In banking, CHIPS stands for the Clearing House Interbank Payments System, the largest private-sector U.S. dollar clearing and settlement network in the world. It processes roughly $2.2 trillion in domestic and international payments each business day, almost all of it moving between large banks rather than ordinary account holders.1The Clearing House. About CHIPS The system exists to move large sums of money between banks cheaply by offsetting what they owe each other instead of settling every payment one by one.
What CHIPS Is Used For
CHIPS is built for high-value, bank-to-bank payments. The transactions flowing through it are things like cross-border trade settlements, foreign exchange deals, interbank funding, and capital market operations. When a company in Germany buys $50 million worth of goods from a U.S. supplier, the payment between their banks likely touches CHIPS.
The system has 42 direct participants, all large commercial or investment banks with a U.S. presence.1The Clearing House. About CHIPS Its reach is much wider than that number suggests. Thousands of smaller banks around the world access the U.S. dollar payment system through correspondent relationships with those direct participants. A regional bank in Southeast Asia, for example, holds an account with a CHIPS participant in New York, and that correspondent handles the CHIPS side of any dollar payment the smaller bank needs to send or receive.
CHIPS is not a consumer payment rail. Everyday wire transfers, retail payments, and personal banking move through other channels. If you’ve sent a wire from your checking account, you didn’t use CHIPS directly, though your bank may have used it upstream to settle with another institution.
How Multilateral Netting Works
The feature that sets CHIPS apart is multilateral netting. Instead of settling each payment individually, the system continuously calculates what each bank owes every other bank on a net basis. If Bank A owes Bank B $100 million and Bank B owes Bank A $80 million, only $20 million actually needs to move. Spread that logic across 42 participants exchanging hundreds of thousands of payments and the savings become enormous.
CHIPS uses a patented algorithm that matches and nets payments throughout the business day. Bilateral netting offsets obligations between pairs of banks; multilateral netting offsets obligations across the whole network. The result is that CHIPS can clear $2.2 trillion in gross payment value while requiring only a small fraction of that amount to actually change hands. According to The Clearing House, every dollar of funding contributed to the network supports roughly $26 in settled payment value.1The Clearing House. About CHIPS
Prefunding, Settlement, and Finality
Each CHIPS participant prefunds an account at the start of every business day. The prefunding amount is transferred via Fedwire to the CHIPS account at the Federal Reserve, where it becomes the liquidity pool used to settle payments through the day. The required amount is calculated weekly by CHIPS based on the bank’s transaction volume and cannot be withdrawn during operating hours.2U.S. Department of the Treasury. Technical Note on Payment Systems and Liquidity Risk Management
Throughout the day, the netting algorithm continuously matches and releases payments as offsetting obligations build up. It’s not a single end-of-day batch. Final net positions are squared up at the close of business, when the Federal Reserve adjusts each participant’s reserve balance to reflect its net debit or credit. That final transfer through Fed balances is what makes CHIPS settlements irrevocable.
The system accepts new payment messages until 6:00 PM Eastern Time.3The Clearing House. CHIPS Network Extends Operating Hours After the cutoff, any remaining unmatched payments go through a final resolution process. If a payment still can’t be matched and netted, it is returned to the sending participant.
How CHIPS Compares to Fedwire and SWIFT
Three systems dominate the infrastructure behind large U.S. dollar transfers, and the differences between them are what cause most of the confusion about what CHIPS actually does.
CHIPS Versus Fedwire
Fedwire is the Federal Reserve’s own payment system. It settles transactions individually and immediately through real-time gross settlement. When a bank sends a Fedwire payment, the full amount moves from the sender’s Fed account to the receiver’s Fed account right away, with no netting. That makes Fedwire the better choice for time-sensitive payments where a bank needs guaranteed, instant finality.
The tradeoff is liquidity. Because Fedwire settles each payment at full value the moment it’s submitted, participating banks must hold enough reserves at the Fed to cover every outgoing payment in real time. CHIPS lets banks settle a far larger volume of payments with less capital tied up, thanks to netting. For high-volume cross-border transfers where immediate settlement isn’t critical, CHIPS is cheaper. The two systems complement each other: Fedwire handles urgency, CHIPS handles volume.
Where SWIFT Fits In
SWIFT is not a payment system at all. It’s a messaging network. When an international bank wants to instruct its correspondent in New York to make a dollar payment, it sends a SWIFT message containing the payment details. The message itself doesn’t move money. The actual transfer happens separately through CHIPS or Fedwire.
Think of SWIFT as the email and CHIPS or Fedwire as the bank account. A SWIFT message tells a bank what to do; CHIPS or Fedwire actually does it. For cross-border dollar payments, the typical flow is a foreign bank sending a SWIFT instruction to its U.S. correspondent, which then uses CHIPS to execute the payment through the netting process.
Who Owns and Regulates CHIPS
CHIPS is owned and operated by The Clearing House Payments Company L.L.C., a private company owned by the largest commercial banks in the United States.4The Clearing House. About Our History A board of executives from participating banks sets governance policy, including risk management and operational standards.
Because a disruption to CHIPS could threaten the broader financial system, the Financial Stability Oversight Council designated The Clearing House Payments Company as a systemically important financial market utility under Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.5Board of Governors of the Federal Reserve System. Designated Financial Market Utilities That designation puts the Federal Reserve in the supervisory seat as CHIPS’s primary regulator, with authority to impose enhanced standards covering risk management, participant default policies, capital requirements, and the timely completion of settlement.6Legal Information Institute. Dodd-Frank Title VIII – Payment, Clearing, and Settlement Supervision
The Move to ISO 20022
On April 8, 2024, CHIPS completed its migration to the ISO 20022 messaging format.7The Clearing House. CHIPS Network Successfully Migrates to ISO 20022 This was more than a technical upgrade. ISO 20022 is the same messaging format used by other major global payment systems, which means CHIPS messages now carry richer, more structured data about each transaction. For banks and their corporate clients, that means easier reconciliation, better compliance screening, and fewer manual interventions when payments arrive with incomplete information.