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Payment Settlement systems

A payment & settlement system can be described as a system which consists of a particular group of institutions & a set of instruments & procedures, designed to ensure the circulation of money & speed up interbank & other settlements resulting from the various economic transactions either within a country or btw countries.

Settlement means the settlement of payment instructions received & these include settlement of securities, forex or derivatives or other transactions. Types of settlements Settlement system in India US UK

Settlement system in India

Real Time Gross Settlement (RTGS) National Electronic Funds Transfer (NEFT) systems.

Settlement system in US
Federal reserve communication system (FEDWIRE) It intro a new system FRS-80 after which there was a rapid increase in settlement volume 2 facilities: Transfer btw reserve deposit accounts of all financial institutions in the US with their affiliates. Transfer of govt. related securities is used in transfer of treasury bills, federal agency securities and accompanying settlements Distinctive feature: payments are irrevocable i.e., once the payment is made it is legally final and the receiving banks receipt of the fund is guaranteed not to be changed or cancelled.(this is called FINALITY OF PAYMENT)

Clearing house interbank payment system (CHIPS)

CHIP is a settlement system operated in New York Clearing house association & was estbd as an efficient means of settlement of Eurodollar transaction. It is presently a centralized settlement system processing more than 90% of the dollar based international transactions.

Process of CHIP
Payment instructions are sent out & received continuously during the day. Each member banks net balance continues to fluctuate, but at the cut off time, each settlement bank fixes its own net balance The fixed net balance is then settled btw the chips account & the banks account with federal reserve bank of new york through FEDWIRE. The settlement is done before the settlement closes and as a result the chips acconut balance become zero.

Settlement system in UK
The main settlement system among banks or btwn banks & the central bank in UK is Clearing House Automated Payment System (CHAPs). CHAP is a settlement system operated by 14 settling banks including the Bank of England and was estbd as an effective means of making settlements in transactions done in London financial market. The transactions are irrevocable and all are settled on the same day.