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An Introduction to U.S. Wire Payment Systems

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1 An Introduction to U.S. Wire Payment Systems
October 10, 2007

2 The Clearing House Mission
The Clearing House is committed to being the premier private-sector payments enterprise Providing efficient, safe and sound payment systems to help our Owners and customers be successful Leveraging the collective voice of our Owners to shape the future of the payments industry Taking positions on critical legal, regulatory and litigation issues of common interest to our members PAYMENTS Wire, ACH, Image Exchange, Check 48 million transactions for $1.9 trillion per day FORUMS Legal/Regulatory, Strategic Payments Highly respected and effective 153+ years of industry leadership

3 The Clearing House Payments Company L.L.C.
Structure TCH includes two limited liability companies: The Clearing House Payments Company (a for-profit payments company) The Clearing House Association (a not-for-profit business league) The Clearing House The Clearing House Payments Company L.L.C. The Clearing House Association L.L.C.

4 22 TCH Owner Banks Representing more than 58% of U.S. deposits BB&T
Bank of America The Bank of New York Mellon Bank of Tokyo Mitsubishi UFJ, Ltd/Union Bank of California Citibank Citizens Bank City National Comerica Bank Deutsche Bank Fifth Third Bank First Citizens Bank HSBC Bank JPMorgan Chase Bank KeyBank LaSalle Bank/ABN AMRO M&T Bank National City Bank PNC Bank UBS U.S. Bank Wachovia Bank Wells Fargo Bank

5 The Clearing House – 153 years of payment services
Real-time final payments An industry standard for processing global payments for over 37 years $1.8 trillion USD daily “Electronifying” the check Lead and facilitate the migration from paper to electronic payments $28 billion USD daily ACH Payments Private sector ACH operator, providing service to more than 1,400 financial institutions nationwide processing over 45% of national ACH volume $66 billion USD daily On July 1, the new business model for The Clearing House (TCH) will be launched. This new model consolidates multiple organizations, boards and committees into a more streamlined and unified organization. The Clearing House, SVPCO and the separate LLC companies will come together into a single company. The list of banks at the right are new The Clearing House owners. It includes all the current Owners of The Clearing House and SVPCo except for Mellon Bank, which will continue to do business with The Clearing House, as an important customer.

6 Domestic Large Value Payments
Why Timeliness Risk Regulatory requirements Globalization Unpredictability requires flexibility Who Participates: Consumers Government Entities Commercial/Corporate Entities Western Union Banks Correspondents Federal Reserve (Fedwire) CHIPS SWIFT

7 Legal Framework for Commercial Large Value Payments
UCC Article 4A State law adopted in each state, essentially the same Covers wholesale credits, including wire payments Regulation J, subpart B Federal regulation adopted by the Board of Governors of the Federal Reserve Covers the legal relationship between the FI and the FRB Operating Circular 6 Adopted by the 12 Reserve Banks; funds transfer through Fedwire; CHIPS Rules and Administrative Procedures

8 CHIPS 3. CHIPS Participants, Statistics & Hours 4. CHIPS History
1. CHIPS Intro 3. CHIPS Participants, Statistics & Hours 4. CHIPS History 5. CHIPS Finality 6. Funds Transfer Flows CHIPS 4 party CHIPS 8 party

9 Clearing House Interbank Payments System
CHIPS is a leader in large value U.S. dollar clearing for both international and domestic payments Outstanding resiliency, reliability, customer satisfaction Benefits Real-time, multilateral netting with Payment Finality Standardization Over 94% straight-through processing rate Direct access to international marketplace Maximizes liquidity - $1 turns over 525 times Contingency capability for Fedwire Value-added services Web-based management tools Global processing hours Remittance Information Delivery Universal Identification numbers (UID) Payments Processed $1.8 Trillion Funding Requirements $3.3 Billion

