FEDwire Fund Service

Fedwire Funds Service is a real-time gross settlement system (RTGS) enabling participants to transmit and receive payment orders between each other and on behalf of their customers. Real-time gross settlement means that the clearing and settlement of each transaction occurs continuously during the processing day. Payment to the receiving participant (payee) over Fedwire Funds Service is final and irrevocable when the Federal Reserve Bank either credits the amount of the payment order to the receiving participant’s Federal Reserve Bank reserve account or sends notice to the receiving participant, whichever is earlier.

Fedwire Funds Service participants must maintain an account with a Federal Reserve Bank. Because of this requirement, non-financial organizations are not permitted direct access to Fedwire Funds Service, although these entities may use these services indirectly as customers of deposit-taking financial institutions. Certain payment and securities settlement systems, such as CHIPS and CLS, also rely upon Fedwire Funds Service to allow participants or their correspondents to provide necessary funding.

Financial institutions sending a Fedwire Funds Service payment order irrevocably authorize their Federal Reserve Bank to debit (charge) their Federal Reserve account for the transfer amount and to give credit in the same amount to the payee. Only the originating financial institution can have funds removed from its Federal Reserve account using the Fedwire Funds Service. Depository institutions that maintain a reserve or clearing account with a Federal Reserve Bank may use Fedwire Funds Service to send payments to, or receive payments from, other account holders directly. Once the Federal Reserve Bank credits the receiving institution’s account, it will not reverse the transaction at the request of the originating institution.

Financial institutions may access the Fedwire Funds Service via high-speed direct computer interface (CI), FedLine, or with off-line telephone connectivity with a Federal Reserve Bank. Financial institutions may also access certain Fedwire Funds Service inquiry information via FedLine for the Web. On-line participants, using either a CI or FedLine PC connection to Fedwire Funds Service, require no manual processing by the Federal Reserve Banks. Off-line participants provide funds transfer instructions to one of two Federal Reserve Bank customer support sites by telephone, and after authenticating the participant, the Federal Reserve Bank enters the transfer instruction into the Fedwire Funds Service system for execution. The manual processing required for off-line requests makes them more costly and suitable only for institutions processing a small number of funds transfer payment orders.

The Federal Reserve Bank’s FedLine for the Web currently offers access to low-risk Federal Reserve Bank financial services. FedLine Advantage, which should begin a graduated rollout by year-end 2004, will allow depository institutions access to additional Federal Reserve financial services, including the Fedwire Funds Services and the Fedwire Securities Service, via a secure Internet Protocol (IP) gateway to Federal Reserve Bank financial services. Residing on a secure Web server, FedLine Advantage will be accessible to customer financial institutions with authenticated credentials using digital certificates.

CHIPS
CHIPS is a privately operated, real-time, multilateral, payments system typically used for large dollar payments. CHIPS is owned by financial institutions, and any banking organization with a regulated U.S. presence may become an owner and participate in the network. The payments transferred over CHIPS are often related to international interbank transactions, including the dollar payments resulting from foreign currency transactions (such as spot and currency swap contracts) and Euro placements and returns. Payment orders are also sent over CHIPS for the purpose of adjusting correspondent balances and making payments associated with commercial transactions, bank loans, and securities transactions.

Since January 2001, CHIPS has been a real-time final settlement system that continuously matches, nets and settles payment orders. This system provides real-time finality for all payment orders released by CHIPS from the CHIPS queue. To achieve real-time finality, payment orders are settled on the books of CHIPS against participants’ positive positions, simultaneously offset by incoming payment orders, or both. This process is dependant on up to two rounds of required prefunding.

To facilitate this prefunding, CHIP Co. members jointly maintain a pre-funded balance account (CHIPS account) on the books of the Federal Reserve Bank of New York. Under the real-time finality arrangement, each CHIPS participant has a pre-established opening position (or initial prefunding) requirement, which, once funded via a Fedwire Funds Service funds transfer to the CHIPS account, is used to settle payment orders throughout the day. A participant cannot send or receive CHIPS payment orders until it transfers its opening position requirement to the CHIPS account. Opening position requirements can be transferred into the CHIPS account any time after the opening of CHIPS and Fedwire Funds Service at 9:00 p.m. Eastern Time. However, all participants must transfer their requirement no later than 9:00 a.m. Eastern Time.

During the operating day, participants submit payment orders to a centralized queue maintained by CHIPS. Participants may remove payment orders from the queue at any time prior to the daily cutoff time for the system (5:00 p.m. Eastern Time). When an opportunity for settlement involving one, two or more payment orders is found, the system releases the relevant payment orders from the central queue and simultaneously marks the CHIPS records to reflect the associated debits and credits to the relevant participant’s positions. Debits and credits to the current position are reflected only in CHIPS records and are not recorded on the books of the Federal Reserve Bank of New York. Under New York law and CHIPS Rules, payments orders are finally settled at the time of release from the central CHIPS queue.

This process, however, typically will be unable to settle all queued messages. Soon after 5:00 p.m. Eastern Time, CHIPS tallies any unreleased payment orders remaining in the queue on a multilateral net basis. The resulting net position for each participant is provisionally combined with that participant’s current position (which is always zero or positive) to calculate the participant’s final net position; if that position is negative, it is the participant’s “final position requirement.”

Each participant with a final position requirement must transfer, via Fedwire Funds Service, this second round of prefunding to the CHIPS account. These requirements, when delivered, are credited to participants’ balances. Once all of the Fedwire Funds Service funds transfers have been received, CHIPS is able to release and settle all remaining payment orders. After completion of this process, CHIPS transfers to those participants who have any balances remaining the full amount of those positions, reducing the amount of funds in the CHIPS account to zero by the end of the day. In the event that less than all final position requirements are received, CHIPS settles as many payments as possible, subject to the positive balance requirement, and deletes any remaining messages from the queue. Participants with deleted messages are informed of which messages were not settled, and may choose, but are in no way required, to settle such messages over Fedwire Funds Service.