** United States Payment systems (funds transfer systems) **
FEDWIRE
In the United States, funds transfers occur primarily through the Fedwire Funds Service, CHIPS, the National Settlement Service (NSS), cheque clearing, ACH, and payment card networks.
Large-value payment systems :
There are two major large-value funds transfer systems in the United States:
(i) the Fedwire Funds Service, operated by the Federal Reserve, and (ii) CHIPS, operated by The Clearing House Payments Company LLC
What Is the Federal Reserve System (FRS)?
The Federal Reserve System (FRS), often called "the Fed," is the central bank of the United States and intended to provide the country with a safe, flexible, and stable monetary and financial system.
Central Bank :
A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations.
Fed operates below payment systems:
1. FEDWIRE FUND TRANSFER
2. THE FEDWIRE SECURITIES SERVICES
3. THE NATIONAL SETTLEMENT SERVICE
FEDWIRE :
Fedwire refers to a real-time gross settlement system that enables participants to send and receive final payments in central bank money for their own accounts and on behalf of customers.
Banks, businesses, and government agencies use Fedwire for large, same-day transactions.
Participation :
An institution that maintains an account at a Federal Reserve Bank is allowed to be a Fedwire Funds participant
Operations :
The Fedwire Funds operating hours for each business day begin at 21:00 eastern time (ET) on the preceding calendar day and end at 18:30 ET, Monday through Friday, excluding designated holidays. For example, processing on a non-holiday Monday begins at 21:00 ET on Sunday night and ends at 18:30 ET Monday night. The deadline for third-party transfers, those initiated or received by a participant on behalf of a customer, is 18:00 ET. Offline transfers generally cannot be initiated before 09:00 or after 18:00 ET (17:30 for third-party transfers). Under certain circumstances, online and offline operating hours may be extended.
Settlement :
The Fed holds accounts for both senders and receivers and settles transactions individually and immediately. Once settled, all transactions are final and irrevocable, and the receiving bank is notified of the credit.
Gateway:
Participants can access Fedwire Funds through computer-to-computer and browser-based electronic access services. Participants conducting large volumes of funds transfers typically use the computer-to-computer service, FedLine Direct. Participants conducting small to moderate volumes of funds transfers typically use the browser-based service, FedLine Advantage. In addition, participants can access the Federal Funds Service by telephone
using the Federal Reserve Banks’ offline access channel.
𝐂𝐥𝐞𝐚𝐫𝐢𝐧𝐠 𝐇𝐨𝐮𝐬𝐞 𝐈𝐧𝐭𝐞𝐫𝐛𝐚𝐧𝐤 𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐬 𝐒𝐲𝐬𝐭𝐞𝐦 (𝐂𝐇𝐈𝐏𝐒) **
CHIPS (Clearing House Inter-bank Payments System) is a privately operated, real-time, multilateral, payments system typically used for large dollar payments.
The Clearing House Interbank Payments System (CHIPS) is an electronic payments system that transfers funds and settles transactions in U.S. dollars.
CHIPS is the primary clearinghouse in the U.S. for large banking transactions.
CHIPS and the Fedwire funds service used by the Federal Reserve Bank combine to constitute the primary network in the U.S. for both domestic and foreign large transactions in U.S. dollars.
𝐊𝐞𝐲 𝐟𝐚𝐜𝐭𝐬 𝐚𝐛𝐨𝐮𝐭 𝐂𝐇𝐈𝐏𝐒 :
-->>>LVPS – Large Value Payments System
-->>> CHIPS acts as a netting engine, where payments between parties are netted against each other instead of the full dollar value of both trades being sent
-->>>It’s a Clearing House – having established service of more than 35 years
-->>Typically used for large USD payments
-->>>Serves major International banks having offices in US, Domestic Banks and Private Banking Institutions representing about 19 Countries
𝐂𝐇𝐈𝐏𝐒 𝐒𝐭𝐚𝐭𝐢𝐬𝐭𝐢𝐜𝐬:
>>Transfers an average total value of $1.4 trillion a day,
>>Clears over 270,000 transactions on an average day
>>Handles 95% of all U.S. dollar cross-border payments
>> On a working day of 9 am to 5 pm for Intra Day & 5 to 5:30 pm for EOD procedures, 85% of the daily transfers are over by 12 noon
No carryover of messages or positions to the next day
𝐇𝐨𝐰 𝐓𝐡𝐞 𝐂𝐥𝐞𝐚𝐫𝐢𝐧𝐠 𝐇𝐨𝐮𝐬𝐞 𝐈𝐧𝐭𝐞𝐫𝐛𝐚𝐧𝐤 𝐏𝐚𝐲𝐦𝐞𝐧𝐭𝐬 𝐒𝐲𝐬𝐭𝐞𝐦 𝐖𝐨𝐫𝐤𝐬 :
There are two steps to processing funds transfers:
clearing and settlement.
