Clearing House Interbank Payments System

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The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments. Together with the Fedwire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value domestic and international USD payments (where it has a market share of around 96%).

CHIPS is owned by financial institutions. According to the Federal Financial Institutions Examination Council (FFIEC), an interagency office of the United States government, "any banking organization with a regulated U.S. presence may become an owner and participate in the network."^[1]

Banks typically prefer to make payments of higher value and of a less time-sensitive nature by CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required).

CHIPS differs from The Fed in three ways. First, it is privately owned, whereas the Fed is a regulatory body. Second, it has around 46 members (2006), compared with the estimated 50,000 of The Fed. Third, it is a netting engine.

A netting engine consolidates all of the pending payments into fewer single transactions. For example, if Bank of America is to pay American Express US$1.2 million, and American Express is to pay Bank of America $800,000, the CHIPS system aggregates this to a single payment of $400,000 from Bank of America to American Express — only 20% of the $2 million to be transferred actually changes hands, which means that the remainder can continue to earn interest for the banks. The Fed's system would require two separate payments for the full amounts ($1.2 million to American Express and $800,000 to Bank of America), preventing that money from earning interest until it is settled in the recipient banks' accounts.

Only 46 of the largest banks dealing in U.S. dollars participate in CHIPS; 70% of these are non-U.S. banks. Smaller banks have not found it cost effective to participate in CHIPS.^{[citation needed]}