10 CHIPS Participants ABN AMRO Bank N.V. American Express Bank Ltd.
Banca Intesa S.p.A. Banco Bilbao Vizcaya, S.A. Banco de la Nacion Argentina Banco do Brasil S.A. Bangkok Bank Public Company Limited Bank Hapoalim B.M. Bank Leumi USA Bank of America, N.A. Bank of China Bank of Communications Bank of New York Bank of Nova Scotia Bank of Tokyo-Mitsubishi UFJ, Ltd. Barclays Bank PLC BB&T BNP Paribas New York Brown Brothers Harriman & Company Calyon Citibank, N.A. Commerzbank AG Credit Industriel et Commercial Deutsche Bank AG Deutsche Bank Trust Co Americas Dresdner Bank AG HSBC Bank USA International Commercial Bank of China Israel Discount Bank of New York JPMorgan Chase Bank, N.A. KBC Bank N.V. M & T Bank The Mitsubishi Trust and Banking Corp. Mizuho Corporate Bank Ltd - NY The National Bank of Kuwait SAK The Northern Trust Company Societe Generale Standard Chartered Bank State Bank of India State Street Bank and Trust Company Sumitomo Mitsui Banking Corporation UBS AG Wachovia Bank, N.A. Charlotte Wachovia Bank, N.A. - New York Wells Fargo Bank, National Association Total 45

11 CHIPS Statistics Participant Community 45 Financial Institutions
20 Countries Average Daily Volume (2006): 310.3 Thousand Payments $1.57 Trillion 2006 Annual Totals: $394.6 Trillion 77.9 million payments Average Dollar Amount per payment: $5.1 million

12 Global Processing Hours
Global Coverage CHIPS begins processing transactions at 9 pm Eastern Time Businesses around the world can take advantage of CHIPS, without sacrificing real-time payments Risk management is more efficient and certain than local US dollar clearings Alternative to local U.S. dollar clearing systems Real-time finality for every time zone in the world

13 CHIPS History 1970 Start of CHIPS 1981 Same Day Settlement
1984 Bilateral Limits 1986 Debit Caps 1990 End of Day Settlement Finality 1992 New Payment Formats 1997 Enhanced End of Day Settlement Finality *2001 CHIPS Finality – Intraday Payment Finality 2003 Intraday Supplemental Funding and Web Enablement 2005 TCP/IP Network

14 CHIPS Finality Here’s how it works:
Bank funds a special CHIPS account at the FRBNY From 9:00 p.m. (previous day) to 5:00 p.m. (current business day) participants send payments to CHIPS CHIPS continuously searches the payments queue to match, net, and release payments A payment is final (settled) when it is released by CHIPS

15 CHIPS Finality: Operational Components
Prefunded Account Each participant transfers its “Initial Prefunded Balance” Requirement This requirement is assigned by the CHIPS system, based on each participant’s payment activity Participant’s intraday current position cannot be less than zero (minimum) nor more than twice (maximum) its initial prefunded balance requirement Participant is never in a debit position – credit risk is eliminated Supplemental funding (payments on demand) is an option

16 CHIPS Finality: Operational Components
Release Method: All incoming payment messages are stored by CHIPS and queued for release by the Balanced Release Algorithm The Algorithm ensures that each participant remains between its minimum and maximum current positions For payments to be released by CHIPS, both the Send and Receive Participants must have funded their requirement, and a participant can begin receiving payments after it has begun sending payments Released messages are recorded against the participants’ current position

17 CHIPS Finality Operating Hours
9:00 p.m. (previous night) 9:00 a.m. *Noon 5:00 p.m. 5:30 p.m. Payment processing begins Prefunded balance account must be funded (7:00 a.m. on day after banking holiday) 65% volume and 55% dollars to CHIPS Cutoff Final Prefunding complete

18 End-of-Day Processing Procedures
Balance is combined with participant’s Current Position to get Closing Position If Closing Position is negative, it is the final prefunding balance requirement Participant has 30 minutes to fund this requirement CHIPS releases all remaining payments Cutoff Maximum Current Position is removed Algorithm matches, nets, sets-off, and releases as many payments as possible Multilateral net balance is calculated for remaining payments

19 CHIPS Payments: Types of Releases…
CHIPS nets and releases payments in seconds All payments are final when released by CHIPS Number of Payments 90% 4% 6% Value of Payments 37% 41% 22% Netting resolves payments quickly Individual (No netting) Bilateral (Two participants) Multilateral (Three or more)

20 Multi-lateral Netting
Bank A Bank B $3 MM available $2.5 MM available Patented netting process releases payments earlier and leverages liquidity Fewer dollars clear more, larger payments $25 MM $26 MM $22.5 MM $3 MM For Example: $76.5 MM payments clear with only $8.1 MM available funds Bank C $2.6 MM available Balances Resulting From Multi-Lateral Netting Bank A $.5 Bank B $4.5 MM Bank C $3.1 MM

