U.S. patent application number 16/364807 was filed with the patent office on 2019-07-18 for system and method for intraday netting payment finality with supplemental funding.
The applicant listed for this patent is THE CLEARING HOUSE PAYMENTS COMPANY L.L.C.. Invention is credited to Robert M. Cotton, Joseph S. Pawelczyk, James W. Reilingh.
Application Number | 20190220833 16/364807 |
Document ID | / |
Family ID | 34526396 |
Filed Date | 2019-07-18 |
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United States Patent
Application |
20190220833 |
Kind Code |
A1 |
Pawelczyk; Joseph S. ; et
al. |
July 18, 2019 |
SYSTEM AND METHOD FOR INTRADAY NETTING PAYMENT FINALITY WITH
SUPPLEMENTAL FUNDING
Abstract
A system and method are disclosed for continuous intraday final
settlement of payment orders among a plurality of participants,
each participant having facilities configured to electronically
send and receive the payment orders in the form of payment
messages. Primary positions, corresponding to balances in a
prefunded balance account, are stored. Supplemental positions,
corresponding to balances in the prefunded balance account, are
stored. Payment messages are received from sending participants. A
selected payment message is released, such that the sending
participant's supplemental position is decreased by the payment
amount and the receiving participant's supplemental position is
increased by the payment amount, if it is determined that: (i) the
sending participant's supplemental position, after subtraction of
the payment amount, is greater than or equal to the predetermined
minimum for the sending participant's supplemental position, and
(ii) the receiving participant's supplemental position, after
addition of the payment amount, is less than or equal to the
predetermined maximum for the receiving participant's supplemental
position.
Inventors: |
Pawelczyk; Joseph S.; (New
York, NY) ; Reilingh; James W.; (Pleasantville,
NY) ; Cotton; Robert M.; (Marlboro, NY) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
THE CLEARING HOUSE PAYMENTS COMPANY L.L.C. |
New York |
NY |
US |
|
|
Family ID: |
34526396 |
Appl. No.: |
16/364807 |
Filed: |
March 26, 2019 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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14223535 |
Mar 24, 2014 |
10262306 |
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16364807 |
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10936610 |
Sep 8, 2004 |
8725609 |
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14223535 |
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60501459 |
Sep 8, 2003 |
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Current U.S.
Class: |
1/1 |
Current CPC
Class: |
G06Q 20/10 20130101;
G06Q 20/102 20130101; G06Q 40/02 20130101 |
International
Class: |
G06Q 20/10 20060101
G06Q020/10; G06Q 40/02 20060101 G06Q040/02 |
Claims
1-27. (canceled)
28. A method for conducting continuous electronic intraday final
settlement of payment orders, the method comprising: storing a
plurality of primary positions, corresponding to balances in a
prefunded balance account, each primary position representing a
right of a corresponding one of a plurality of participants to
payment from the prefunded balance account; storing a plurality of
supplemental positions, corresponding to supplemental balances in
the prefunded balance account, each supplemental position
representing a right of a corresponding one of the participants to
payment from the prefunded balance account; determining if a
sending participant's supplemental position, after subtraction of a
payment amount of a payment message, is no less than a
predetermined minimum for the sending participant's supplemental
position; and releasing a payment message to cause the sending
participant's supplemental position to decrease by the payment
amount of the payment message and a receiving participant's
supplemental position to increase by the payment amount when it is
determined that the sending participant's supplemental position,
after subtraction of the payment amount, is no less than the
predetermined minimum for the sending participant's supplemental
position.
29. The method of claim 28, further comprising: receiving a
plurality of payment messages from sending participants and holding
the payment messages in a queue; and accepting designation of at
least one of the plurality of payment messages received from
sending participants as a priority message.
30. The method of claim 28, further comprising determining whether
the sending participant's supplemental position is sufficient to
cover the payment amount.
31. The method of claim 30, wherein the determining of whether the
sending participant's supplemental position is sufficient to cover
the payment amount includes determining whether releasing the
payment message would not cause the sending participant's
supplemental position to go below zero.
32. The method of claim 28, further comprising determining whether
a primary position of a sending participant is sufficient to cover
a remainder of an amount not covered by the sending participant's
supplemental position.
33. The method of claim 32, wherein the determining of whether the
primary position of the sending participant is sufficient to cover
the remainder of the amount not covered by the sending
participant's supplemental position is performed if the sending
participant's supplemental position is not sufficient.
34. The method of claim 33, wherein the payment message is one of a
plurality of payment messages including a priority message, an
urgent message, a preferred message, or a non-priority message.
35. A computer-readable medium storing instructions which, when
executed by a computer processor, cause the computer processor to
perform a method for conducting settlement, the method comprising:
determining a usable supplemental position of a sending
participant; releasing a payment if it is determined that the
usable supplemental position is no less than an amount of the
payment; if the usable supplemental position of the sending
participant is not sufficient to cover the amount of the payment,
determining whether a primary position of the sending participant
is sufficient to cover a remainder of a payment amount not covered
by the usable supplemental position of the sending participant; and
releasing the payment, if the primary position of the sending
participant is sufficient to cover the remainder of the payment
amount.
36. The computer-readable medium of claim 35, wherein the
determining of the usable supplemental position includes:
subtracting a portion of a reserved supplemental position of a
sending participant from a supplemental position of the sending
participant; determining a usable supplemental position by
determining a lesser of a result of the subtracting and an amount
by which a maximum supplemental position of the receiving
participant exceeds a current supplemental position
37. A system, comprising: a memory storing a program; a computer
processor arranged to execute the program for performing a method
comprising: determining a usable supplemental position of a sending
participant, releasing a payment if it is determined that the
usable supplemental position is no less than an amount of the
payment, if the usable supplemental position of the sending
participant is not sufficient to cover the amount of the payment,
determining whether a primary position of the sending participant
is sufficient to cover a remainder of a payment amount not covered
by the usable supplemental position of the sending participant, and
releasing the payment, if the primary position of the sending
participant is sufficient to cover the remainder of the payment
amount.
38. The system of claim 37, wherein the determining of the usable
supplemental position includes: subtracting a portion of a reserved
supplemental position of a sending participant from a supplemental
position of the sending participant; determining a usable
supplemental position by determining a lesser of a result of the
subtracting and an amount by which a maximum supplemental position
of the receiving participant exceeds a current supplemental
position
39. The system of claim 38, wherein the method further comprises
determining if the usable supplemental position is no less than the
payment amount.
40. The system of claim 39, wherein the method further comprises
releasing the payment where the usable supplemental position is
determined to be no less than the payment amount.
41. The system of claim 40, wherein the method further comprises
performing at least one of deducting the payment amount from the
supplemental position of the sending participant, and adding the
payment amount to the supplemental position of the receiving
participant.
42. The system of claim 37, wherein, if the primary position of the
sending participant is not sufficient to cover the remainder of the
payment amount, the payment is not released.
43. The system of claim 37, wherein the method further comprises,
releasing a next payment message if the primary position of the
sending participant is not sufficient to cover the remainder of the
payment amount.
44. The system of claim 37, wherein the method comprises, if the
usable supplemental position of the sending participant is
sufficient to cover the amount of the payment, determining whether
a primary portion of the payment message would cause a receiving
participant's maximum primary position would be exceeded.
45. The system of claim 37, wherein the method further comprises
releasing a next payment message but not the payment message, if it
is determined that a primary portion of the payment message would
cause a receiving participant's maximum primary position would be
exceeded.
46. The system of claim 37, wherein the method further comprises,
if it is determined that a primary portion of the payment message
would not cause a receiving participant's maximum primary position
would be exceeded, performing at least one of: deducting an amount
of the primary portion from the sending participant's primary
position; adding the amount of the primary portion to the receiving
participant's primary position; deducting a supplemental portion of
the amount from a sending participant's supplemental position; and
adding the supplemental portion of the amount from the sending
participant's supplemental position.
47. The system of claim 37, wherein the payment message is one of a
plurality of payment messages including a priority message, an
urgent message, a preferred message, or a non-priority message.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This application claims the benefit of U.S. Provisional
Application No. 60/501,459, filed on Sep. 8, 2003, which is hereby
incorporated herein by reference in its entirety.
BACKGROUND OF THE INVENTION
Field of the Invention
[0002] The present invention relates generally to a system and
method for multilateral net settlement, in which participants
deposit a predetermined amount into a prefunded balance account and
send messages to one another incurring obligations to pay. These
obligations are netted against each other, giving each participant
a net credit position or a net debit position that is settled at
the end of the day. More specifically, the present invention
relates to an improvement allowing participants to transfer
supplemental funds into their prefunded balance account throughout
the day, and, for example, is intended to be an improvement to the
system and method for Intraday Netting Payment Finality described
in U.S. Pat. No. 6,076,074, which is incorporated herein in its
entirety by reference.
Related Art
[0003] A person (individual or corporate) making a payment in the
United States has an array of payment instruments from which to
choose. It is likely that most single transactions still are paid
for in cash (coin and currency). There are also checks and other
paper instruments (travelers' checks, money orders, and certified
and cashier's checks) and debit and credit entries processed by
automated clearing houses ("ACH") (a computer-based, batch
processing electronic payment mechanism that supports both credit
and debit transfers and is used primarily for low-dollar
transactions such as direct deposit of payroll and benefit payments
and mortgage and insurance premium payments that can be scheduled
some time in advance and that are not time-critical). The largest
payments, however, usually are sent by funds transfers. Each day,
the two principal funds transfer systems, Fedwire and CHIPS
("Clearing House Interbank Payments System"), transfer hundreds of
thousands of payments worth more than $2 trillion. The average size
of a funds transfer is very large--about $6 million on CHIPS and $3
million on Fedwire.
[0004] Funds transfers can involve a number of different parties.
Many transfers take place to settle obligations of two banks, such
as the delivery or return of "fed funds" (a bank's deposits with
its Federal Reserve Bank, which can be lent to other banks). In
these cases, only the two banks are involved. Banks also transfer
funds on behalf of customers. These transfers may be to another
person, either at the same bank or at another bank. Sometimes a
customer moves funds between two of its own accounts, either at
different banks or at the same bank, for example, from local
accounts used to collect bills to a cash concentration account or
to a payroll account.
[0005] A funds transfer may involve a single bank (a
"book-transfer") or it may involve several. In most cases, the
originator does not specify the method for carrying out his payment
order, and the originator's bank selects the most efficient way to
have the funds sent to the beneficiary, including choosing a
network or intermediary bank.
A. Origination of Funds Transfer
[0006] There are many ways for a person to order his bank to send a
funds transfer. Probably the largest number of funds transfers, and
certainly those involving the highest monetary value, are those
originated by corporations with a direct computer-to-computer link
to the bank. In these cases, the customer enters the payment
instructions into his computer, and the computer sends the payment
order directly to his bank's computer. The bank's computer "edits"
the payment order. If the payment order fails one of the edits, for
example, if mandatory information has not been included in the
payment order, the computer routes the payment order to an
operator's screen, and the operator makes any necessary corrections
or seeks (or has someone else in the bank seek) clarification from
the customer. A similar procedure is used for customers who use a
personal computer to transmit payment orders to the bank.
Individuals generally must go to the bank to fill out a form and
pay a fee for a funds-transfer service.
