Aligning Cross Border Banking Charter Scopes for Direct Central Bank Settlement Access
Aligning cross border banking charter scopes for direct central bank settlement access eliminates correspondent fees but demands unencumbered capital backing.
CHAPS
Meaning
Sterling settlement system for high value and time sensitive transactions. Participants use chaps to move money across the central bank accounting platform in real time with immediate effect. It handles the financial settlement of house purchases and corporate acquisitions where the transfer of ownership depends on the guaranteed arrival of funds.
Settlement Finality
Payments made through the system are irrevocable once they are accepted by the central infrastructure. This characteristic of chaps eliminates the risk that a sender might go bankrupt while a transaction is in transit between commercial banks. Receivers can treat the incoming credit as cleared funds that are available for immediate use or onward transfer.
Operational Framework
Access to the network is restricted to direct participants who maintain settlement accounts at the Bank of England and indirect participants who use those members as agents. Transaction volume in chaps fluctuates throughout the business day as liquidity pools are managed to meet clearing deadlines. The system operates on a gross basis which means each individual instruction is processed separately rather than being batched into a single net amount at the end of the window.
This architecture ensures that large scale systemic failures are avoided by decoupling the success of one payment from the liquidation of unrelated debts across the market.
Liquidity Provision
Banks must hold enough reserves or collateral to cover the full value of every outgoing instruction. Because chaps does not use netting, the demand for intraday liquidity is substantially higher than in deferred settlement systems. Participants often coordinate the timing of large payments to ensure that incoming flows from other members provide the necessary balance to fund their own outgoing obligations.