CHIPS Liquidity Algorithm saves financial industry billions

Financial institution participants on CHIPS benefit from enhanced liquidity efficiency that saves the industry almost $14 million per day.
PRNewswireApril 2, 20247 min

Participants on CHIPS®, the largest private sector high-value clearing and settlement system in the world, receive significant economic benefits due to its patented liquidity savings algorithm. In 2023 this algorithm generated an economic value for CHIPS participants and the financial system of $4.99 billion, or $13.8 million per day, estimates The Clearing House, the operator of CHIPS and the leading innovator and operator of U.S. payments networks.

These savings are proving especially relevant following an unprecedented cycle of monetary tightening and rising interest rates. The liquidity efficiency of CHIPS averaged 26:1 in 2023, meaning that $1 contributed to the network in funding supported $26 in settled value, with most payments settling in mere seconds. This contrasts with the average of 6.6:1 liquidity efficiency in other major large-value payment systems around the world.

“Barclays has enjoyed a decade long relationship with The Clearing House, and we have achieved significant liquidity savings by using the CHIPS network,” said Graham Warner, Barclays Americas Head of International Corporate Banking. “As a UK headquartered bank with a global footprint and significant U.S. client base, the efficiency and global connectivity of the system provides great benefit to the bank by reducing friction and cost in the payments process.”

The economic value to participants and the industry from the liquidity efficiency of CHIPS can be approximated by considering the opportunity cost of routing CHIPS payments, which in 2023 averaged $1.8 trillion per day, through less liquidity efficient payment channels. By comparing the costs to maintain additional reserves to support this alternative payment routing, relative to the return experienced by CHIPS participants by deploying these resources more productively through lending and investment activities, the estimated economic value of the CHIPS network can be quantified.

“CHIPS allows the participating banks to recycle liquidity earlier in the operating day,” said Dawid Janas, Global Clearing Head, Citi. “The nature of CHIPS as a net settlement platform allows us to extract substantial liquidity savings which is especially valuable during the early processing hours. It is particularly meaningful for Citi given the size of the network reaching across 95+ countries many of which are operating outside of the U.S. usual (9 to 5) business hours.”

Beyond this economic value, the liquidity efficiency of the CHIPS network allows CHIPS participants and their customers to deploy scarce liquidity more flexibly and contributes to a more nimble and less risky financial system. This flexibility becomes especially valuable during periods of stress and heightened financial stability risk when liquidity, and access to liquidity, tend to evaporate.

“As significant as these benefits may be, we know from simulation analysis and empirical experience that the liquidity savings on CHIPS increases when additional volume is contributed to the network,” said Richard Dzina, Senior Vice President, Product Development, The Clearing House. “We therefore believe that there is greater value to glean for the industry as we add more participants to the network and as existing participants send more payments to CHIPS.”

Financial institutions in the U.S. and around the world rely on CHIPS to clear and settle USD payments reliably and with settlement finality. CHIPS patented liquidity savings algorithm matches and offsets payments continually, resulting in an extremely efficient settlement process. CHIPS is the premier USD clearing platform for international payment activity, with approximately 95% of CHIPS payments representing the USD leg of a funds transfer that begins and/or ends in another country. Through a robust network of correspondent banking relationships across its participants, CHIPS also has the capacity and reach to satisfy every domestic high-value payment need.

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