B. Originator's Bank's Acceptance of Payment Order
[0007] Once the payment order has been entered into the bank's
funds-transfer computer system and passes the initial edits, it is
checked against the customer's demand account balance. If the
balance is sufficient, the bank executes the payment order by
issuing a corresponding payment order to a funds-transfer network
or the next bank in the funds transfer. If the customer does not
have a sufficient balance in his account, the computer checks to
see if the customer has an available credit line. If so, the
payment is released; if not, the payment is held pending receipt of
funds to cover the payment. If covering funds have not been
received by the late afternoon (usually 2:00 to 4:00 p.m.), the
payment order may be referred to a credit officer who decides
whether to extend additional credit to the customer to enable the
payment to be made.
[0008] If a payment order has not been sent by the end of the
execution date (the date that the bank may properly issue a payment
order in execution of the sender's order), the bank normally
rejects it by sending a notice of the rejection to the sender.
C. Transfers Between Banks
[0009] If there is more than one bank involved in a funds transfer,
it is necessary for funds to be moved from one bank to the other.
In the U.S., this can be accomplished by using one of the two
large-dollar funds transfer networks to be discussed below, or
through the adjustment of correspondent balances.
[0010] 1. Fedwire
[0011] One of these transfer networks is "Fedwire", which is the
funds transfer network operated by the 12 Federal Reserve Banks. It
is a real-time, gross settlement system, meaning that the payment
is final and irrevocable at the time the Federal Reserve Bank
credits the account on its books of the receiving bank. There is
thus no risk that the receiving bank will suffer a loss if it makes
the funds available to the beneficiary and the sender cannot pay
the amount of the payment order to its Federal Reserve Bank. In
such a case, the Federal Reserve Bank would suffer the loss, not
the receiving bank. A payment order received by a Federal Reserve
Bank is routed to a Fedwire processing computer. This computer
performs system edits and routes the payment order to the receiving
Federal Reserve Bank, which automatically credits the receiving
bank's account and sends an advice to the receiving bank.
[0012] 2. CHIPS
[0013] The other such transfer network, is the Clearing House
Interbank Payments System ("CHIPS"), which is a funds-transfer
system operated by The Clearing House Payments Company L.L.C.
("Clearing House"). A CHIPS participant (a "participant" is defined
as a financial institution that may deliver and receive payment
messages through CHIPS) that sends a CHIPS payment message to
another participant incurs an obligation to pay the receiving
participant the amount of the transfer. This obligation is settled
in accordance with the system and method for intraday payment
finality described in U.S. Pat. No. 6,076,074.
[0014] As an alternative to these funds-transfer networks, if a
bank has a correspondent relationship with the bank holding the
beneficiary's account, or if the bank does not have direct access
to a funds-transfer network, it may use debits and credits to
various correspondent accounts to complete a funds transfer. Often
a bank sends a payment order over the network operated by the
Society for Worldwide Interbank Financial Telecommunication
("SWIFT"), with payment of the sender's obligation effected through
adjustment of correspondent balances or other means. Payment orders
may also be sent by telex or other communications medium. The
actual mechanics of performing these transactions varies from bank
to bank.
[0015] In some cases, a customer may ask his bank to transfer funds
from his account and pay another account on the books of the same
bank (either another customer's account or a different account of
the ordering customer). These are called book transfers because
they take place on the books of a single bank. Procedures used to
effect these transfers and recordkeeping arrangements vary from
bank to bank. Example 5 in U.S. Pat. No. 6,076,074 shows the
accounting entries for a book transfer.
D. Paying the Beneficiary
[0016] The last step in the process of a funds transfer is paying
the beneficiary. In all but a small number of cases, this is
accomplished when the beneficiary's bank credits the beneficiary's
account on its books and allows the beneficiary use of the funds.
Under Federal Reserve Board regulations, a bank must make the
proceeds of a funds transfer available to the beneficiary no later
than the opening of business on the day after the bank has received
final payment. For Fedwire payments, final payment occurs when the
amount of the payment order is credited to the receiving bank's
account at the Federal Reserve Bank or when notice of the credit is
sent, whichever occurs first. For CHIPS transfers, final payment
occurs when settlement is completed. For transfers using a
correspondent account in which the sender credits the account on
its books of the receiving bank (Example 4 in U.S. Pat. No.
6,076,074), final payment occurs when the credit is withdrawn or,
if it is not withdrawn, at midnight of the day on which the credit
is withdrawable and the receiving bank learns of the fact. Where
the receiving bank debits the senders account (Example 3 in U.S.
Pat. No. 6,076,074), final payment occurs when the debit is made to
the extent the debit is covered by a withdrawable credit in the
account.
E. Interbank Settlements
[0017] Both of the above-mentioned major funds-transfer systems in
the United States provide for settlement, i.e., the actual transfer
of value in good funds that results in final payment. Once
settlement is accomplished, payments are irrevocable (except in
cases of duplicate or erroneous payments). The actual mechanics of
the settlement in Fedwire and CHIPS differ, reflecting the
differences between a real-time, gross settlement system operated
by the central bank and a privately operated real-time final
settlement system.
[0018] 1. Fedwire
[0019] From the point of view of a bank that sends a payment order
to or receives a payment order from a Federal Reserve Bank, Fedwire
funds transfers are final when made. The sender's Federal Reserve
Bank debits the sender's account as of the time the Federal Reserve
Bank acts on the payment order. The receiving bank receives final
payment when its Federal Reserve Bank credits its account or sends
an advice of credit, whichever is earlier. At this point, the
beneficiary has been paid, and the originator's obligation to pay
the beneficiary is discharged. The receiving bank has good funds in
its reserve or clearing account that can be withdrawn and that
counts towards fulfillment of the bank's required reserve
balance.
[0020] Viewed from the inside, however, Fedwire is a net settlement
system involving 12 settling banks, each of which is a separate
corporation with its own balance sheet, and transactions must be
settled among these banks. For this purpose, the Federal Reserve
Board maintains interdistrict settlement accounts for the Federal
Reserve Banks. This account appears on each Federal Reserve Bank's
balance sheet. Each transaction between Federal Reserve Banks
results in a credit to the interdistrict settlement account of one
Federal Reserve Bank and a corresponding debit to the other's. As a
result of the accumulated debits and credits, each Federal Reserve
Bank has an accumulated position that is either a debit or a
credit, and on the consolidated balance sheet of all 12 Federal
Reserve Banks, these debits and credits net to zero. Once each year
the interdistrict settlement account of each Federal Reserve Bank
is brought to zero by the reallocation of the Federal Reserve
Bank's ownership interest in the System Open Market Account--the
consolidated holdings of all Federal Reserve Banks' government
securities.
[0021] One disadvantage of Fedwire is that all participants in the
system in good standing can incur a large daylight overdraft
position. Banks incurring such overdrafts are charged a fee by the
Federal Reserve.
[0022] 2. CHIPS
[0023] In contrast, CHIPS is a true real-time final settlement
system. As explained above, the release of a payment message
creates an obligation to pay the amount of the payment order that
is settled in accordance with the system and method described in
U.S. Pat. No. 6,076,074.
[0024] An earlier version of CHIPS involved an end-of-day,
multilateral net settlement system. At the end of each day, each
participant received a report showing the total value of all
payment messages sent, the total value of all payment messages
received, and a net figure (debit or credit) showing the
difference. Once the agreement to settle on the basis of the report
has been received from each settling participant, the Clearing
House would instruct the Federal Reserve Bank of New York to open
the CHIPS settlement account that it held on behalf of all CHIPS
settling participants and send a notice to all settling
participants that settlement could begin. After this notice had
been sent, each settling participant that had an aggregate net
debit position had 15 minutes to send a Fedwire funds transfer in
the amount of its debit position to the CHIPS settlement account at
the Federal Reserve Bank of New York (FRBNY). Once all these
Fedwires were completed, the Clearing House checked the balance in
the account and then sent Fedwire payment orders from the
settlement account to the accounts of those settling participants
that were in a net credit position. Once all of these Fedwire
payment orders had been sent, settlement was complete, and all
CHIPS payments made that day were finally paid.
[0025] This type of multilateral net settlement system, which
provides for settlement at the end of the day, is subject to the
risk that a participant with a net debit position (a "debtor
participant") would be unwilling or unable to pay its settlement
obligation. Absent some measures to make up for the debtor
participant's failure, a failure of this kind could mean that the
system would fail to settle, which could mean that the funds
transfers that were processed by the netting system on the date of
the failure would not be completed. Depending on the number and
value of the payments handled by the funds-transfer system, such a
failure could have serious deleterious effects on the surviving
participants and world financial markets generally.
[0026] CHIPS took a number of steps to control the risk of a
settlement failure. In 1984, it required each of its participants
to establish "bilateral credit limits" on each other participant as
a measure of the credit risk that it would be willing to accept
from the other participant. In 1986, CHIPS took a further step by
establishing "sender net debit caps" on each participant as a
percentage of the aggregate of the bilateral limits that had been
established by other participants. This control limits the amount
of risk that a participant can present to the system.
[0027] In 1990 CHIPS took the further step of requiring each of its
participants to agree to pay a portion of a failed participant's
settlement obligation. This "additional settlement obligation" is
collateralized by Treasury securities pledged for this purpose and
held at FRBNY. This collateralized loss-sharing arrangement assured
that CHIPS would be able to settle even if the participant with the
highest debit cap were to fail at its greatest possible debit
position. (Called the "Lamfalussy Standard" because it was
articulated by a working group of the Bank for International
Settlements chaired by Alexandre Lamfalussy. CHIPS had in fact
anticipated the Lamfalussy Standard and had adopted this
risk-control measure before the BIS report had been issued.)
[0028] In 1994, CHIPS began to strengthen its existing risk
controls so that by 1997 the two banks with the highest debit caps
would fail simultaneously with each at its greatest possible debit
position, and CHIPS would still be able to settle (referred to as a
"Lamfalussy+1 Standard"). The same loss-sharing formula would allow
CHIPS to settle if a large number of smaller banks were to
fail.
[0029] Despite these measures, there remained the risk that a
catastrophic financial crisis could result in a settlement failure
on CHIPS with the result that all of the payment messages released
would have to be "unwound"; i.e., all payment messages be pulled
back from the receiving participant and returned to the sending
participant, who would be free to decide whether or not the payment
should be sent.
[0030] To address this risk, CHIPS introduced a system in January
2001 that continuously matches, nets, and releases payment messages
on an individual, bilateral, or multilateral basis among
participants throughout the day. This system requires each
participant to deposit a predetermined amount into a prefunded
balance account. Payment messages are not released unless (a) the
value of the payment message can be simultaneously charged against
and credited to prefunded balances established by each participant;
or (b) the payment message can be netted and set off against one or
more other payment messages and the resulting balance
simultaneously charged against and credited to prefunded balances
established by each participant. However, participants are not
allowed to make additional deposits to or withdrawals from the
prefunded balance account until the system closes for receipt of
payment messages at the end of the day. This system greatly reduced
the risk of settlement failure due to failure by one or more
participants during the business day.
[0031] 3. German EAF 2 System
[0032] A third type of system, which uses elements of both the
gross settlement and net settlement systems, is the Electronic
Clearing Frankfurt (EAF 2) system, operated in Frankfurt by the
Deutsches Bundesbank, the central bank of Germany.
