Clearing House Automated Payments System Essay

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A clearing house for Britain’s large-value time-sensitive interbank, business-to-business, and home purchase transactions in pound sterling, the Clearing House Automated Payments System (CHAPS) facilitates low volume, high-value transactions. CHAPS uses a real-time gross settlement (RTGS) process similar to that of Fedwire whereby transactions are quickly cleared and settled across accounts in the Bank of England on the same day. These transactions are final and irrevocable at the time they are made. The system is overseen in the United Kingdom (UK) by the Association for Payment Clearing Services (APACS).

CHAPS is owned by a small number of direct members and used by a large number of direct and indirect members. Direct members include large banks and building societies. Indirect members are smaller banks and building societies with access to CHAPS through direct members. Since 1999 CHAPS had operated as two clearing houses, CHAPS Sterling and CHAPS Euro, clearing and settling transactions in sterling and euros, respectively. However, CHAPS Euro ceased operations in May 2008. Reasons cited for this closure included a change in the UK’s stance on the euro and declining volume of euro transactions conducted through CHAPS as other options became available for conducting such transactions (e.g., Trans-European Automated Real Time Gross Settlement Express Transfer, or Target2, and Single Euro Payment Area, or SEPA, for clearing that uses Target2 for settlement).

CHAPS was created in 1984. Initially, CHAPS used a netting settlements process whereby clearing was made throughout the day and a final settlement was made at the end of the day. This exposed the system to settlement risk should a large bank fail during the day. In 1996 CHAPS switched to an RTGS system for nearly instant settlement. This significantly reduces risk in the system. Since CHAPS Sterling payments represent 20–25 percent of annual UK GDP per day, there is significant need to keep the system sound. Payments are not made through the system without the funds to back up the payment in the system, thus banks participating in CHAPS use collateral at least equal to the amount of their expected peak payment activities. K. James and M. Willison suspect that this is due to the higher opportunity cost of not being able to make a payment versus the cost of posting collateral and borrowing intraday from the Bank of England.

Typically, individuals wanting to conduct electronic bank transactions in pound sterling had two choices: CHAPS or Bankers Automated Clearing House (BACS). The choice between the two depended on the size, cost, and/or urgency of the transaction. Large urgent transactions were conducted using CHAPS, and smaller, less urgent, and recurring transactions were conducted using BACS. Consumers might use CHAPS to buy a house or car and use BACS to pay their bills online. CHAPS has same day real-time settlement and BACS has an average three-day settlement. However, 50 percent of CHAPS payments are less than £10,000. The recently released Faster Payments Service (FPS) will offer faster, cheaper payments for smaller-value (less than £10,000) transactions. This is expected to draw a significant volume of transactions away from CHAPS, raising its costs and possibly injecting instability into the system. For this reason, FPS will be managed by CHAPS.


  1. APACS, “CHAPS Euro System to Close After Nine Years of Service,” (cited March 2009);
  2. Bank of England, “Payment Systems Oversight Report 2006,” February 2007, Issue No. 3, (cited March 2009);
  3. Bank of England, “Payment Systems Oversight Report 2007,” February 2008, Issue No. 4, (cited March 2009);
  4. Hughes, “Faster Payments in the UK: What Do Corporates Need to Know?” Bottomline Technologies, (cited March 2009);
  5. James and M. Willison, “Collateral Posting Decisions in CHAPS Sterling” (Market Infrastructure Division, Bank of England, November 2, 2004).

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