a prefunded account at the Federal Reserve, and the balance in that account is the maximum the bank can settle on a net basis during the day. The bank funds the account at the start of the day and can top it up intraday with a liquidity transfer. If the prefunded balance runs low, the bank's payments sit in the queue until funding arrives or offsetting payments release them. The analyst must design the funding alerts with treasury: a warning when the balance falls below a threshold, a hard stop when it reaches zero, and a clear view of which queued payments are waiting for funding and which are waiting for an offset. Operating hours, cutoffs and prefunding decide whether a payment settles today. CHIPS operates on business days with published hours and cutoffs, and participants must prefund their CHIPS accounts and manage their queues, because a payment that stays in the queue because the sending bank has not funded its position will not settle. The analyst must show the cutoff in the product and in the operations manual in Eastern Time, and must design the queue view so operations can see which payments are waiting and what funding is needed to release them. A payment released to CHIPS is not the same as a payment that has settled, and the customer communication must reflect that difference, because a payment can sit in the queue for hours while the banks wait for offsetting payments or funding. Exceptions in CHIPS follow the queue and the funding position. A reject happens before the payment enters the queue, when the instruction fails validation or screening, for example an invalid account, a sanctions hit, or a missing mandatory field, and it is reported with a status message carrying a reject code. A return happens after receipt, when the receiving bank cannot apply the payment, and the funds come back through a return message. A recall is a request to cancel a payment still in the queue, and it can succeed while the payment has not yet been released for settlement, which is a real advantage over Fedwire, where a payment settles immediately and cannot be recalled. A payment that stays in the queue past the cutoff because the sending bank never funded its position will not settle that day, and operations must decide whether to fund it or reroute it through Fedwire. The ISO 20022 migration changed the message format but not the settlement model. CHIPS moved to ISO 20022 in April 2024, in a single cutover, and all of its payments now use ISO 20022 messages with structured party information, structured remittance data and the same pacs.008 and pacs.009 definitions as the cross border messages. A payment that arrives from abroad through SWIFT and is then settled through CHIPS now carries consistent data throughout, which improves screening and reconciliation. The analyst's requirements should reference The Clearing House CHIPS ISO 20022 usage guidelines, and test cases should use ISO 20022 messages with the same field definitions as the cross border leg. The choice between CHIPS and Fedwire is a treasury decision as much as a payments decision, and the analyst should be able to explain it. Fedwire settles each payment immediately in central bank money, which gives certainty and finality, but it needs the full gross amount in the sending bank's Federal Reserve account at that moment. CHIPS needs only the net amount, which is far less liquidity, but the payment may wait in the queue for an offset or for funding, and it settles later in the day. A bank may use Fedwire for a payment that must settle immediately and CHIPS for a payment where netting saves liquidity and a short delay is acceptable. For a cross border US dollar payment, CHIPS is often the natural choice, because the payment has already travelled through correspondent banking and the receiving bank expects a CHIPS settlement. A worked example with the liquidity saving makes the decision concrete. A bank needs to send 120 million dollars of payments during the day and expects to receive 110 million dollars. On Fedwire it would need up to 120 million dollars of intraday balance to fund the gross outflows. These figures are illustrative, chosen to show the liquidity saving from netting, not measured from a real bank day. On CHIPS, if the flows offset through the day, it may need only 10 to 20 million dollars of prefunded balance to settle the net position. The saving is real money: the balance held at the Federal Reserve earns little, and the bank would rather deploy it elsewhere. The cost is time: some payments wait in the queue, and the operations team must manage that wait and communicate it to customers who expected immediate settlement. The analyst working on CHIPS needs to understand the queue, the prefunding requirement, the cutoff times, and the difference between a payment released to CHIPS and a payment that has actually settled. The analyst checklist is therefore practical: confirm the prefunding process and the intraday funding alerts, confirm the cutoff in Eastern Time, design the queue view with funding and release status, map the reject, return and recall paths, and make sure the customer communication distinguishes queued from settled. CHIPS and Fedwire are complementary, not competing, and the analyst who can route between them is the analyst treasury teams want to work with.

Clearing House Interbank Payments System, or CHIPS, is the private sector system operated by The Clearing House for large value US dollar payments. It is the main alternative to Fedwire for wholesale payments, and it is used heavily for international payments, because many cross border US dollar payments are settled through CHIPS after arriving in the United States through correspondent banking. It is also used for domestic large value payments between banks, for securities settlement, and for corporate treasury movements. While Fedwire settles each payment individually in central bank money, CHIPS settles payments through netting that is designed to save liquidity. It processes around 500,000 payments a day with a value of around 1.8 trillion dollars.

The happy flow starts with a payment instruction and a prefunded position. A bank that wants to send a CHIPS payment first makes sure its CHIPS prefunded account at the Federal Reserve holds enough funds, because settlement draws on that prefunded balance. The sending bank then sends the payment instruction to CHIPS as an ISO 20022 message, and CHIPS places the payment in its queue. CHIPS continuously looks for payments that can be offset against each other, and when a match is found, it releases the payments. The receiving bank is notified, credits the beneficiary, and the payment status moves from queued to settled, with final settlement in central bank money through the prefunded accounts.