[0033] EAF 2's operating day has two phases. In phase 1 (8:00 a.m.
to 12:45 p.m.), payment orders received from financial institutions
are entered into the system and offset bilaterally, and final
payments are available to the recipient credit institution at
regular intervals of approximately 20 minutes. These payments are
settled as they would be in a gross settlement system. The proceeds
of the payment order can thereafter be made available to the
beneficiary without credit risk to the receiving bank. In a
subsequent phase 2 (1:00 p.m. to 2:15 p.m.), an attempt is made to
effect two-stage multilateral clearing of the remaining payments,
which have not been netted bilaterally during the first phase. The
crucial difference from multilateral clearing, as it exists at
present, lies in the avoidance of the systemic risk. If there are
uncovered debit balances, no unwinding, involving the exclusion of
a participant and the return of all payments associated with the
excluded participant, takes place; instead, only individual
payments are returned. These individual payments are treated as
uncovered payments, as in a gross settlement system.
[0034] In phase 1, EAF 2 is very similar to a gross settlement
system in which individual payments are executed after cover is
available. It is based on the principle that, in bilateral
relations, incoming payments are used preferably instead of account
balances as cover for outgoing payments, by offsetting them against
each other in 20-minute cycles, at which point they become final.
The use of liquid funds as working balances, in the form of account
balances, is necessary only to a limited extent, compared with a
purely gross settlement system, in that the amounts of
counter-payments included in the offsetting procedure do not match
exactly. In EAF 2, in contrast to a net settlement system, incoming
and outgoing payments, which are matched as far as possible, in
terms of their amount, are offset against each other. The payments
not included in the offsetting procedure are then carried over into
queues for the next processing cycle. By contrast, in a net
settlement system, a net balance is calculated as the difference
between all incoming and outgoing payments, which is settled by
debits or credits to an account at the end of day.
[0035] In EAF 2 the participants themselves determine how much
liquidity or working balances in the form of so-called maximum
sender amounts they wish to make available to clear residual
differences between the payments included in the offsetting in the
particular bilateral relation concerned. In this way, they limit
the extent to which they are willing to resort to their own funds,
in excess of those received from the counterparty. These maximum
sender amounts are covered by the transfer of liquidity to a
special account of a participant, whose credit balance has been
assigned to the bilateral party concerned. Apart from that, the
system takes advantage of the high level of two-way payments to
conserve liquidity. At the end of phase 1, in order to simplify
accounting, all bilateral debit balances of each participant are
aggregated into a single overall credit balance, and both overall
balances are booked on the giro accounts (a type of German draft
account) and the assigned amounts released.
[0036] At the beginning of phase 2 (about 1.00 p.m.), there is an
initial multilateral clearing process of the payments not settled
in phase 1. If debit balances are not covered, the maximum volume
of residual payments, which is covered by liquidity on the giro
accounts, is calculated on the basis of an algorithm for sorting
out individual payments. These residual payments then become final
immediately. With the aid of the objective selection criteria
predefined by the algorithm, individual payments that have caused
the uncovered debit balances are identified. The individual
payments that are regarded as uncovered are set aside provisionally
pending the execution of the second multilateral clearing, and the
revised balances are booked on the Bundesbank giro accounts.
[0037] Subsequently, the participants are granted a 45-minute
period to acquire cover. Technically, this can be obtained in two
different ways: (i) a payment input from the EIL-ZV (the gross
settlement system of the Bundesbank) increases the account balance,
which is then used to cover the net balances; or (ii) a payment
input in the EAF 2 itself (in favor of participants with debit
balances) changes the net balances between the participants; the
liquidity on the giro accounts remain unchanged.
[0038] If net balances arising from the subsequent second
multilateral clearing are still uncovered, no unwinding, involving
the exclusion of a participant, is performed. Instead, by means of
the above-mentioned algorithm, individual payments are now finally
withdrawn until the covering funds on the giro accounts are
sufficient. Thus the EAF 2 clearing and settlement is always
completed, and the systemic risk typical of net settlement
procedures is avoided by ruling out an unwinding of a high volume
of payments. The individual payments that are treated as uncovered
are deemed to be revoked and are not executed. The finality of the
payments offset bilaterally in phase 1 and cleared and settled
multilaterally in phase 2 is not affected by this. This procedure
is also the same as that used in a gross settlement system, where
uncovered payments remaining in queues are returned without
affecting the finality of payments that have already been executed.
Payments that have not been executed can be either entered on the
same day into a gross settlement system, such as the German EIL-ZV
system, whose operating hours may be extended slightly for this
reason, or re-entered in EAF 2 the following day.
[0039] The EAF 2 system has several drawbacks. For one thing,
although final settlement occurs throughout the day, the
occurrences are at 20 minute intervals. Also, although the system
allows prefunded accounts to be set up by individual institutions,
each account is created for use in offsetting payments to a
preselected financial institution. For example, Bank A may set up
an account for offsetting payments and receipts vis-a-vis Bank B,
and only Bank B, and another account for Bank A's relations with
Bank C, and so on.
[0040] By contrast, CHIPS provides continuous intraday final
settlement of payments by means of prefunded accounts of
participating financial institutions that are used to offset
payments and receipts as against all other participants. Under the
CHIPS rules, each participant is required to deposit a
predetermined amount into the prefunded balance account. This
deposit is recorded on CHIPS's books as the participant's "opening
position" or "initial prefunded balance." As each payment message
is released (whether individually or in bilateral or multilateral
batches), the amount of the payment message is subtracted from the
position of the sending participant and added to the position of
the receiving participant. The intraday record of each
participant's opening position, adjusted to reflect these increases
and decreases, is referred to as its "current position."
Participants are not permitted to make additional deposits to or
withdrawals from the prefunded balance account during the day until
the system has closed for receipt of payment messages.
[0041] The release of payment messages is controlled by a computer
program (the "balanced release algorithm") to ensure that no
participant's current position is ever less than zero or more than
twice its opening position. These boundaries require some payment
messages, especially higher value payment messages, to be held in a
queue, because they could not be released without causing either
the sending participant's or the receiving participant's current
position to fall outside of their current-position boundaries.
Nevertheless, the balanced release algorithm is extraordinarily
efficient.
[0042] Still, the experience has been that a few very large payment
messages may be held by the balanced release algorithm for 30
minutes or more, and that these delays can be of concern to
participants and their customers. In addition, the operation of the
balanced release algorithm does not clear all payment messages
before the end-of-day close, requiring a final prefunding phase to
settle and release any payment messages that remain unreleased.
[0043] Given this background, what is needed is a system and method
for allowing banks to supplement their prefunded balance account
with intraday supplemental funding. This supplemental funding would
permit banks to allow large payment messages to be processed
quickly, which in turn should reduce the size of the final
prefunding requirements at the end of the day.
SUMMARY OF THE INVENTION
[0044] In one aspect of the present invention, a system, method,
and computer code are provided for continuous intraday final
settlement of payment orders among a number of participants, each
participant having facilities configured to electronically send and
receive the payment orders in the form of payment messages. Primary
and supplemental positions are stored, the positions corresponding
to balances in a prefunded balance account and representing a right
of one of the participants to payment from the prefunded balance
account. Payment messages are received from sending participants. A
determination is made, for at least one selected payment message,
as to whether the supplemental position of a sending participant of
the selected payment message, after subtraction of a payment amount
of the selected payment message, is greater than or equal to a
predetermined minimum for the sending participant's supplemental
position. A determination is made as to whether the supplemental
position of a receiving participant of the selected payment
message, after addition of the payment amount, is less than or
equal to a predetermined maximum for the receiving participant's
supplemental position.
[0045] This aspect further includes releasing the payment message,
such that the sending participant's supplemental position is
decreased by the payment amount and the receiving participant's
supplemental position is increased by the payment amount, if it is
determined that: (i) the sending participant's supplemental
position, after subtraction of the payment amount, is greater than
or equal to the predetermined minimum for the sending participant's
supplemental position, and (ii) the receiving participant's
supplemental position, after addition of the payment amount, is
less than or equal to the predetermined maximum for the receiving
participant's supplemental position.
[0046] Embodiments of the present invention may include one or more
of the following features. If it is determined that the sending
participant's supplemental position, after subtraction of the
payment amount, is less than the predetermined minimum for the
sending participant's supplemental position, then the payment
amount may be divided into a primary payment portion and a
supplemental payment portion, such that the sending participant's
supplemental position, after subtraction of the supplemental
payment portion, is greater than or equal to the predetermined
minimum for the sending participant's supplemental position. A
determination may be made as to whether the sending participant's
primary position, after subtraction of the primary payment portion,
is greater than or equal to a predetermined minimum for the sending
participant's primary position. A determination may be made as to
whether the receiving participant's primary position, after
addition of the primary payment portion, is less than or equal to a
predetermined maximum for the receiving participant's primary
position.
[0047] Additionally, the payment message may be released, such that
the sending participant's primary position is decreased by the
primary payment portion and the receiving participant's primary
position is increased by the primary payment portion, and the
sending participant's supplemental position is decreased by the
supplemental payment portion and the receiving participant's
supplemental position is increased by the supplemental payment
portion, if it is determined that: (i) the sending participant's
primary position, after subtraction of the primary payment portion,
is greater than or equal to the predetermined minimum for the
sending participant's primary position, and (ii) the receiving
participant's primary position, after addition of the primary
payment portion, is less than or equal to the predetermined maximum
for the receiving participant's primary position.
[0048] A payment messages may be designated as a priority message,
and a participant may be allowed to reserve a portion of the
participant's supplemental position for payment of priority payment
messages.
[0049] In another aspect of the present invention, a system,
method, and computer code are provided for continuous intraday
final settlement of payment orders among a number of participants,
each participant having facilities configured to electronically
send and receive the payment orders in the form of payment
messages. Primary and supplemental positions are stored, the
positions corresponding to balances in a prefunded balance account
and representing a right of one of the participants to payment from
the prefunded balance account. Payment messages are received from
sending participants. Designation of at least one of the payment
messages as a priority message is accepted. A determination is
made, for a selected priority payment message, as to whether the
sending participant's supplemental position, after subtraction of a
payment amount of the selected priority payment message, is greater
than or equal to a predetermined minimum for the sending
participant's supplemental position. The priority payment message
is released, such that the sending participant's supplemental
position is decreased by the payment amount and the receiving
participant's supplemental position is increased by the payment
amount, if it is determined that the sending participant's
supplemental position, after subtraction of the payment amount, is
greater than or equal to the predetermined minimum for the sending
participant's supplemental position.
[0050] Embodiments of the present invention may include one or more
of the following features. The sending participant may be allowed
to reserve a portion of the sending participant's supplemental
position for payment of priority payment messages. A determination
may be made, for a selected non-priority payment message, as to
whether the sending participant's supplemental position, excluding
the reserved portion, after subtraction of a payment amount of the
selected non-priority payment message is greater than or equal to
the predetermined minimum for the sending participant's
supplemental position. A determination may be made, for the
selected non-priority payment message, as to whether the
supplemental position of a receiving participant of the selected
non-priority payment message, after addition of the payment amount,
is less than or equal to a predetermined maximum for the receiving
participant's supplemental position. The non-priority payment
message may be released, such that the sending participant's
supplemental position is decreased by the payment amount and the
receiving participant's supplemental position is increased by the
payment amount, if it is determined that: (i) the sending
participant's supplemental position, excluding the reserved
portion, after subtraction of the payment amount is greater than or
equal to the predetermined minimum for the sending participant's
supplemental position, and (ii) the supplemental position of the
receiving participant of the selected non-priority payment message,
after addition of the payment amount, is less than or equal to a
predetermined maximum for the receiving participant's supplemental
position.
