Chaps Co makes rule changes for financial stability

Source: Chaps Clearing Company

Chaps Clearing Company has today (Monday, 30th April) announced changes to its Rules to address financial stability risks highlighted by the Bank of England last year[1].

The changes, which formally came into effect on 23rd April, will impact those CHAPS Settlement Members who provide payment processing for other financial institutions, known as Indirect Participants of CHAPS.

It means that CHAPS Settlement Members will be responsible for monitoring whether their Indirect Participant's CHAPS payments exceed certain value criteria over a given time period. Should they do so, the Indirect Participant may be required to become a CHAPS Settlement Member in its own right. This will further reduce settlement risk within CHAPS.

Phil Kenworthy, Managing Director of CHAPS Clearing Company said: "CHAPS processes high-value, instantaneous payments between banks in excess of £250 billion each day. This makes it vital to the UK's financial infrastructure and makes its stability critical; and why we've been very happy to work with the Bank of England to agree these important changes."

CHAPS is systemically important to the UK financial infrastructure because it processes real-time high-value payments. Financial institutions make many large CHAPS transactions daily, regularly settling interbank obligations worth hundreds of millions of pounds.

More than 350 financial institutions access CHAPS as Indirect Participants through an agreement with one of CHAPS' 18 Settlement Members. Over the next six months, CHAPS Co will be working with Settlement Members and the Bank of England to identify which Indirect Participants are impacted and to agree with them what action they may need to take and to what timescale. It is believed that only a handful of Indirect Participants will be impacted by these changes, and in the interim they will be able to continue processing payments through their existing Settlement Member.

CHAPS Co will ensure Settlement Members are complying with the Scheme Rules. The ultimate sanction would be exclusion from the CHAPS Scheme. The new CHAPS Rules and related Tiering Criteria are b both available from 

1. CHAPS Co processes and settles systemically important and time-dependent payments. The CHAPS Scheme enables same-day bank-to-bank payments in sterling. The Bank of England has formal responsibility for the oversight of CHAPS Clearing Company's operation of the CHAPS system. CHAPS has 18 full Settlement Members:
• Bank of America Merrill Lynch
• Bank of England
• Bank of Scotland (HBOS)
• Barclays Bank plc.
• Citibank N.A.
• CLS Bank International
• Clydesdale Bank plc.
• The Co-operative Bank plc
• Danske Bank (including Northern Bank)
• Deutsche Bank A.G.
• HSBC Bank plc
• J.P. Morgan
• Lloyds TSB Bank plc
• National Westminster Bank plc
• The Royal Bank of Scotland plc
• Santander UK plc
• Standard Chartered Bank
• UBS A.G.

2. Under a "tiered arrangement" a direct CHAPS Settlement Member, under contract with another financial institution as an Indirect Participant, facilitates that Indirect Participant's access to and use of CHAPS.

3. In broad terms, risk mitigation measures will need to be taken when the average daily value of payments made and received by an Indirect Participant of CHAPS (or members of its group) through CHAPS exceeds:

- 2% of the total gross value processed by CHAPS each day
- 40% of the average daily value of CHAPS "own account payments" processed by the "sponsoring" Settlement Member (and other members of its group). 

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