In the United States, payment and securities settlement systems consist of numerous financial intermediaries, financial services firms, and non-bank businesses that create, distribute, and process large-value payments. The bulk of the dollar value of these payments are processed electronically and are generally used to purchase, sell, or finance securities transactions; disburse or repay loans; settle real estate transactions; and make large-value, time-critical payments, such as payments for the settlement of interbank purchases and sales of federal funds, settlement of foreign exchange transactions, or other financial market transactions.
There are two primary networks for interbank, or large-value, domestic, funds transfer payment orders. The first, Fedwire® Funds Service, is operated by the Federal Reserve Banks, and is an important participant in providing interbank payment services as well as safekeeping and transfer services for U.S. government and agency securities, and mortgage-backed securities. Funds Service and the Federal Reserve's National Settlement Service (NSS) are critical components used in other payment systems' settlement processes. The Clearing House Interbank Payments Company L.L.C. (CHIP Co.) operates the second, the Clearing House Interbank Payments System (CHIPS).
Processing large-value funds transfers involves two key elements: clearing and settlement. Clearing is the transfer and confirmation of information between the payer (sending financial institution) and payee (receiving financial institution). Settlement is the actual transfer of funds between the payer's financial institution and the payee's financial institution. Settlement discharges the obligation of the payer financial institution to the payee financial institution with respect to the payment order. Final settlement is irrevocable and unconditional. The finality of the payment is determined by that system's rules and applicable law.
In general, payment messages may be credit transfers or debit transfers. Most large-value funds transfer systems are credit transfer systems in which both payment messages and funds move from the payer financial institution to the payee financial institution. An institution initiates a funds transfer by transmitting a payment order (a message that requests the transfer of funds to the payee). Payment order processing follows the predefined rules and operating procedures of the large-value payment system used. Typically, large-value payment system operating procedures include identification, reconciliation, and confirmation procedures necessary to process the payment orders. In some systems, financial institutions may contract with one or more third parties to help perform clearing and settlement activities on behalf of the institution.
The legal framework governing payment activity and the regulatory structure for financial institutions that provide payment services is complex. There are rules for large-value payments that are distinct from retail payments. Large-value funds transfer systems differ from retail electronic funds transfer (EFT) systems, which generally handle a large volume of low value payments including automated clearinghouse (ACH) and debit and credit card transactions at the point of sale.