[0051] Priority payment messages may be categorized in one of at
least two categories of priority, and all of the priority payment
messages in the first category may be selected for release before
selection of any of the priority payment messages in the second
category.
[0052] In another aspect of the present invention, a system,
method, and computer code are provided for continuous intraday
final settlement of payment orders among a plurality of
participants, each participant having facilities configured to
electronically send and receive the payment orders in the form of
payment messages. Primary and supplemental positions are stored,
the positions corresponding to balances in a prefunded balance
account and representing a right of one of the participants to
payment from the prefunded balance account. Payment messages are
received from participants. At least two of the payment messages
are combined to form a batch, which results in position changes for
the primary position and the supplemental position of each
participant in the batch.
[0053] Each of the payment messages of the batch is selected such
that: (i) the combined primary and supplemental position of each
participant in the batch changes by the sum of payments received by
that participant minus the sum of payments sent by that
participant; (ii) for all of the participants in the batch, the sum
of all primary position changes is zero, and the sum of all
supplemental position changes is zero; (iii) the primary position
of each participant in the batch is within predetermined primary
position limits for that participant; (iv) the supplemental
position of each participant within the batch is non-negative; (v)
the supplemental position of each participant in the batch is less
than a predetermined maximum supplemental position, except that the
supplemental position of a participant may exceed that
participant's maximum supplemental position if: (a) the participant
is the receiving participant of the selected payment message, (b)
the selected payment message is a priority message, and (c) the
participant's supplemental position change is no more than an
amount of the payment message. The batch of payment messages is
released if and only if the batch meets conditions (i) through
(v).
[0054] Embodiments of the present invention may include the feature
that each payment message of the batch is selected on a trial basis
and added to the batch if and only if conditions (i) through (v)
are met.
[0055] In another aspect of the present invention, a system,
method, and computer code are provided for end-of-day final
settlement of payment orders among a number of participants, each
participant having facilities configured to electronically send and
receive the payment orders in the form of payment messages. Primary
and supplemental positions are stored, the positions corresponding
to balances in a prefunded balance account and representing a right
of one of the participants to payment from the prefunded balance
account. Payment messages are received from sending participants.
At least one of the payment messages is retained as an end-of-day
unreleased payment message. The primary positions for each
participant are combined with the corresponding supplemental
position for each participant to form a combined position. A
determination is made, for each unreleased payment message, as to
whether the sending participant's combined position, after
subtraction of a payment amount of the unreleased payment message,
is greater than or equal to a predetermined minimum for the sending
participant's combined position. Each of the unreleased payment
messages is released, such that the sending participant's combined
position is decreased by the payment amount and the receiving
participant's combined position is increased by the payment amount,
if it is determined that the sending participant's combined
position, after subtraction of the payment amount of the unreleased
payment message, is greater than or equal to the predetermined
minimum for the sending participant's combined position.
[0056] Embodiments of the present invention may include one or more
of the following features. A multilateral net balance may be
calculated for each participant based on any messages remaining
after the releasing of the unreleased payment messages. Each
participant's multilateral net balance may be combined with each
participant's combined position to determine each participant's
closing position. Payment may be required from each participant for
which the closing position is less than zero.
[0057] Additionally, all payment messages from sending participants
who have paid their closing position may be released, and any
remaining payment messages may be cancelled. Funds may be
transferred from the prefunded balance account to each participant
based on their closing position.
[0058] These and other objects, features and advantages will be
apparent from the following description of the preferred
embodiments of the present invention.
BRIEF DESCRIPTION OF THE DRAWINGS
[0059] The present invention will be more readily understood from a
detailed description of the preferred embodiments taken in
conjunction with the following figures.
[0060] FIG. 1 is a flow chart showing the procedure for releasing
urgent and preferred payment messages in a system including
supplemental funding.
[0061] FIG. 2 is a flow chart showing the procedure for releasing
non-priority payment messages in a system including supplemental
funding.
[0062] FIG. 3 is a block diagram of a computer system for executing
the program that drives the system of the present invention.
[0063] FIG. 4 is a tree structure used to perform multilateral
batching to release large payments.
[0064] FIG. 5 is a flowchart showing the end-of-day closing
procedure.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS
[0065] In accordance with the present invention, each CHIPS
participant is required to deposit a predetermined amount into a
prefunded balance account (the participant's "opening position" or
"initial prefunded balance"), which is a special deposit account
established at the Federal Reserve Bank of New York (FRBNY) to hold
a balance pursuant to the CHIPS Prefunded Balance Account
Agreement. This agreement, dated Aug. 28, 2000, was entered into by
the Clearing House (then The Clearing House Interbank Payments
Company L.L.C.) as agent on behalf of all funding participants and
the Federal Reserve Bank of New York. In accordance with the
present invention, after each participant has transferred its
opening position requirement, it is permitted to transfer
additional funds to the prefunded balance account. There is no
limit on the amount that a participant can add as supplemental
prefunding, and participants are able to add supplemental funds
throughout the day until the end-of-day closing procedure begins.
This supplemental funding represents an improvement upon the System
and Method for Intraday Netting Payment Finality disclosed in U.S.
Pat. No. 6,076,074, which, as noted above, is incorporated herein
in its entirety by reference.
I. Overview of Operational Procedures
[0066] Under the operational procedures for supplemental funding,
CHIPS records any supplemental transfer by a participant and
records any increases or decreases to this initial supplemental
position as payment messages are sent and received (a "payment
message" is an electronic message, which when released by CHIPS,
instructs a receiving participant to pay, or cause another bank to
pay, a fixed amount of money to a beneficiary, which may be the
receiving participant itself, the sending participant itself, or a
third party). CHIPS keeps separate records of each bank's: (i)
opening position (hereafter referred to as its "opening primary
position") and any increases or decreases to the required opening
position resulting from sending or receiving payments messages
(hereinafter referred to as its "current primary position"); (ii)
any intraday addition to the prefunded balance account ("initial
supplemental position"), including any increases or decreases to
the supplemental position resulting from sending or receiving
payment messages and any voluntary additions to or withdrawals of a
supplemental position (the supplemental position, including these
increases and decreases, is hereinafter referred to as the "current
supplemental position"); and (iii) a "combined position," which is
the sum of the current primary position and the current
supplemental position.
[0067] A participant is also permitted to designate any payment
message as "urgent" or "preferred." The balanced release algorithm,
which is discussed in further detail below, releases urgent payment
messages before preferred messages and releases preferred payment
messages before payment messages that have not been designated as
urgent or preferred ("non-priority payment messages"). Urgent and
preferred payment messages are sent to a receiving participant
without regard to any maximum position limits on the receiving
participant. A participant is permitted to designate any or all of
its supplemental transfers as a "reserved supplemental position" to
be used exclusively for the settlement and release of its urgent
and preferred payment messages.
[0068] CHIPS administers a limit on the amount of liquidity that a
receiving participant can accumulate (its "maximum current
supplemental position"). The maximum current supplemental position
limits only the size that the current supplemental position can
reach through the receipt of non-priority payment messages--the
receipt of urgent and preferred payment messages are not affected
by this limit.
[0069] The balanced release algorithm processes a sending
participant's payment messages in the following order of priority:
urgent payment messages, preferred payment messages, non-priority
payment messages. For receiving participants, the balanced release
algorithm settles and releases all urgent and preferred payment
messages without regard to any limit on the receiving participant's
positions. A non-priority payment message is not released if its
receipt would cause the receiving participant to exceed its maximum
current primary position or its maximum current supplemental
position.
[0070] Until closing for delivery of new payment messages, CHIPS
maintains a separate record of each participant's current primary
position and current supplemental position. When a payment message
is individually settled by deducting an amount from the sending
participant's current primary position, the receiving participant's
current primary position is increased by an identical amount.
Likewise, when a payment message is individually settled by
deducting an amount from the sending participant's current
supplemental position, the receiving participant's current
supplemental position is increased by an identical amount. Thus,
both accounts (primary and supplemental) may be used to affect the
release of particular payment. The balanced release algorithm
ensures that neither of these positions ever goes below zero and
that the maximum limits on these positions are not breached.
[0071] The sum of a participant's current primary position and its
current supplemental position is its "combined position." Because
it is the sum of two non-negative numbers, the combined position
can never go below zero until the end-of-day closing procedure
commences. At that point, CHIPS combines the primary and
supplemental positions into the combined position and stops
maintaining account of separate primary and supplemental positions.
From that point on, the end-of-day closing procedure proceeds
normally. At the conclusion of the initial closing, netting, and
release phase, a participant's combined position may be a negative
number, in which case it is the participant's "closing position
requirement," which must be paid if all payments remaining in the
queue are to be settled and released through CHIPS.
[0072] A participant is not permitted to withdraw funds from the
prefunded balance account with respect to its current primary
position. However, a participant may withdraw that portion of the
current supplemental position that is less than or equal to the
amount of supplemental transfers it made to the prefunded balance
account. For example, if a participant makes $1 million in
supplemental transfers and sends out payment messages that are
settled in whole or in part by reducing its current supplemental
position by $1 million, and then the participant receives payment
messages that result in an increase to its current supplemental
position of $2.5 million, it would be able to withdraw no more than
$1 million from the prefunded balance account. On the other hand, a
participant that made no supplemental payments and received payment
messages resulting in a $2.5 million addition to its current
supplemental position would not be able to withdraw any funds from
the prefunded balance account. Such a participant would, however,
be able to send payment messages that would be settled by reducing
its current supplemental position.
II. Overview of Supplemental Funding
[0073] As discussed above, supplemental funding is offered by CHIPS
to address the release of certain types of payment messages.
However, this feature is optional, and participants can choose
whether or not to implement supplemental funding based on
operational considerations. While, as noted above, most payment
messages are released in a timely manner, certain payment messages
may remain queued in CHIPS longer than is thought desirable by
participants. Supplemental funding facilitates prompt payment
message release by allowing a participant to exercise more direct
control over its own payment messages that have yet to be sent to
or released by CHIPS, while still retaining the economic benefits
afforded by CHIPS Finality.
[0074] Supplemental funding allows a participant to add funds to
CHIPS throughout the day to cause a controlled release of certain
types of unreleased payment messages. After providing its initial
prefunding balance requirement to CHIPS, a participant can provide
supplemental funding at any time throughout the day. There is no
limit as to the amount or frequency of supplemental funding that a
participant may send to the CHIPS prefunded balance account.
[0075] Supplemental funding consists of a Fedwire funds-transfer
payment order that identifies the participant for whom the payment
order is submitted, and specifies, within the Fedwire payment
order, that the funds are for supplemental funding. Any
supplemental funding received for a participant that has yet to
provide its opening position is returned to the originator of the
Fedwire payment order. In addition, any Fedwire payment order that
cannot be identified as supplemental funding is returned to the
originator of the Fedwire payment order.