21 Universal Identification Numbers (UIDs)
UID ensures highest STP rate in the industry 94% Straight–through processing with UID no manual lookups or delays A six-digit number to identify beneficiary One UID per corporation for all its banks Stored in CHIPS database: updated daily and available online CHIPS verifies and validates UIDs with payments CHIPS releases payments with associated information from database: Customer Bank Account Number Name and Address Secure Accurate Simple

22 CHIPS Remittance Information Delivery Capability Electronic Data Interchange (EDI)
Real-time system to move remittance information with payment Allows user to provide corporate customers with electronic remittance details. Can include information such as customer numbers, invoice numbers, discounts taken and more, with each electronic payment CHIPS messages can carry an additional 9,000 characters: ANSI X.12 UNEDIFACT User-defined XML Aligned with SWIFT MT103 (REMIT) Low cost EDI provider solution

23 Retailer Sending a US Dollar Payment to Supplier Via CHIPS
1)Retail customer (Originator) communicates payment order to their bank. 2)Originating Bank (CHIPS Send Participant) debits Retail account 3)Originating Bank (CHIPS Send Participant) sends CHIPS payment order to CHIPS 4)CHIPS debits Send Participant’s balance and credits Receive Participant’s balance, based on requirements of Balanced Release Algorithm 5)CHIPS sends CHIPS payment advice to Beneficiary Bank (CHIPS Receive Participant). 6)Beneficiary Bank credits Customer’s (Beneficiary) account. 7)Beneficiary Bank advises Beneficiary. U.S. Originating Bank (CHIPS Send Participant) Beneficiary Bank (CHIPS Receive Participant) CHIPS $ $ 3 5 2 4 6 1 7 Beneficiary Originator

24 CHIPS Receive Participant
Retailer Sending a US Dollar Payment to Supplier Via CHIPS with Correspondents 1)Retail customer (Originator) communicates payment order to their bank, Originating Bank debits account 2)Originating Bank sends CHIPS payment order to Instructing Bank who debits Orig. Bank’s account 3)Instructing Bank sends payment order to CHIPS Send Participant, who debits Inst. Bank’s account 4)CHIPS Send Participant sends CHIPS payment order to CHIPS 5)CHIPS debits Send Participant’s balance and credits Receive Participant’s balance, based on requirements of Balanced Release Algorithm 6)CHIPS sends CHIPS payment advice to CHIPS Receive Participant, who credits Intermediary Bank’s account 7)Intermediary Bank advises Beneficiary Bank and credits their account 8)Beneficiary Bank advises Beneficiary and credits their account CHIPS Send Participant CHIPS Receive Participant CHIPS $ $ 4 6 3 5 Intermediary Bank 6 Instructing Bank 7 7 2 Beneficiary Bank Originator Bank 8 Beneficiary 1 Originator

25 CHIPS and Fedwire Comparison - 2006
VOLUME CHIPS 37% Fedwire 63% Fedwire 59% CHIPS 41% DOLLARS

26 Wire Transfer Daily Routines
From behind the scenes at a wire participant’s site: Entrance points: SWIFT Proprietary Preference (plus priority & liquidity decisions): Book transfer? CHIPS? Fedwire? Repairs Approvals OFAC screening Re-route (throttle) Pull out of one, map into another

27 Payments Study CHIPS and the Federal Reserve Bank conducted a study on Business-to-Business wire payments Study sought information on the current and future use of Business-to-Business wire payments Preferences for selecting specific payments types Factors that influence decisions to choose one payment type over another Factors that would increase the use of wire payments Study published in October 2006

28 Payments Study - Addressing the barriers to growth
Banks can influence future migration Recognize opportunity to improve customer experience and retain/grow wire business and the revenue opportunities it provides Common Standards - Support an industry remittance information (invoice data) standard (e.g. ISO and STP 820) Integration – Enable cash management systems to integrate more effectively with corporate accounts payable and accounts receivable systems to facilitate straight-through processing CHIPS and the Federal Reserve Bank to work together to endorse common standards Work with other infrastructure providers globally to agree on common standards Research report is available on:

29 FACILITATING GLOBAL PAYMENTS
Future of Payments Invoice Invoice Deta Details FACILITATING GLOBAL PAYMENTS

30 Resources www.FRBSERVICES.org www.CHIPS.org www.SWIFT.com
Contact Information Tim Mills, AAP Director of Education Services The Clearing House Payments Co. L.L.C. Ellen Jacques, AAP Training Manager

31 Contact Information Tim Mills, AAP Director of Education Services The Clearing House Payments Co. L.L.C. Ellen Jacques, AAP Senior Trainer


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