The clearing is the transfer and confirmation of information between the payer (sending financial institution) and the payee (receiving financial institution).
Settlement is the actual transfer of funds between the payer's financial institution and the payee's financial institution.
𝐂𝐇𝐈𝐏𝐒 – 𝐌𝐞𝐬𝐬𝐚𝐠𝐞 𝐓𝐲𝐩𝐞𝐬 :
𝐏𝐚𝐲𝐦𝐞𝐧𝐭 𝐌𝐞𝐬𝐬𝐚𝐠𝐞𝐬:
Typical Payment requests MT10
Payment Message stored response MT25
Payment Preference Message MT02
Payment Resolver Notification MT38
Delete Payment MT01
𝐒𝐞𝐫𝐯𝐢𝐜𝐞 𝐌𝐞𝐬𝐬𝐚𝐠𝐞𝐬:
Typical Service Message MT22
Valid Service Message Response MT27
In Valid Service Message Response MT27
Service Message notification MT36
𝐂𝐇𝐈𝐏𝐒 – 𝐊𝐞𝐲 𝐰𝐨𝐫𝐝𝐬:
PSN – Payment Sequence Number – 7 Digit Numeric number to be assigned by the sender.
ISN – Input Sequence Number (Issued by CHIPS) (6-Digit),
OSN – Output Sequence Number (Issued by CHIPS) (6-Digit)
RSN – Resolved Sequence Number (issued by CHIPS) (6-Digit)
SSN – System Sequence Number (7-Digit)
NSS - National Settlement Services
The National Settlement Service, owned and operated by the Federal Reserve Banks, is a multilateral settlement service used to settle for clearing houses, financial exchanges and other clearing and settlement arrangements.
An NSS arrangement consists of a designated settlement agent and a group of depository institutions with accounts at a Reserve Bank that settles for the participants in the clearing arrangement. Each arrangement designates a settlement agent to submit settlement files to a Reserve Bank on behalf of the settlers. Settlement agents are not required to be depository institutions or to have accounts at the Federal Reserve. Their responsibilities include determination of settlement amounts by settler and electronic submission of NSS settlement
files to the Federal Reserve Banks.
Transaction types:
NSS files multilaterally settle payments among a group of settlers in the private sector cheque clearing houses, the private sector ACH network and the securities settlement systems or other clearing houses that use NSS.
Operations :
The NSS business day begins at 08:30 and ends at 17:00 ET, Monday through Friday, excluding designated holidays. Under certain circumstances, hours can be extended. Files submitted earlier than 08:30 ET are queued for processing beginning at 08:30 ET.
Automated clearinghouse (ACH):
ACH is a nationwide electronic file transfer mechanism that processed 19.2 billion credit and debit transfers initiated by depository institutions through electronically originated batches during 2010. The Federal Reserve is one of the nation’s two ACH operators; The Clearing House’s Electronic Payments Network (EPN) is the sole private sector ACH operator. FedACH is operated by Federal Reserve.
Operation of the ACH system :
The Federal Reserve maintains centralised application software used to process ACH payments submitted to the Federal Reserve Banks through the FedACH system. Depository institutions electronically deliver files to and receive files from the Federal Reserve Banks through a variety of electronic-access options. EPN and the Federal Reserve Banks rely on each other for the processing of ACH transactions in which either the originating depository
institution or the receiving depository institution is not their customer. These inter-operator transactions are settled by the Federal Reserve.
ACH transactions processed by the Federal Reserve are settled through depository institutions’ accounts at the Federal Reserve. Settlement for ACH credit transactions processed by the Federal Reserve Banks is final when transactions are posted to the receiving depository institutions’ accounts, which is currently at 08:30 ET on the settlement date.
Credit for Federal Reserve ACH debit transfers is not final at settlement. Credit for debit items is available to the originating depository institution on the settlement date but is not final until the banking day following the settlement date. FedACH is governed by Transactions processed by EPN are settled on a net basis using the
National Settlement Service.