[0076] As payment messages are released by CHIPS, the participants'
available balances increase and decrease. As discussed above, the
balance derived from the initial prefunding balance requirement is
referred to as the participant's current or primary position. The
balance derived from supplemental funding is referred to as the
participant's supplemental position. A portion or all of a
participant's supplemental position may be reserved for payment
messages that have been identified as a priority payment messages
by a participant, e.g., identified as "urgent" or "preferred." Each
day, at the CHIPS cutoff time, each participant's supplemental
position is used during the final release process and applied to
the final net balances for the final prefunding balance
requirements.
[0077] A participant can withdraw up to the amount of supplemental
funds that it has added to the CHIPS prefunded balance account, as
long as those funds are available at the time CHIPS acts upon the
instruction. However, if a participant has accumulated supplemental
funds in excess of the amount that it has added, the participant
may withdraw only an amount that is less than or equal to the
amount that it added. CHIPS initiates, from the prefunded balance
account, a Fedwire payment order to the participant that has
requested a withdrawal from its supplemental position. The payment
order is sent in accordance with pre-arranged instructions,
established between the participant and CHIPS, for returning funds
at the end of the day.
[0078] To control the release of certain types of payment messages,
a participant may use: (i) the existing CHIPS payment message
preference flag (ii) a new category of the payment message
preference flag or (iii) a new command to reserve some or all of
its supplemental position to be used exclusively for releasing
payment messages that have been marked with a preference flag. A
payment message may be designated "non-priority," "preferred," or
"urgent." Payment messages that are marked preferred or urgent are
released if the sending participant has a sufficient supplemental
position, regardless of a receiving participant's supplemental
position absorption limit.
[0079] Payment messages that are marked preferred or urgent are
released in order of their priority. For example, if a participant
has one urgent and one preferred payment message, the urgent
payment message is released first. If there are enough funds to
release the preferred payment message, but not enough for the
urgent payment message, neither payment message is released. In
such case, the sending participant could mark the preferred payment
message as urgent and the payment message would then be
released.
[0080] The procedure for releasing individual urgent and preferred
payment messages is shown in FIG. 1. In general, funds from both
the primary and supplemental accounts may be used. The sending
participant's full supplemental account position is available to
release the sending participant's payment of highest priority. In
addition, that part of the sending participant's primary account
position that does not exceed the difference between the receiving
participant's primary maximum position and the receiving
participant's primary actual position, is also available. If the
payment amount is no greater than the sum of these available
amounts from the sending participant's respective accounts, the
payment is released. The system chooses a suitable division of
funds from the two accounts totaling the payment amount, and these
partial amounts are transferred to the respective accounts of the
receiving participant. That is, the sending participant's accounts
are debited and the receiving participant's corresponding accounts
are credited. If the payment amount is greater than the sum of the
available funds, as described above, the payment is not
released.
[0081] First, the system determines whether the sending participant
has a sufficient supplemental position to cover the amount of the
payment message (Step 110), i.e., whether releasing the payment
message would not cause the sending participant's current
supplemental position to go below zero. If so, the amount of the
payment message is deducted from the sending participant's
supplemental position and added to the receiving participant's
supplemental position (Step 120). If the sending participant does
not have a sufficient supplemental position, the system determines
whether the sending participant's primary position is sufficient to
cover the remainder of the amount not covered by the sending
participant's supplemental position (Step 130). If the sending
participant's primary position is sufficient to cover the remainder
of the amount, then the system determines whether releasing the
payment message would cause the receiving participant to exceed its
primary limit (Step 135), i.e., whether adding the portion of the
amount covered by the sending participant's primary position to the
receiving participant's primary position would cause it to exceed
its maximum limit. If the receiving participant's primary limit
would not be exceeded, then the primary portion of the payment
amount (i.e., that portion covered by the sending participant's
primary position) is deducted from the sending participant's
primary position and added to the receiving participant's primary
position, and the supplemental portion of the amount is deducted
from the sending participant's supplemental position and added to
the receiving participant's supplemental position (Step 140).
[0082] If the system determines that the sending participant's
primary position is not sufficient to cover the remainder of the
amount not covered by the sending participant's supplemental
position (Step 130), then the system attempts to release other
urgent payment messages, if any. However, none of a sending
participant's reserved supplemental funds are used to release
preferred payment messages until all of its urgent payment messages
have been released (Step 150). Likewise, if the system determines
that releasing the payment message would cause the receiving
participant to exceed its primary limit (Step 135), then message in
question is not released.
[0083] Payment messages that have the same preference flag
designation are released in system sequence number (SSN) order,
i.e., the order in which the payment messages were received by the
system, when possible. However, a smaller sized payment message is
not blocked by a larger payment message with the same preference.
If a participant's position is not sufficient to release an older,
larger payment message, but is sufficient to release a newer,
smaller payment message, the newer payment message is released
first.
[0084] As noted above, a participant's supplemental position is
tracked separately from its primary position. If a sending
participant sends a payment message that is settled by deducting
all or part of the amount of the payment message from the
participant's supplemental position, the amount is added to the
receiving participant's supplemental position. Therefore, a
participant can have a supplemental position even if it has not
sent any supplemental funding to the CHIPS prefunded balance
account. The total amount in the prefunded balance account, i.e.,
the total for all participants, does not change with the release
and settlement of a payment message. Likewise, the total amount in
the prefunded balance account devoted to the primary account
positions of the participants does not change with the release and
settlement of a payment message, and consequently, the same is true
for the supplemental account positions.
[0085] CHIPS attempts to release a participant's non-priority
payment messages using its supplemental position, provided the
following criteria are satisfied: (i) only the excess of the
supplemental position over the reserved amount is used; and (ii)
the receiving participant does not exceed its supplemental funding
credit cap for receiving non-priority payment messages.
[0086] The procedure for releasing non-priority payment messages is
shown in FIG. 2. In general, maximum positions are observed for
both the receiving participant's supplemental and primary
positions. In addition, only the excess of the sending
participant's supplemental position, over any reserved amount, is
available for use. For each account, primary and supplemental, only
that part of the sending participant's available position that does
not exceed the difference between the receiving participant's
maximum position and its respective actual position is available to
affect the release of a payment. If the payment amount is no
greater than the sum of the amounts thus available in each of the
sending participant's two accounts, then release occurs--otherwise
not. The system chooses a suitable division of funds from the
sending participant's two accounts totaling the payment amount, and
these partial amounts are transferred to the respective accounts of
the receiving participant (i.e., the sending participant's accounts
are debited and the receiving participant's accounts are
credited).
[0087] First, the system determines the sending participant's
usable supplemental position (Step 210). As discussed above, a
portion of the sending participant's supplemental position may be
reserved for priority payment messages, so this reserved amount is
subtracted from the sending participant's supplemental position.
The lesser of this difference and the amount by which the receiving
participant's maximum supplemental position exceeds its current
supplemental position is taken to be the usable supplemental
position of the sending participant (by contrast, urgent and
preferred payment messages are sent without regard to the receiving
participant's maximum supplemental position). If this usable
supplemental position is greater than or equal to the payment
amount, then the payment is released, and the payment amount is
deducted from the sending participant's supplemental position and
added to the receiving participant's supplemental position (Step
220).
[0088] If the sending participant's usable supplemental position,
as determined above, is not sufficient, then the system determines
whether the sending participant's primary position is sufficient to
cover the remainder of the payment amount not covered by the
sending participant's usable supplemental position (Step 230). If
the sending participant does not have a sufficient primary position
to cover the remainder of the payment amount, then the payment
message is not released, and the system attempts to release the
next payment message in the queue (Step 240).
[0089] If the sending participant does have a sufficient primary
position, then the system determines whether the primary portion of
the payment message (i.e., that portion covered by the sending
participant's primary position) would cause the receiving
participant to exceed the receiving participant's maximum primary
position (Step 250). If so, then the payment message is not sent,
and the system attempts to release the next payment message in the
queue (Step 260).
[0090] If the primary portion of the payment message would not
cause the receiving participant to exceed the receiving
participant's maximum primary position (Step 250), then the primary
portion of the amount is deducted from the sending participant's
primary position and added to the receiving participant's primary
position, and the supplemental portion of the amount is deducted
from the sending participant's supplemental position and added to
the receiving participant's supplemental position (Step 270).
[0091] As discussed in further detail below, CHIPS also releases
payments in batches, e.g., when payments are deemed to be too large
for individual release. This batching process is also discussed in
U.S. Pat. No. 6,046,074, which has been incorporated by reference.
In forming batches, the flow of funds between primary and
supplementary accounts is less constrained than in the case of
individual payment releases. The situation may be described in
terms of the multiple constraints observed by CHIPS in building a
batch to release. Each batch consists of one "target" payment and
one or more "helper" payments. The constraints are these: (1) the
combined balance of each participant involved in a batch increases
by the sum of the payments it receives minus the sum of the
payments it sends within the batch; (2) among the participants
involved in a batch, the sum of all of the primary account changes
is zero, and the sum of all of the supplementary account changes is
zero; (3) all primary account limits hold upon release of the
batch; (4) supplemental accounts are non-negative upon release of
the batch; and (5) if a supplemental position meets or exceeds its
maximum position after the batch release, then that balance may
have been increased by the batch only if (a) the target payment of
the batch is marked either "preferred" or "urgent" and (b) the
balance belongs to the receiving participant of the target payment.
In such a case, the balance increase may be no more than the amount
of the target payment.
[0092] In forming tentative batches of payments, the method adopted
above for individual payments, whereby a payment amount is divided
into primary and supplemental portions, is adopted in a relaxed
form in accord with the prior paragraph. Specifically, additional
payment flows are permitted between the primary and supplemental
accounts of the sending and receiving participants. The latter
payment flows must sum to zero in a completed batch. This approach
permits a more optimum and robust use of supplemental funds.
[0093] In order to keep the balanced release algorithm from
allowing a participant to absorb excessive liquidity from
supplemental funding with non-priority payment messages, CHIPS
calculates for each participant a "maximum current supplemental
position" in accordance with a formula that is reasonably designed
to facilitate the CHIPS payment message release methodology. In one
embodiment, this credit cap is derived from a formula based upon
the participant's initial prefunding balance requirement. The
supplemental funding credit cap of a participant is equal to the
total supplemental funding held by CHIPS at the time of the
calculation, multiplied by a fraction. The numerator of this
fraction is the actual initial prefunding balance requirement for
the participant, held by CHIPS at the time of the calculation. The
denominator is the sum of the initial prefunding balance
requirements for all participants, expected by CHIPS on the
business day.
[0094] This amount may be expressed as follows:
SFCC = TSF * IPBR TIPBR ##EQU00001## [0095] Where: [0096]
SFCC=Supplemental funding credit cap of a participant at the time
of the calculation [0097] TSF=Total supplemental funding held by
CHIPS at the time of the calculation [0098] IPBR=Participant's
initial prefunding balance requirement held by CHIPS at the time of
the calculation [0099] TIPBR=Total of all initial prefunding
balance requirements expected by CHIPS on the business day
[0100] For example, if: [0101] IPBR=$10 M [0102] TIPBR=$2,525 B
[0103] TSF=$600 M
[0103] SFCC = $600 M * $10 M $2 , 525 B ##EQU00002## [0104] then:
[0105] SFCC=$2.376 M
[0106] This calculation is used to determine the maximum amount a
participant can absorb in its supplemental position by receiving
non-priority payment messages. As the total of supplemental funds
held by CHIPS increases and decreases during the business day, each
participant's supplemental funding credit cap is adjusted
accordingly.
