An Introduction to U.S. Wire Payment Systems October 10, 2007.

An Introduction to

U.S. Wire Payment Systems

October 10, 2007

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The Clearing House Mission

The Clearing House is committed to being the premier private-sector payments enterprise

• Providing efficient, safe and sound payment systems to help our Owners and customers be successful

• Leveraging the collective voice of our Ownersto shape the future of the payments industry

• Taking positions on critical legal, regulatory and litigation issues of common interest to our members

153+ yearsof industry leadership

PAYMENTS • Wire, ACH, Image Exchange, Check

• 48 million transactions for $1.9 trillion per day

FORUMS• Legal/Regulatory, Strategic Payments

• Highly respected and effective

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• TCH includes two limited liability companies:

— The Clearing House Payments Company (a for-profit payments company)

— The Clearing House Association (a not-for-profit business league)

Structure

The Clearing House

The Clearing HouseAssociation L.L.C.

The Clearing HousePayments Company L.L.C.

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22 TCH Owner Banks

• BB&T

• Bank of America

• The Bank of New York Mellon

• Bank of Tokyo Mitsubishi UFJ, Ltd/Union Bank of California

• Citibank

• Citizens Bank

• City National

• Comerica Bank

• Deutsche Bank

• Fifth Third Bank

• First Citizens Bank

• HSBC Bank

• JPMorgan Chase Bank

• KeyBank

• LaSalle Bank/ABN AMRO

• M&T Bank

• National City Bank

• PNC Bank

• UBS

• U.S. Bank

• Wachovia Bank

• Wells Fargo Bank

Representing more than 58% of U.S. deposits

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Real-time final payments

An industry standard for processing global payments for over 37 years

$1.8 trillion USD daily

“Electronifying” the check

Lead and facilitate the migration from paper to electronic payments

$28 billion USD daily

ACH Payments

Private sector ACH operator, providing service to more than 1,400 financial institutions nationwide processing over 45% of national ACH volume

$66 billion USD daily

The Clearing House – 153 years of payment services

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• Why— Timeliness— Risk— Regulatory requirements— Globalization— Unpredictability requires flexibility

• Who Participates:

— Consumers— Government Entities— Commercial/Corporate Entities— Western Union— Banks— Correspondents— Federal Reserve (Fedwire)— CHIPS— SWIFT

Domestic Large Value Payments

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Legal Framework for Commercial Large Value Payments

— UCC Article 4A• State law adopted in each state, essentially the same• Covers wholesale credits, including wire payments

— Regulation J, subpart B• Federal regulation adopted by the Board of Governors of the Federal Reserve

• Covers the legal relationship between the FI and the FRB

— Operating Circular 6• Adopted by the 12 Reserve Banks; funds transfer through Fedwire; www.frbservices.org

— CHIPS Rules and Administrative Procedures• www.chips.org

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CHIPS

1. CHIPS Intro3. CHIPS Participants,

Statistics & Hours4. CHIPS History5. CHIPS Finality6. Funds Transfer Flows

— CHIPS 4 party — CHIPS 8 party

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• Outstanding resiliency, reliability, customer satisfaction

• Benefits— Real-time, multilateral netting with Payment Finality— Standardization— Over 94% straight-through processing rate — Direct access to international marketplace— Maximizes liquidity - $1 turns over 525 times— Contingency capability for Fedwire

• Value-added services — Web-based management tools— Global processing hours— Remittance Information Delivery — Universal Identification numbers (UID)

CHIPS is a leader in large value U.S. dollar clearing for both international and domestic payments

Clearing House Interbank Payments System

Payments Processed $1.8 Trillion

Funding Requirements

$3.3 Billion

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CHIPS Participants

Total 45

ABN AMRO Bank N.V.

American Express Bank Ltd.Banca Intesa S.p.A.Banco Bilbao Vizcaya, S.A.Banco de la Nacion ArgentinaBanco do Brasil S.A.Bangkok Bank Public Company

LimitedBank Hapoalim B.M.Bank Leumi USABank of America, N.A.Bank of ChinaBank of CommunicationsBank of New YorkBank of Nova Scotia Bank of Tokyo-Mitsubishi UFJ,

Ltd.

Barclays Bank PLCBB&T BNP Paribas New York Brown Brothers Harriman &

CompanyCalyonCitibank, N.A.Commerzbank AGCredit Industriel et

CommercialDeutsche Bank AG Deutsche Bank Trust Co

Americas Dresdner Bank AGHSBC Bank USAInternational Commercial Bank

of ChinaIsrael Discount Bank of New

YorkJPMorgan Chase Bank, N.A.

