The New York Clearing House Association is taking steps to further purge settlement risk from its electronic funds transfer system.

The bank-owned organization announced last week that it is changing some of the rules for its Clearing House Interbank Payment System, or Chips.

The clearing house is introducing a minimum collateral requirement of $10 million for individual banks. It is also mandating a 20% reduction in the net debit limits, effectively lowering the dollar amounts banks can send.

The moves are a result of the clearing house's strategic review of the wholesale payments process to ensure that Chips remains an efficient and financially sound payment system.

The need to reduce risk in large-value payment systems is of utmost importance to bankers, since one bank's failure can cause others to fail.

But bankers realize that a zero-risk system is impossible to achieve because of the added costs of using the system. These opportunity costs result when, for example, banks lock in collateral in the form of Treasuries as opposed to making other more profitable investments.

If Chips were risk-free, banks might look for cheaper alternatives to effect their payments, so the clearing house must walk a fine line between risk and efficiency.

"We are trying to improve settlement finality, but not put an inordinate expense on our participants," said George Thomas, a senior vice president with the clearing house.

Chips averages over 200,000 transactions valued at about $1.2 trillion daily. The Chips system handles one-fifth of all value moving between most developed countries, clearing house officials said.

Each day, transactions among 115 banks based in 29 countries are processed on the Chips system. Net debit or credit positions are ultimately settled using Fed Wire, the Federal Reserve System's high-speed funds transfer service.

Chips plays a crucial role in the international financial system and the world's economy overall. It's the conduit used for moving U.S. dollars for foreign trade services, international loans, syndicated loans, and foreign exchange sales and purchases, among other transactions.

Before the rules changes, banks had pledged enough U.S. Treasury bills as collateral to ensure settlement if larger Chips participants fail. But Mr. Thomas said the committee found that during numerous simulations of multiple bank failures, "banks with the lowest amounts of collateral would run out of money."

"The reason we came up with the minimum is that it would give us substantially more coverage in multiple bank failures," Mr. Thomas explained. "With these new changes, we would be able to cover those complete financial failures in 20 of the 29 countries."

Furthermore, under the new rules, Chips will be able to cover the top two banks failing simultaneously in seven additional countries, Mr. Thomas said.

One anticipated result of the across-the-board reduction in sender debit limits will be restrictions in the daily ebb and flow of payments.

Philip Chappo, first vice president of Compagnie Financiere de CIC et de L'Union Europeenne, a $97 billion-asset bank based in Paris, said that lower debit caps will "have an impact on the payment flows, but I think the clearing house is already geared up and ready to deal with that and might make other changes."

Indeed, clearing house officials will monitor and "make sure that those payment flow reductions are not that severe," Mr. Thomas said.

Chips is also considering an extension to its operating hours and the introduction of multiple batch settlements, or rolling settlements, which would permit settlement finality earlier in the day.

The debit caps will be incrementally phased in, beginning early next year, as will the collateral requirements.

The moves by the clearing house follow last year's formation of its Global Payments Committee, which is composed of senior executives from Citicorp, Chase Manhattan Bank Corp., Chemical Banking Corp., Bankers Trust New York Corp., and J.P. Morgan & Co.

The Global Payments Committee first made the proposals for enhanced finality of settlement on Chips earlier this year. It also recommended the develop of additional private-sector large-value payment systems for currencies other than the dollar.

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