[0107] A participants has the ability to control the use of its
supplemental position by reserving a specified amount to be used
only for urgent and preferred payment messages. CHIPS uses the
unreserved amount of a participant's supplemental position for
release of any payment messages, though payment priority affects
the order in which payment message releases are attempted. A
participant may specify a reserve amount of supplemental funds that
it has already sent to the prefunded balance account or that it
intends to send to the prefunded balance account according to the
following rules:
[0108] 1. A participant may reserve an amount at any time and may
alter it at any time during the business day;
[0109] 2. The reserve amount is reset to zero at the start of each
business day;
[0110] 3. The reserve amount is used by CHIPS to determine the
amount of the participant's supplemental position available for the
release of non-priority payment messages; and
[0111] 4. As stated earlier, a participant may specify a reserve
amount of supplemental funds that it has already sent to CHIPS or
intends to send to CHIPS.
[0112] In practice, CHIPS reserves a supplemental funds amount that
is the smaller of either the specified reserve amount or the actual
net supplemental funding amount that the participant has added to
the CHIPS prefunded balance account, where the net amount includes
its supplemental deposits minus its supplemental withdrawals. As
discussed above, if a participant has urgent and preferred payment
messages, its supplemental position is not be used to release the
preferred payment messages until all of the urgent payment messages
are released.
[0113] The Clearing House, as agent of all funding participants,
maintains an account at the Federal Reserve Bank of New York to
receive funding payments for CHIPS processing. All payments made
for initial, supplemental, and final prefunding are made
individually for each participant, and any participant that funds
for one or more other participants must send separate Fedwire
payment orders for each participant, identifying the participant
that is being funded (these rules apply for initial, supplemental,
and final prefunding). While a non-funding institution (i.e., a
participant that has not become a party to the CHIPS Prefunded
Balance Account Agreement) is typically funded by a designated
funding participant, funding is not restricted to the designated
funding participant. A participant may be funded by another
institution on Fedwire as long as the CHIPS participant is
correctly identified.
[0114] A receiving participant's routing number is kept on file at
CHIPS to designate where the outgoing end-of-day, and withdrawals
of supplemental funding, payments are to be sent. In addition, an
optional demand deposit account ("DDA") number is kept on file to
designate an account at the receiving participant. All Fedwire
payments must be settlement type 16 message payments. For initial
and final payments, all Fedwire payments made for CHIPS prefunding
purposes must identify the participant that is being funded in the
Originator Tag as follows: [0115] {5000}C<CHIPS 4 digit
ABA#>*<ABA name>*
[0116] The FI-to-FI tag {6500} must also be used to specify whether
the payment is for initial or final pre-funding. For example, an
initial pre-funded message for participant 0004 would be formatted
as follows: [0117] {5000}C0004*BANK 0004 NAME*{6500}*CHIPS INITIAL
PREFUNDED*BALANCE REQUIREMENT
[0118] An example of a final prefunded message for participant 0004
would be: [0119] {5000}C0004*BANK 0004 NAME*{6500}CHIPS FINAL
PREFUNDED*BALANCE REQUIREMENT*
[0120] For supplemental funding, all Fedwire payments made for
CHIPS prefunding purposes again must identify the participant that
is being funded in the Originator Tag as follows: [0121]
{5000}C<CHIPS 4 digit ABA#>*<ABA name>*
[0122] The FI-to-FI tag {6500} must also be used to specify that
the payment is for supplemental funding. The token "SUPPLEMENTAL"
or "ADDITIONAL" must be present on the first line of this tag. An
example of a supplemental pre-funded message for participant 0004
would be: [0123] {5000}C0004*BANK 0004 NAME*{6500}CHIPS
SUPPLEMENTAL FUNDING* [0124] or [0125] {5000}C0004*BANK 0004
NAME*{6500}CHIPS ADDITIONAL FUNDING*
[0126] For outgoing payments, CHIPS uses the receiving financial
institution and the optional DDA number in the Beneficiary Tag as
follows: [0127] {4200}C<CHIPS 4 digit ABA#>*<ABA name>*
[0128] or [0129] {4200}D<DDA account# on file>*<CHIPS 4
digit ABA#><space><ABA name>*
[0130] The FI-to-FI tag is formatted as follows: [0131] {6500}CHIPS
END OF DAY*FINAL AVAILABLE BALANCE*
[0132] An example of an end of day payment with DDA for participant
0999 would be: [0133] {4200}D009999999912*0999 BANK NAME
0999{6500}CHIPS END OF DAY*FINAL AVAILABLE BALANCE*
[0134] For withdrawal payments, CHIPS uses the receiving financial
institution and the optional DDA number in the Beneficiary Tag as
follows: [0135] {4200}C<CHIPS 4 digit ABA#>*<ABA name>*
[0136] or [0137] {4200}D<DDA account# on file>*<CHIPS 4
digit ABA#><space><ABA name>*
[0138] The FI to FI tag is formatted as follows: [0139]
{6500}WITHDRAWAL OF SUPPLEMENTAL FUNDING*
[0140] An example of an end of day payment with DDA for participant
0999 would be: [0141] {4200}D009999999912*0999 BANK NAME [0142]
0999{6500}WITHDRAWAL OF SUPPLEMENTAL FUNDING*
[0143] Fedwire payment orders that are received and cannot be
identified, or result in an over-payment of funding, are returned
as a Fedwire reversal. The FI-to-FI contains information regarding
the reason for the reversal. For example: [0144] {6500}RETURN OF
EXCESS INITIAL*PREFUNDED BALANCE*
[0145] Or, when returning supplemental funds to a participant that
has not yet funded: [0146] {6500}RETURN OF SUPPLEMENTAL [0147]
FUNDING*PARTICIPANT NOT FUNDED*
III. System Hardware
[0148] The system of the present invention includes a central
controlling agent having a central computer that is structured to
communicate with participating financial institutions. The system
has hardware and software to control and update prefunded balance
accounts associated with the participating financial institutions,
and, by means of crediting and debiting these accounts within
predetermined constraints, the system controls release and
settlement of payments between and among the participating
institutions. The system preferably is implemented with a computer
system having the ability to communicate electronically with banks,
including the participating financial institutions as well as the
Federal Reserve Bank that is holding the prefunded balance account,
and having storage capacity sufficient to maintain queues for
temporarily storing payment orders received by banks until the
associated payments can be released.
[0149] The system may be implemented using certain aspects of the
current CHIPS system hardware. However, when implemented using
CHIPS hardware, the system achieves an improvement over the current
CHIPS implementation by allowing supplemental funding. The system
of the present invention is not limited to this implementation,
however, and may be implemented using hardware and software
independent of and different from that utilized in the current
CHIPS system. A detailed description of the current CHIPS system
can be found in the CHIPS Systems and Operations Manual, published
by The Clearing House Payments Company L.L.C., which is
incorporated herein by reference.
[0150] An example of a computer system for executing the program
that drives the system of the present invention is shown in FIG. 3.
The system includes a CPU 31 that performs processing functions.
Also included is read only memory 32 (ROM), which stores at least
some of the program instructions to be executed by CPU 31, such as
portions of the operating system or basic input-output system
(BIOS), and random access memory 33 (RAM) used for temporary
storage of data. The computer also includes a network interface 72
which enables communication with external devices, such as the
computers located at participant financial institutions. A data
storage device 34 is provided to allow for storage of data. Data
storage device 34 may be written to or read from the CPU 31.
Data/Address bus 37 connects the ROM 32, RAM 33 and data storage
device 34 to the CPU. A keyboard is preferably provided to receive
input from an operator. However any conventional method of operator
input may be used. A display is preferably provided for conveying
information to the operator of the computer.
[0151] A participant's primary connection to the System generally
consists of a dedicated line leased from a telephone company by the
Clearing House for that purpose. A participant may use a secure
Internet connection that meets the standards for such a connection
established by CHIPS to send and receive administrative messages to
perform the following functions, which are discussed in further
detail below: (i) set, remove, or change a priority designation;
(ii) establish or change a reserve supplemental position; and (iii)
request a withdrawal under or make certain types of inquiries.
Documents describing the standards and communication protocols (and
other functional requirements) for a participant's computer
interface to the System are furnished by the Clearing House.
[0152] Each participant must maintain adequate primary and backup
computer facilities. A backup computer must be able to emulate
fully the primary computer with respect to functions and capacity
and must afford the same level of message authentication security
as the primary computer. The backup computer should not be located
in the same power grid as the primary computer. Such backup
computer facilities must meet relevant standards adopted by the
Clearing House. Any primary or backup computer linked to the System
may be located only where there are adequate arrangements for
on-site review of a participant's payment processing and computer
facilities, adequate access to digital telecommunications
facilities, adequate arrangements for necessary authentication and
security devices, and adequate assurances that operation of the
System is not be subject to interruption or interference by
internal or external political developments.
IV. Detailed Procedures for Delivering, Storing, Releasing and
Receiving Payment Messages
[0153] A participant may deliver a payment message to CHIPS for
storage and release in accordance with the following rules. A
participant may delete a stored payment message until the system
has closed for the delivery of payment messages, unless CHIPS has
released the payment message to the receiving participant. After a
payment message has been released by CHIPS, it cannot be deleted by
the Sending participant. Before its release, the CEO (i.e., the
chief executive officer of the Clearing House or his or her
designee) may delete from storage any payment message delivered by
any participant or that is in storage to be sent to any
participant.
[0154] A participant may designate a payment message as an "urgent
payment message" or as a "preferred payment message." A payment
message that has been designated as an urgent payment message or a
preferred payment message is a "priority payment message," and a
payment message that has not been so designated is a "non-priority
payment message." A designation may occur when the participant
delivers the payment message to the Clearing House or while the
payment message is held in storage. With respect to a stored
payment message, a participant may instruct the Clearing House to
add, change, or remove a priority designation from a payment
message at any time up to the time that the payment message has
been released. The Clearing House acts on a participant's
instruction to add, change, or remove a priority designation with
respect to a stored payment message if it receives the instruction
within a reasonable time before the payment message has been
released. Designation, change, or removal of a designation must be
accomplished using certain prescribed formats.
[0155] CHIPS controls the release of each payment message to any
receiving participant in accordance with the procedures described
below. When a payment message has been released by CHIPS, it is
deemed to have been sent by the sending participant and received by
the receiving participant. CHIPS does not release any payment
message from a sending participant on any day until that
participant has transferred, directly or indirectly, funds in the
amount of its initial opening position requirement to the prefunded
balance account. Moreover, CHIPS does not release any payment
message to a receiving participant on any day until that
participant has transferred, directly or indirectly, funds in the
amount of its initial opening position requirement to the prefunded
balance account, and, as a sending participant, has begun to
deliver payment messages to the Clearing House.
