On this day in 1996 Real Time Gross Settlement in CHAPS went live - join me and raise a glass to celebrate 25 years of RTGS in the UK.
In this edition of Payments:Unpacked we take a look at the CHAPS payment system UK’s Real Time Gross Settlement (RTGS) system operated by the Bank of England.
What is CHAPS?
The Bank of England describe CHAPS as:
CHAPS is a sterling same-day system that is used to settle high-value wholesale payments as well as time-critical, lower-value payments like buying or paying a deposit on a property.
When considering CHAPS’ place in the payments landscape it is important to recognise that, sometimes, ‘value’ is more significant than ‘volume’. CHAPS represents 0.5% of UK total payment volumes but 92% of total sterling payment values (excluding internalised flows within payment service providers).
To put this in context, CHAPS turns over the annual UK GDP every 6 working days.
By July 2011 the total value processed since the start of CHAPS exceeded one quadrillion (£1,000,000,000,000,000) pounds.
A close association with CHAPS
In many ways a large portion of my career in payments has been closely associated with the UK’s RTGS system. CHAPS had been live for 13 months when I started in The City.
At that time CHAPS wasn’t real time gross settlement or even truly same day (I seem to recall that it had a form of recourse until 12 noon the next day but I might be wrong on this as I was only 18 at the time) and the ‘A’ (Automated) in CHAPS was definitely a misnomer.
Having had operational exposure to CHAPS my career then provided credit exposure (during a time of UN Sanctions and the collapse of BCCI), product P&L responsibility for a UK’s clearers retail, corporate and FI CHAPS products and, finally, becoming the Managing Director of the CHAPS Clearing Company Limited - the operator of the systemically important payment RTGS system in the UK.
1983 BC (Before CHAPS)
Before we look too deeply into CHAPS lets look at the payment system CHAPS replaced: Town Clearing.
I have vivid memories of running down Lombard Street clutching an outsized cheque (Bankers Payment) trying to get to Threadneedle Street before the door to the banking hall at the Bank of England was closed firmly shut at 3.10pm.
After all, there was no benefit in being ‘long’ at the Bank overnight and being ‘short’ was something my superiors definitely wanted to avoid.
If all the Walks messengers were ‘out on the walks’ or in partaking in a swift half in The Swan then the youngest (and always male) bank clerk took the cheque off the typist, found two signatories and then promptly set off for the Old Lady in Threadneedle Street as fast as they could.
I recall standing in the banking hall at the Bank (Of England) with a very large value Bankers Payments begging a clerk from another clearer to accept my payment and pay it into their account at The Bank.
If his bank was ‘short’ and needed the money it was readily accepted but if his bank was already ‘square’ at the Bank then he often wasn’t that interested! After all a ‘long’ balance at the Central Bank was a missed overnight investment opportunity.
The ability to consider a Bankers Payment (similar to a cheque) as ‘good’ money was solely down to a magical ‘T’ after the sort code in the top right hand corner of the cheque – for example 20-00-00 T / the magical ‘T’ that unlocked a same day paper clearing system.
For more about same day payments before CHAPS visit - running down Lombard Street with a piece of paper.
Clearing House Automated Payment System but no STP
Straight Through Processing (STP) was mostly absent in the early days of CHAPS. For example processing inbound CHAPS payments took a lot of manual effort.
The correspondent bank I worked in received about 3,000 inbound CHAPS payments a day each one required printing, the printed copy was then ‘ticked off’ against a list of numbers, the beneficiary account number was then manually looked up or recalled from memory and handwritten on the printed CHAPS payment, the account number was then input into ‘the system’, checked and released to the beneficiary account. Five clerks required to process a single inbound payment (unless it needed ‘repairing’ which took extra resources).
The easiest job was the last and final check (‘releasing’ the payment) – the operator had to type in the control number to call the payment up, then type Y, Y, N and N. I can’t remember what the four key strokes confirmed or did but it took all of this just to credit an inbound CHAPS to a beneficiary’s account and complete the process.
CHAPS had been live for 13 months when I started in The City. At that time CHAPS wasn’t real time gross settlement or even truly same day (I seem to recall that it had a form of recourse until 12 noon the next day but I might be wrong on this as I was only 18 at the time) and the ‘A’ (Automated) in CHAPS was definitely a misnomer.
The official history of CHAPS
Having indulged in a little personal association, briefly considering the same day payments world prior to CHAPS and concluded that in the early days the ‘A’ didn’t deliver automation it might be useful to consider the official history of the UK’s RTGS system.
The CHAPS Sterling system commenced operations on 9 February 1984. At the end of 1984 the average daily volume and value transmitted was around 7,000 payments with an aggregate value of around £5 billion.