The netting model is what makes CHIPS different, and a worked example shows why it saves money. During the operating day, CHIPS collects payment instructions and holds them in a queue, and it continuously looks for payments that can be offset against each other. If Bank A owes Bank B ten million dollars and Bank B owes Bank A eight million dollars, the system can settle the net two million dollars rather than moving eighteen million dollars in two separate gross payments. This multilateral netting reduces the liquidity banks need to hold, which is a real saving when trillions of dollars move every day. At the end of the day, any payments not yet netted are settled through the participants' prefunded accounts at the Federal Reserve, so the final settlement is still in central bank money, and no payment is left unsettled overnight.

Follow one payment end to end. A US bank receives a cross border payment instruction for a corporate customer: 4 million dollars to be paid to a supplier's bank, and the funds are already sitting in the US bank's correspondent account. The bank sends a pacs.008 customer credit transfer message to CHIPS, and CHIPS places it in the queue. During the morning, CHIPS finds offsetting payments from the receiving bank back to the sending bank worth 3.2 million dollars, and it releases the payments together: the net 800,000 dollars moves between the prefunded accounts at the Federal Reserve, and both banks are notified. The receiving bank credits the supplier 4 million dollars in full, and returns a pacs.002 payment status report confirming settlement. The customer sees a single payment of 4 million dollars; the netting that saved 3.2 million dollars of liquidity is invisible to them, and that invisibility is the point.

The prefunding mechanics are the part an analyst must understand best. Each CHIPS participant holds a prefunded account at the Federal Reserve, and the balance in that account is the maximum the bank can settle on a net basis during the day. The bank funds the account at the start of the day and can top it up intraday with a liquidity transfer. If the prefunded balance runs low, the bank's payments sit in the queue until funding arrives or offsetting payments release them. The analyst must design the funding alerts with treasury: a warning when the balance falls below a threshold, a hard stop when it reaches zero, and a clear view of which queued payments are waiting for funding and which are waiting for an offset.

Operating hours, cutoffs and prefunding decide whether a payment settles today. CHIPS operates on business days with published hours and cutoffs, and participants must prefund their CHIPS accounts and manage their queues, because a payment that stays in the queue because the sending bank has not funded its position will not settle. The analyst must show the cutoff in the product and in the operations manual in Eastern Time, and must design the queue view so operations can see which payments are waiting and what funding is needed to release them. A payment released to CHIPS is not the same as a payment that has settled, and the customer communication must reflect that difference, because a payment can sit in the queue for hours while the banks wait for offsetting payments or funding.

Exceptions in CHIPS follow the queue and the funding position. A reject happens before the payment enters the queue, when the instruction fails validation or screening, for example an invalid account, a sanctions hit, or a missing mandatory field, and it is reported with a status message carrying a reject code. A return happens after receipt, when the receiving bank cannot apply the payment, and the funds come back through a return message. A recall is a request to cancel a payment still in the queue, and it can succeed while the payment has not yet been released for settlement, which is a real advantage over Fedwire, where a payment settles immediately and cannot be recalled. A payment that stays in the queue past the cutoff because the sending bank never funded its position will not settle that day, and operations must decide whether to fund it or reroute it through Fedwire.

The ISO 20022 migration changed the message format but not the settlement model. CHIPS moved to ISO 20022 in April 2024, in a single cutover, and all of its payments now use ISO 20022 messages with structured party information, structured remittance data and the same pacs.008 and pacs.009 definitions as the cross border messages. A payment that arrives from abroad through SWIFT and is then settled through CHIPS now carries consistent data throughout, which improves screening and reconciliation. The analyst's requirements should reference The Clearing House CHIPS ISO 20022 usage guidelines, and test cases should use ISO 20022 messages with the same field definitions as the cross border leg.

The choice between CHIPS and Fedwire is a treasury decision as much as a payments decision, and the analyst should be able to explain it. Fedwire settles each payment immediately in central bank money, which gives certainty and finality, but it needs the full gross amount in the sending bank's Federal Reserve account at that moment. CHIPS needs only the net amount, which is far less liquidity, but the payment may wait in the queue for an offset or for funding, and it settles later in the day. A bank may use Fedwire for a payment that must settle immediately and CHIPS for a payment where netting saves liquidity and a short delay is acceptable. For a cross border US dollar payment, CHIPS is often the natural choice, because the payment has already travelled through correspondent banking and the receiving bank expects a CHIPS settlement.

A worked example with the liquidity saving makes the decision concrete. A bank needs to send 120 million dollars of payments during the day and expects to receive 110 million dollars. On Fedwire it would need up to 120 million dollars of intraday balance to fund the gross outflows. These figures are illustrative, chosen to show the liquidity saving from netting, not measured from a real bank day. On CHIPS, if the flows offset through the day, it may need only 10 to 20 million dollars of prefunded balance to settle the net position. The saving is real money: the balance held at the Federal Reserve earns little, and the bank would rather deploy it elsewhere. The cost is time: some payments wait in the queue, and the operations team must manage that wait and communicate it to customers who expected immediate settlement.

The analyst working on CHIPS needs to understand the queue, the prefunding requirement, the cutoff times, and the difference between a payment released to CHIPS and a payment that has actually settled. The analyst checklist is therefore practical: confirm the prefunding process and the intraday funding alerts, confirm the cutoff in Eastern Time, design the queue view with funding and release status, map the reject, return and recall paths, and make sure the customer communication distinguishes queued from settled. CHIPS and Fedwire are complementary, not competing, and the analyst who can route between them is the analyst treasury teams want to work with.

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