[0156] A sending participant does not become obligated to pay the
amount of a payment message to the receiving participant until
CHIPS has released the payment message to the receiving
participant. Release of a payment message by CHIPS to the receiving
participant creates an obligation of the sending participant to pay
the receiving participant the amount of the payment message.
Simultaneously with the release of a payment message, this payment
obligation is settled in accordance with procedures discussed
below. The completion of settlement of any payment message in
accordance with the procedures discussed below constitutes a final
settlement of that payment message and a final discharge and
payment of the sending participant's obligation to pay the amount
of that payment message to the receiving participant.
V. Detailed Procedures Relating to Prefunded Balance Account and
Current Positions
A. Prefunded Balance Account
[0157] Each funding participant must become a party to the CHIPS
Prefunded Balance Account Agreement, under which the CHIPS
prefunded balance account is established at the Federal Reserve
Bank of New York (FRBNY). A participant may, and if it is not
eligible to open its own account at a Federal Reserve Bank must,
designate as its funding participant another participant that is
eligible to open an account at a Federal Reserve Bank. FRBNY holds
all funds deposited in the CHIPS prefunded balance account for the
joint benefit of all the funding participants and payable
exclusively in accordance with the instructions of the Clearing
House as agent on behalf of all funding participants. However, the
records in the System's books are not records of FRBNY, and FRBNY
does not take any action during the day to adjust its records in
connection with payment messages released by CHIPS.
B. Primary Prefunding
[0158] At certain intervals, but generally no less frequently than
once each month, the Clearing House calculates for each participant
its "desired opening position" in accordance with a formula that is
reasonably designed to facilitate the CHIPS payment message release
methodology. The Clearing House transmits to each participant a
report showing the desired opening position and the period during
which the desired opening position is effective ("opening position
effective period"). A participant's "opening position requirement"
for any opening balance effective period is the lesser of its
desired opening position for the current opening position effective
period or the desired opening position for the immediately
preceding opening position effective period.
[0159] Each day, each participant must arrange to have funds in the
amount of its opening position requirement transferred finally and
irrevocably to the prefunded balance account. These funds transfers
may be sent directly by the participant itself or indirectly
through another financial institution that has an account at a
Federal Reserve Bank. These transfers must be completed by certain
established deadlines. If a participant transfers to the prefunded
balance account funds in excess of its desired opening position for
the current opening position effective period, the Clearing House
promptly returns to the participant (or the financial institution
that sent the funds transfer to the prefunded balance account on
the participant's behalf) an amount sufficient to reduce the
participant's opening primary position to the desired opening
position for the current opening position effective period. Any
amount so returned is not included in the calculation of the
participant's opening primary position or used in the calculation
of the maximum current primary position.
[0160] Upon receipt of advices from FRBNY, the Clearing House makes
a record in the System's books of the amount that each participant
has transferred, directly or indirectly, to the prefunded balance
account (i.e., the participant's opening primary position).
Following the recording of a participant's opening primary position
and continuously throughout the day, the Clearing House records
entries on the System's books to adjust a participant's opening
primary position to reflect all decreases and increases in a
participant's opening primary position. The intraday record of each
participant's opening primary position, as adjusted to reflect all
decreases and increases recorded, is referred to herein as the
participant's "current primary position."
C. Supplemental Prefunding
[0161] At any time following the transfer of its opening position
requirement, but before the System has closed for the delivery of
payment messages, a participant may directly or indirectly transfer
additional funds to the prefunded balance account (i.e., the
participant's "supplemental transfer"). Upon receipt of an advice
of credit from FRBNY, the Clearing House makes a record in the
System's books of the supplemental transfer as the participant's
"initial supplemental position." If a participant has not made a
supplemental transfer to the CHIPS prefunded balance account, but
receives one or more payment messages settled in whole or in part
by a reduction in the sending participant's initial or current
supplemental position, the Clearing House records the corresponding
increase in the receiving participant's supplemental position
resulting from the settlement of the first such payment message as
the receiving participant's initial supplemental position.
[0162] Following the recording of a participant's initial
supplemental position and continuously throughout the day, the
Clearing House records entries on the System's books to adjust the
participant's initial supplemental position to reflect all
increases and decreases in its initial supplemental position due to
the receipt of additional supplemental transfers to the prefunded
balance account or due to a withdrawal. The intraday record of each
participant's initial supplemental position, as adjusted to reflect
all increases and decreases referred to in this paragraph is the
participant's current supplemental position. In addition, a
participant may designate that a portion of the current
supplemental position attributable to it any time that is equal to
the sum of all supplemental transfers it has made, less the amount
of any withdrawals, as its reserved supplemental position to be
used exclusively for the settlement of payment messages that have
been designated as priority payment messages.
[0163] The sum of each participant's current primary position and
its current supplemental position is referred to as its "combined
position." Each participant's combined position, as adjusted to
reflect all intraday decreases and increases, is referred to as the
participant's "final position."
D. Position Limits
[0164] A payment message is not released if the decreases to be
recorded for the sending participant or the increases to be
recorded for the receiving participant would cause the current
primary position of the sending participant or the receiving
participant to be less than zero (i.e., the "minimum current
primary position") or, except during the end-of-day closing
procedure discussed below, would cause the current position of the
sending participant or the receiving participant to exceed an
amount equal to twice its opening primary position requirement.
[0165] CHIPS calculates for each participant a "maximum current
supplemental position" in accordance with a formula that is
reasonably designed to facilitate the CHIPS payment message release
methodology. A non-priority payment message is not released if the
decreases to be recorded in the current supplemental position of
the sending participant and the corresponding increases to be
recorded in the current supplemental position of the receiving
participant would cause the receiving participant's current
supplemental position to exceed its maximum current supplemental
position. The maximum current supplemental position limit does not
apply to payment messages designated as priority payment messages.
A payment message is not released if the decreases to be recorded
for the sending participant would cause its current supplemental
position to be less than zero ("minimum current supplemental
position"). In addition, a payment message is not released if the
decreases to be recorded for the sending participant would cause
its combined position to be less than zero ("minimum combined
position").
E. Withdrawals from the Prefunded Balance Account.
[0166] A participant may request a transfer of funds from the
prefunded balance account to that participant in an amount up to
the lesser of: (i) the participant's current supplemental position,
or (ii) the sum of all supplemental transfers it has made up to the
time of its request, less any amount that has already been
transferred to the participant (i.e., the participant's
"withdrawable amount"). A participant's current combined position,
less its withdrawable amount, at any point in time represents the
amount that is to become due to that participant following the
close of business on that day contingent on the event that no
additional payment messages to or from that participant are
released and settled.
VI. Detailed Procedures Relating to Settlement
A. Release Methodology
[0167] CHIPS uses a methodology for controlling the release of
payment messages that has the following characteristics. The
methodology is reasonably designed to ensure that: (i) no
participant's current primary position is either less than its
minimum current primary position or, except during the end-of-day
closing procedures, more than its maximum current primary position;
(ii) the sum of the current primary positions of all participants
remains the same following the release as it was before the
release; (iii) no participant's current supplemental position is
less than its minimum current supplemental position; (iv) the
release of a non-priority payment message to a receiving
participant does not cause the receiving participant's current
supplemental position to exceed its maximum current supplemental
position; (v) the sum of the current supplemental positions of all
participants remains the same following the release as it was
before the release; (vi) no participant's combined position is less
than its minimum combined position; and (vii) if a participant has
designated a portion of its current supplemental position as its
reserved supplemental position, CHIPS does not use the reserved
supplemental position to settle: (a) non-priority payment messages;
or (b) preferred payment messages if the participant has any
unreleased urgent payment messages.
[0168] The methodology is also reasonably designed to release: (i)
urgent payment messages before preferred payment messages and
preferred payment messages before non-priority payment messages;
and (ii) payment messages that share the same priority designation
in the order in which they were received. These sequences may be
varied depending on the mix of payment messages in each priority
designation and the current positions of the sending and receiving
participants or to increase the number or value of payment messages
that can be released and settled before the close of the System for
delivery of payment messages.
[0169] Other aspects of the methodology include the following. The
methodology may release a payment message as soon as it has been
delivered by the sending participant or hold it in storage for
release at a later time. The methodology may include individual
release of payment messages, bilateral netting and release of
payment messages, multilateral netting and release of payment
messages, or any combination of these. From time to time, the
methodology used by CHIPS may be adjusted as part of continuing
efforts by the Clearing House to increase the number or value of
payment messages that can be released and settled before the close
of the System for delivery of payment messages.
B. Balanced Release Algorithm
[0170] A computer-based system, including a computer program, is
used to control the release of payment messages. This program (the
"balanced release algorithm") continuously matches, nets, sets off,
and releases payment messages throughout the day. All incoming
payment messages are received by the system and held in a queue or,
preferably several queues for release when the requirements of the
computer program are satisfied. The program broadly classifies each
payment message as large (e.g., equal to or greater than 80 percent
of the lesser of the sending participant's opening primary position
and the receiving participant's opening primary position) or small
(e.g., less than 80 percent of the lesser of these values).
[0171] The program releases payments individually, in bilateral
batches, or in multilateral batches, and release notification is
sent to the sending participant while a receive notification is
sent to the receiving participant. The release of a large payment
individually could cause the sending participant to fall below its
minimum current primary position or cause the receiving participant
to exceed its maximum current primary position (except that, as
discussed above, urgent and preferred payment messages are sent to
a receiving participant without regard to any maximum position
limits on the receiving participant). Therefore, the balanced
release algorithm searches for payments that can be included in a
batch and netted against the large payment message. If necessary,
other "helper" payment messages from other participants may be
added to the batch, and all the payment messages in the batch are
netted and set-off against one another so that the net changes to
the available balance of each participant with payment messages in
the batch will not cause any participant's available balance to
drop below its minimum or exceed its maximum. This batching will be
discussed in greater detail below.
[0172] The balanced release algorithm releases small payments,
e.g., those less than 80% of the lower of the opening primary
positions of the sending participant and receiving participant,
individually (without batching) from bilateral, first-in-first-out
(FIFO) queues, resident in the central computer storage, upon which
incoming payment orders are placed upon receipt, as the current
primary positions of the sending and receiving participants permit.
Neither the minimum nor maximum current primary positions discussed
above may be exceeded following the release of a payment (except
with respect to urgent and preferred payment messages, as discussed
above). The earliest queued payments are considered first, e.g.,
the messages may be released in system sequence number (SSN) order.
In addition, a matching technique, e.g., based upon the
Gale-Shapley algorithm, may be used to find an optimum match of
sending participants with receiving participants.
[0173] The balanced release algorithm releases payments with the
aid of multilateral and bilateral batching. Large queued payments
are batched bilaterally as follows. When a large payment order from
bank A to bank B is queued, a check is made to see whether there is
another payment order from bank B to bank A already queued that is
between half as large and twice as large as the first payment
order. If so, such a second payment order is chosen and is batched
with the first one. The result is a "pseudo-payment" whose amount
is the difference of the amounts of the original two payment
orders. This difference is less than or equal to each of the
amounts of the two payment orders in the batch. The direction of
the pseudo-payment is the direction of the larger payment
order.
[0174] After a pseudo-payment is formed, the process is repeated
iteratively until no suitable "second" payment order is available.