KBC Bank N.V.M & T BankThe Mitsubishi Trust and Banking Corp.Mizuho Corporate Bank Ltd - NY The National Bank of Kuwait SAKThe Northern Trust CompanySociete GeneraleStandard Chartered BankState Bank of IndiaState Street Bank and Trust CompanySumitomo Mitsui Banking CorporationUBS AG Wachovia Bank, N.A. CharlotteWachovia Bank, N.A. - New York Wells Fargo Bank, National Association

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CHIPS Statistics

• Participant Community• 45 Financial Institutions• 20 Countries

• Average Daily Volume (2006):• 310.3 Thousand Payments• $1.57 Trillion• 2006 Annual Totals:

• $394.6 Trillion• 77.9 million payments

• Average Dollar Amount per payment:• $5.1 million

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Global Processing Hours

• CHIPS begins processing transactions at 9 pm Eastern Time

• Businesses around the world can take advantage of CHIPS, without sacrificing real-time payments

• Risk management is more efficient and certain than local US dollar clearings

• Alternative to local U.S. dollar clearing systems

Global Coverage

• Real-time finality for every time zone in the world

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CHIPS History

• 1970 Start of CHIPS• 1981 Same Day Settlement• 1984 Bilateral Limits• 1986 Debit Caps• 1990 End of Day Settlement Finality • 1992 New Payment Formats • 1997 Enhanced End of Day Settlement Finality• *2001 CHIPS Finality – Intraday Payment Finality• 2003 Intraday Supplemental Funding and Web Enablement• 2005 TCP/IP Network

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• Here’s how it works:— Bank funds a special CHIPS account at the FRBNY— From 9:00 p.m. (previous day) to 5:00 p.m. (current

business day) participants send payments to CHIPS— CHIPS continuously searches the payments queue to

match, net, and release payments— A payment is final (settled) when it is released by

CHIPS

CHIPS Finality

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• Prefunded Account— Each participant transfers its “Initial Prefunded

Balance” Requirement— This requirement is assigned by the CHIPS system,

based on each participant’s payment activity— Participant’s intraday current position cannot be

less than zero (minimum) nor more than twice (maximum) its initial prefunded balance requirement

— Participant is never in a debit position – credit risk is eliminated

— Supplemental funding (payments on demand) is an option

CHIPS Finality: Operational Components

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• Release Method:— All incoming payment messages are stored by CHIPS

and queued for release by the Balanced Release Algorithm

— The Algorithm ensures that each participant remains between its minimum and maximum current positions

— For payments to be released by CHIPS, both the Send and Receive Participants must have funded their requirement, and a participant can begin receiving payments after it has begun sending payments

— Released messages are recorded against the participants’ current position

CHIPS Finality: Operational Components

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CHIPS Finality Operating Hours

9:00 p.m.(previous night)

9:00 a.m.

*Noon

5:00 p.m.

5:30 p.m.

Payment processing begins

Prefunded balance account must be funded(7:00 a.m. on day after banking holiday)

65% volume and 55% dollars to CHIPS

Cutoff

Final Prefunding complete

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End-of-Day Processing Procedures

1. Cutoff2. Maximum Current Position is

removed3. Algorithm matches, nets,

sets-off, and releases as many payments as possible

4. Multilateral net balance is calculated for remaining payments

5. Balance is combined with participant’s Current Position to get Closing Position

6. If Closing Position is negative, it is the final prefunding balance requirement

7. Participant has 30 minutes to fund this requirement

8. CHIPS releases all remaining payments

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CHIPS Payments:Types of Releases…

Value of Payments

37%41%

22%

Number of Payments

90%

4%6%

Individual (No netting)Bilateral (Two participants)Multilateral (Three or more)

Netting resolves payments quickly

• CHIPS nets and releases payments in seconds

• All payments are final when released by CHIPS

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Multi-lateral Netting

• Patented netting process releases payments earlier and leverages liquidity

— Fewer dollars clear more, larger payments

Bank A$3 MM

available$2.5 MM available

Bank C

$2.6 MM available

$25 MM

$26 MM$3 MM$22.5 MM

Bank A

$.5

Balances Resulting From Multi-Lateral Netting

Bank C

$3.1 MM

Bank B $4.5 MM

Bank B

For Example: $76.5 MM payments clear with only $8.1 MM available funds

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• 94% Straight–through processing with UID

no manual lookups or delays

• A six-digit number to identify beneficiary

One UID per corporation for all its banks

Stored in CHIPS database: updated daily and available online

• CHIPS verifies and validates UIDs with payments

• CHIPS releases payments with associated information from database:

