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The Strategic Role of the CHIPS® Network in Modern Liquidity Management

How the CHIPS® network from The Clearing House unlocks significant liquidity savings

Financial Institutions (FIs) today operate in an environment defined by elevated interest rates, tight liquidity, and intense regulatory expectations. Idle liquidity carries tangible opportunity costs, putting pressure on institutions to ensure that every dollar they deploy works harder.
 
One solution lies in optimizing liquidity both internally and through external market infrastructure. The Clearing House’s CHIPS® network, the world’s largest private-sector U.S. dollar clearing and settlement system, offers a powerful example. Unlike traditional real-time gross settlement (RTGS) systems that require every transaction to be fully funded or supported by central bank-provided daylight credit, the CHIPS network employs a sophisticated algorithm that leverages multilateral netting and intelligent queuing to reduce funding needs. In 2024, these efficiencies delivered an estimated $5.14 billion in annualized economic savings for CHIPS participants – roughly $14 million per day.
 
This white paper sets out a practical roadmap for FIs looking to unlock unrealized liquidity value. It explores operational best practices, quantifies economic and systemic benefits, and provides guidance on how FIs can integrate the CHIPS network into their broader liquidity and payment strategies. By doing so, FIs are able to maximize efficiency, strengthen resilience, and redeploy capital.

1. Today’s Liquidity Landscape

Liquidity – a bank’s ability to fund assets and meet obligations without incurring losses – is typically held in the form of central bank reserves or high-quality liquid assets or accessed through short-term funding markets.
 
The liquidity environment has fundamentally shifted since 2008:
  • Post-Global Financial Crisis era: Central bank actions taken in response to the Global Financial Crisis led to low interest rates and ample reserves, which allowed FIs to operate with less focus on liquidity efficiency.
  • Current environment: In today’s environment, interest rates remain high, quantitative tightening continues, and the risk of liquidity shocks persists.

FIs also continue to contend with significant regulatory requirements, including the liquidity coverage ratio, net stable funding ratio, internal liquidity stress tests, and resolution liquidity metrics. Meeting these obligations efficiently while maintaining flexibility represents a growing challenge.

Banks are increasingly looking both inward and outward for solutions, though the goal is the same: to make every dollar work harder.

2. Enhancing Liquidity Efficiency

High-value payment systems are essential to managing liquidity. RTGS systems, like the Fedwire® Funds Service, settle transactions individually and immediately, which offers certainty but requires substantial funding or intraday credit. Liquidity savings mechanisms, by contrast, queue payments and use multilateral netting to reduce liquidity needs, smooth settlement flows throughout the day while maintaining settlement finality, and reduce the risk of payment gridlock.
 
The CHIPS network, as a hybrid settlement system, stands out for its efficiency:
  • Settles an average of $1.9 trillion each business day in domestic and international payments
  • Uses a continuous net settlement model with a patented liquidity algorithm
  • Allows FIs to prioritize payments, recycle liquidity, and inject supplemental funds dynamically
  • Demonstrates exceptional efficiency: In 2024, the CHIPS network’s average liquidity efficiency ratio was $29 of payments settled for every $1 in funding provided by CHIPS participants.

This generates a self-reinforcing ‘virtuous circle’ – greater participation drives greater liquidity efficiency, which in turn incentivizes broader adoption
- Richard Dzina, SVP, Core Product Management, The Clearing House

3. Strategic Advantages for Financial Institutions

The CHIPS network provides three core advantages:
  1. Resiliency: The CHIPS network can help ensure FIs can continue to make time-critical payments during a Fedwire Funds Service disruption. The Clearing House regularly plans for and tests the ability of the CHIPS network to handle spikes in payment flows or systemic shocks.
  2. Operational flexibility: Participants can adjust payment priorities, reserve liquidity for critical transactions, and contribute or withdraw supplemental funding in real time, balancing speed and efficiency.
  3. Business value: By optimizing liquidity use, banks reduce the cash they need to settle payments, freeing capital for lending, investment, or other growth activities.
To maximize benefits, FIs are encouraged to:
  • Run simulations to identify potential liquidity savings and optimize settlement strategies before shifting payment flows to the CHIPS network.
  • Reroute eligible payments by reviewing Fedwire Funds Service activity to determine which transactions can be settled over the CHIPS network.
  • Rethink liquidity deployment by increasing use of the CHIPS network to reduce funding needs and improve payment throughput.
  • Leverage CHIPS network functionality like Auto-Reserve and supplemental funding to enhance operational efficiency.
  • Integrate CHIPS network data into their liquidity management systems for real-time visibility and dynamic decision-making.
  • Review contingency plans to ensure resiliency in the event of a Fedwire Funds Service disruption.

As liquidity tightens, this white paper shows how financial institutions can turn CHIPS efficiency gains into lasting advantage through best practices, quantified benefits, and strategic guidance.

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Treasury teams often talk about liquidity optimization, and through the CHIPS network we have the ability to quantify the savings. On an average day, the algorithm helps us to better optimize our liquidity usage - the netting is intelligent, with the ability to inject or withdraw supplemental funding. This gives us enhanced control over how we manage our intraday balances. From a business perspective, the capital we free up can then be put to work; whether that's short-term investments, interbank placements, or reducing opportunity costs. These are not just theoretical efficiencies; they are tangible benefits.
- John Foran, Product Manager, Institutional Cash Management Product, Deutsche Bank

Download: The Strategic Role of the CHIPS Network in Modern Liquidity Management

The Clearing House logo and “CHIPS” are registered service marks of The Clearing House Payments Company L.L.C. “Fedwire” is a registered service mark of the Federal Reserve Banks.