At each step, the size of the pseudo-payment gets smaller or, at
worst, remains the same. Thus, the overall effect of bilateral
batching is to reduce the size and number of the payments to be
released. These pseudo-payments are then released either as small
payments as described above, or as large payments, using
multilateral batching, described next. When the system "releases" a
pseudo-payment, it releases all of the batched payments linked into
the pseudo-payment in one transaction.
[0175] Multilateral batching is utilized in the system of the
present invention to provide a means to release payments (and
pseudo-payments) larger than the flow cap--even payments falling
outside of the participants' minimum and maximum current primary
positions. When a large payment is queued, after any bilateral
batching has been done, a check is begun to see whether any large
payments on the queue can be released. When considering the release
of a given large payment P from bank A to bank B, usually such a
release would lower the position of bank A below its minimum
current primary position, and might also raise the position of bank
B beyond its maximum current primary position. Therefore, helper
payments are used to bank A from third party participants currently
in a credit position to produce a net position at bank A that is
within the prescribed limits. Helper payments are chosen initially
with only the position at bank A in mind.
[0176] At each stage of the construction of the multilateral batch,
a tree of payments exists directed downward toward the root
participant bank, e.g., Bank A. An example of such a tree is shown
in FIG. 4, which will be discussed in greater detail below.
participants at nodes of the tree, e.g., Bank B, with both incoming
and outgoing branches satisfy their limit constraints. Leaf
(terminal) nodes of the tree are participants that may exceed their
maximum current primary position, and which therefore may
themselves need helper payments. Any participant in the tree that
needs help of this sort is later either supplied with the help or
is discarded, cutting back the tree.
[0177] If the construction succeeds, a tree of payments is obtained
among the participants previously in a credit position such that
every participant position in the tree, including participant Bank
A, is within its prescribed limits. If the above tree can be
created, an attempt is made to accomplish the analogous situation
at Bank B using payments to participants previously in a debit
position. Another tree is constructed, if possible, so that every
participant position in the second tree is within the prescribed
limits. If all this is accomplished successfully, all of the
payments taken together constitute a multilateral batch and are
released in a single transaction.
C. Intraday Settlement Procedures
[0178] Payment messages released before the close of the System for
the delivery of payment messages are settled in accordance with the
following Intraday Settlement Procedures. Payment messages released
after the close of the System for the delivery of payment messages
are settled in accordance with the end-of-day closing procedures
discussed below.
[0179] For "individual release," the following procedures are used.
If a payment message is released individually, CHIPS decreases the
sending participant's current primary position or current
supplemental position or both (depending upon, inter alia, the
priority of the message and whether a portion of the supplemental
position has been reserved, as discussed above in "Overview of
Supplemental Funding") by amounts that total the amount of the
payment message and increases the receiving participant's current
positions by amounts that are equal to the decreases in the sending
participant's corresponding current positions. The release of the
payment message and the recording of these entries is deemed to be
effective simultaneously. Settlement with respect to the payment
message is complete when the System has recorded the decreases in
the sending participant's current positions and the increases in
the receiving participant's current positions. Completion of
settlement constitutes final settlement of that payment message and
final discharge and payment of the sending participant's obligation
to pay the amount of the payment message to the receiving
participant.
[0180] For "bilateral netting and release," the following
procedures are used. If a payment message is released in a batch
that consists of one or more payment messages from first
participant to second participant, and one or more payment messages
from the second participant to the first participant, the
obligation of the first participant to pay the second participant
for the amount of any payment messages in the batch that the first
participant is sending to the second participant is netted by
setting off and applying the obligation of the second participant
to pay the first participant for the amount of any payment messages
in the batch that it is sending to the first participant. The
balance remaining from this netting is referred to as the
"bilateral net balance." The current positions of each participant
with payment messages in the batch is decreased by amounts that
total the amount of each payment message in the batch for which it
is the sending participant and, for each payment message for which
it is the receiving participant, increased by amounts that are
equal to the decreases in the sending participant's corresponding
current positions.
[0181] As a result of these entries, the current positions of the
participant whose bilateral net balance is positive is increased by
an amount equal to the amount of the bilateral net balance and the
current positions of the participant whose bilateral net balance is
negative is decreased by the amount of the bilateral net balance.
The release of these payment messages, the netting of these
obligations, and the recording of these entries is deemed to be
effective simultaneously. Settlement with respect to all payment
messages in the batch is complete when the System has recorded the
decreases and increases of the amounts of the payment messages in
the batch to the current positions of the participants. Completion
of settlement constitutes final settlement of all payment messages
in the batch and final discharge and payment of the obligations of
each participant as a sending participant to pay the amount of each
payment message in the batch that is released to the other
participant as a receiving participant.
[0182] For "multilateral netting and release," the following
procedures are used. If a payment message is released in a batch
that includes payment messages to or from three or more
participants, the obligation of each participant to pay the amount
of each payment message sent by it as a sending participant in the
batch to another participant as a receiving participant is netted
by setting off and applying against the sending participant's
obligation the right of the sending participant to receive payment
from the receiving participant of the amount of any other payment
message sent to the sending participant by the receiving
participant in the batch. The balance resulting from this netting
equals the bilateral net balance between each pair of
participants.
[0183] The bilateral net balance of obligations owed by each
sending participant to each receiving participant with respect to
payment messages in the batch is netted by setting off and applying
against that balance the bilateral net balance of obligations owed
to the sending participant by other participants who have payment
messages sent through CHIPS in the batch. The balances resulting
from this netting are referred to as the "multilateral net
balances." The current positions of each participant with payment
messages in the batch is decreased by amounts that total the amount
of each payment message in the batch for which it is the sending
participant and increased in respect of payment messages for which
it is the receiving participant by amounts that are equal to the
decreases in the sending participant's corresponding current
positions.
[0184] As a result of these entries, the current positions of a
participant whose multilateral net balance is positive is increased
by the amount of its multilateral net balance and the current
positions of a participant whose multilateral net balance is
negative is decreased by the amount of its multilateral net
balance. The release of these payment messages, the netting of
these obligations, and the recording of these entries is deemed to
be effective simultaneously. Settlement with respect to all payment
messages in the batch is complete when the System has recorded the
decreases and increases of the amounts of the payment messages in
the batch to the current positions of the participants. Completion
of settlement constitutes final settlement of all payment messages
in the batch and final discharge and payment of the obligation of
each participant as a sending participant to pay the amount of each
payment message in the batch that is released to another
participant as a receiving participant.
D. End-of-Day Closing Procedure
[0185] The following procedures, as shown in FIG. 5, are used for
initial closing, netting, and release. Immediately following the
close of the System for the delivery of payment messages, CHIPS
nets, sets off, and releases as many of the payment messages that
remain in storage as possible (Step 505) using the intraday
settlement procedures described above, except that prior to Step
505 CHIPS combines the current primary position and the current
supplemental position of each participant into the participant's
combined position (Step 500) and applies no limits to the
participant's combined position other than the minimum combined
position. Settlement with respect to all payment messages released
as part of this procedure is complete when the System has recorded
the decreases and increases to the current combined positions.
Completion of settlement constitutes final settlement of all
payment messages released as part of this procedure and final
discharge and payment of the obligation of a participant as a
sending participant to pay the amount of each payment message
released as part of this procedure to another participant as a
receiving participant.
[0186] In calculating closing positions, if any payment messages
remain in storage following the procedures described above, CHIPS
calculates a multilateral net balance for all participants based on
the payment messages in storage, without actually releasing any of
those payment messages (Step 510). The resulting multilateral net
balance for each participant is combined with that participant's
current combined position to calculate the participant's "closing
position" (Step 515). If a participant's closing position is a
negative number, it is the participant's "closing position
requirement." Following this calculation, the Clearing House
prepares and sends to each participant an "Initial End-of-Day
Balance Report" showing its closing position (Step 520). The
Initial End-of-Day Balance Report of each funding participant also
shows the closing position of each participant for which it has
been designated funding participant.
[0187] To complete final specified prefunding, netting, and
release, each participant with a closing position requirement is
given a specified period (unless additional time is allowed by the
CEO), e.g., 30 minutes, from the time that the Clearing House sends
the Initial End-of-Day Balance Reports to pay the amount of its
closing position requirement by transferring the appropriate funds
finally and irrevocably to the prefunded balance account (Step
525).
[0188] If all of these closing transfers are made (Step 530), all
of the payment messages that remain in storage are netted, set off,
and released (Step 535) as in the intraday settlement procedures,
except that CHIPS combines the current primary position and the
current supplemental position of each participant into the
participant's combined position and applies no limits to the
participant's combined position other than the minimum combined
position. The release of these payment messages, the netting of
these obligations, and the recording of these entries is deemed to
be effective simultaneously. Settlement with respect to all payment
messages released as part of this procedure is complete when the
System has recorded the decreases and increases to the current
combined positions. Completion of settlement constitutes final
settlement of all payment messages released as part of this
procedure and final discharge and payment of the obligations of a
participant as a sending participant to pay the amount of each
payment message released as part of this procedure to another
participant as a receiving participant.
[0189] A participant's current combined position resulting from the
release of any payment messages and recording of the entries made
pursuant to this procedure is the participant's final position
(Step 540). After the release of all payment messages remaining in
storage, the Clearing House transfers from the prefunded balance
account to the account of each funding participant whose final
position is greater than zero (545). The total of the funds
transfers made to the participants in this manner equals the
balance in the prefunded balance account.
[0190] If one or more of the closing transfers discussed above has
not been made within the appropriate time period, the current
combined position of each participant whose closing position
requirement has been paid completely or partially is increased by
the amount so paid, and the Clearing House nets, sets off, and
releases as many of the payment messages that remain in storage as
is possible (Step 550) using the intraday settlement procedures
described above, except that CHIPS combines the current primary
position and the current supplemental position of each participant
into the participant's combined position and applies no limits to
the participant's combined position other than the minimum combined
position, and taking account of the additions to the current
combined positions. Settlement with respect to all payment messages
released as part of this procedure is complete when the System has
recorded the decreases and increases to the current combined
positions. Completion of settlement constitutes final settlement of
all payment messages released as part of this procedure and final
discharge and payment of the obligations of a participant as a
sending participant to pay the amount of each payment message
released as part of this procedure to another participant as a
receiving participant. A participant's current combined position
resulting from the release of any payment messages and recording of
the entries made pursuant to this procedure is the participant's
final position.
[0191] Any payment message remaining in storage, following the
netting, set-off, and release of any payment messages as described
immediately above, expires as of the time of the calculation of the
final positions, and the Clearing House notifies the sending
participant of the expiration. Expiration of a payment message is
effective as the cancellation of the payment message by the sending
participant (Step 555). After all payment messages have been
released or have expired, the Clearing House determines the final
position of each participant (Step 560) transfers from the
prefunded balance account to the account of each funding
participant whose final position is greater than zero funds in the
amount of its final position (Step 565). The total amount of the
funds transfers made to the participants in this manner equals the
balance in the prefunded balance account.
[0192] While the present invention has been described with respect
to what is presently considered to be the preferred embodiments, it
is to be understood that the invention is not limited to the
disclosed embodiments. To the contrary, the invention is intended
to cover various modifications and equivalent arrangements included
within the spirit and scope of the appended claims.
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