Customer Bank Account Number Name and Address

Universal Identification Numbers (UIDs)UID ensures highest

STP rate in the industry

• Secure• Accurate• Simple

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• Real-time system to move remittance information with payment• Allows user to provide corporate customers with electronic

remittance details.• Can include information such as customer numbers, invoice

numbers, discounts taken and more, with each electronic payment

• CHIPS messages can carry an additional 9,000 characters:— ANSI X.12— UNEDIFACT— User-defined XML

• Aligned with SWIFT MT103 (REMIT)• Low cost EDI provider solution

CHIPS Remittance Information Delivery CapabilityElectronic Data Interchange (EDI)

1

34

56

$

7

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Originator

Retailer Sending a US Dollar Payment to Supplier Via CHIPS

1)Retail customer (Originator) communicates payment order to their bank.2)Originating Bank (CHIPS Send Participant) debits Retail account3)Originating Bank (CHIPS Send Participant) sends CHIPS payment order to

CHIPS4)CHIPS debits Send Participant’s balance and credits Receive

Participant’s balance, based on requirements of Balanced Release Algorithm5)CHIPS sends CHIPS payment advice to Beneficiary Bank (CHIPS Receive

Participant).6)Beneficiary Bank credits Customer’s (Beneficiary) account.7)Beneficiary Bank advises Beneficiary.U.S.

OriginatingBank

(CHIPS Send Participant)

BeneficiaryBank

(CHIPS Receive Participant)

$

CHIPS

Beneficiary

1

3

4

56

$

72

Originator

Retailer Sending a US Dollar Payment to Supplier Via CHIPS with Correspondents

1)Retail customer (Originator) communicates payment order to their bank, Originating Bank debits account2)Originating Bank sends CHIPS payment order to Instructing Bank who debits Orig. Bank’s account3)Instructing Bank sends payment order to CHIPS Send Participant, who debits Inst. Bank’s account4)CHIPS Send Participant sends CHIPS payment order to CHIPS5)CHIPS debits Send Participant’s balance and credits Receive Participant’s balance, based on requirements of Balanced Release Algorithm6)CHIPS sends CHIPS payment advice to CHIPS Receive Participant, who credits Intermediary Bank’s account7)Intermediary Bank advises Beneficiary Bank and credits their account8)Beneficiary Bank advises Beneficiary and credits their account

CHIPS Send Participant

CHIPS Receive Participant

$

CHIPS

Beneficiary

6

7

8Originator Bank

Beneficiary Bank

Instructing Bank

Intermediary Bank

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VOLUME

CHIPS37%

Fedwire63%

Fedwire59%

CHIPS41%

DOLLARS

CHIPS and Fedwire Comparison - 2006

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Wire Transfer Daily Routines

From behind the scenes at a wire participant’s site:

• Entrance points:— SWIFT— Proprietary

• Preference (plus priority & liquidity decisions):— Book transfer?— CHIPS?— Fedwire?

• Repairs• Approvals• OFAC screening• Re-route (throttle)

— Pull out of one, map into another

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Payments Study

• CHIPS and the Federal Reserve Bank conducted a study on Business-to-Business wire payments

• Study sought information on the current and future use of Business-to-Business wire payments

— Preferences for selecting specific payments types

— Factors that influence decisions to choose one payment type over another

— Factors that would increase the use of wire payments

• Study published in October 2006

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Payments Study - Addressing the barriers to growth

• Banks can influence future migration— Recognize opportunity to improve customer experience and retain/grow

wire business and the revenue opportunities it provides

— Common Standards - Support an industry remittance information (invoice data) standard• (e.g. ISO 20022 and STP 820)

— Integration – Enable cash management systems to integrate more effectively with corporate accounts payable and accounts receivable systems to facilitate straight-through processing

• CHIPS and the Federal Reserve Bank to work together to endorse common standards

• Work with other infrastructure providers globally to agree on common standards

Research report is available on: www.chips.org

29FACILITATING GLOBAL PAYMENTS

Invoice Deta

Details

Invoice

ACH

Invoice Data

Wire

ACH

Invoice Data

Wire

Future of Payments

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Resources

• www.FRBSERVICES.org• www.CHIPS.org• www.SWIFT.com

Contact Information

Tim Mills, AAPDirector of Education ServicesThe Clearing House Payments Co. [email protected]

Ellen Jacques, AAPTraining ManagerThe Clearing House Payments Co. [email protected]

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Contact Information

Tim Mills, AAPDirector of Education ServicesThe Clearing House Payments Co. [email protected]

Ellen Jacques, AAPSenior TrainerThe Clearing House Payments Co. [email protected]