The early history of CHAPS is best described by the previous Payment System Operator (PSO): CHAPS Clearing Company Limited (CHAPS).
The CHAPS company was created to operate the payment scheme from its launch in 1984 (under the auspices of APACS), it also operated under the Payments Council and then as a stand alone entity before finally being brought into the Bank of England.
Source: CHAPS website archived as part of The National Archives.
Responsibility for the CHAPS system transferred to the Bank of England in November 2017.
Move to Real Time Gross Settlement in 1996
Of the three key developments in the history of CHAPS, the decisions to progress two of these (Liquidity Saving Mechanism (LSM) and Market Infrastructure Resiliency Service (MIRS)) were made during my tenure as CHAPSCo’s Managing Director. A contribution to RTGS in the UK I am pleased to have made.
However, notwithstanding the importance of these two developments, it was the move to Real Time Gross Settlement (RTGS) in 1996 that can be considered as the most transformational change to CHAPS since its launch in 1984.
Andrew Dent and Will Dison of the Bank’s Market Services Division describe this move in their excellent 2012 paper ‘The Bank of England’s Real-Time Gross Settlement infrastructure’.
In their paper Andrew and Will write:
The Bank has provided accounts for the settlement of interbank obligations since the mid-19th century. Early accounting systems were paper-based, but developments in technology meant that by the mid-1980s, CHAPS payments settled electronically across the Bank’s books. By the early 1990s, the interbank cash obligations arising from transactions in gilts and sterling money market instruments also settled electronically at the Bank, as did the main electronic and paper-based retail clearings. They all did so, however, on an end-of-day multilateral net settlement basis.
During the 1980s and 1990s, central banks around the world progressively moved to settling their high-value domestic payment schemes using the RTGS model. In 1980, of the major developed economies, only the United States had an RTGS infrastructure; by the end of the 1990s, such infrastructures had been established in all the G10 countries except one. Advances in technology made real-time accounting operationally feasible. But the key policy driver of the change was the recognition by public authorities of the systemic risks inherent in settling high-value or wholesale payments under the DNS model.
In the United Kingdom, Robin Leigh-Pemberton, the then Governor of the Bank of England, used his 1989 Ernest Sykes Memorial Lecture to open a debate on ‘the future of the wholesale payment system in the United Kingdom’. In 1992, the Association for Payment Clearing Services announced that an infrastructure would be developed for settling CHAPS payments under the RTGS model. The Bank’s RTGS infrastructure was subsequently launched in 1996. In 2001, securities settlement in CREST moved to an RTGS-equivalent model of DvP.
The benefit of this move to the RTGS model was demonstrated in 2008 during the financial crisis. Risk appetites in the sterling money markets shrank, but the absence of credit risk in the settlement process contributed to the willingness of market participants to continue transacting with one another.
For those of us involved in the 2008 financial crisis the true benefit of CHAPS’ RTGS model was certainly a reality.
CHAPS is one of the largest high-value payment systems in the world, providing efficient, settlement risk-free and irrevocable payments.
There are over 30 direct participants and over five thousand financial institutions that make CHAPS payments through one of the direct participants.
The direct participants include the traditional high-street banks, some ‘challenger banks’ and a number of international and custody banks.
Many more financial institutions access the system indirectly and make their payments via direct participants. This is known as agency or correspondent banking.
CHAPS payments have several main uses:
Financial institutions and some of the largest businesses use CHAPS to settle money market and foreign exchange transactions
Corporates use CHAPS for high value and time-sensitive payments such as to suppliers or for payment of taxes
CHAPS is commonly used by solicitors and conveyancers to complete housing and other property transactions
Individuals may use CHAPS to buy high-value items such as a car or pay a deposit for a house.
CHAPS payment obligations between direct participants are settled individually on a gross basis in RTGS on the same day that they are submitted. The transfer of funds is irrevocable between the direct participants.
Over the years the CHAPS working day has been extended. The CHAPS system opens at 6am each working day. Participants must be open to receive by 8am and must send by 10am. CHAPS closes at 6pm for bank-to-bank payments. Customer payments must be submitted by 5.40pm.
Helpfully, the Bank of England provide a graphic to describe the end to end process of a CHAPS payment:
Source: Bank of England.
There is no minimum or maximum payment limit and settlement risk is eliminated between CHAPS direct participants, at the cost of an increased need for liquidity, making this model best suited to a high-value payment system with the largest potential systemic risk.
Volumes 1990 to 2019
CHAPS volumes have grown steadily over the past 30 years:
Data source: PayUK / Graphic: Northey Point
The Bank of England’s CHAPS website can be found here: Link.
CHAPS record days
Volumes: Thursday 29 March 2018, the day before the Easter break, and the last working day of the quarter, saw a record 320,034 payments, worth £463bn, beating the 11-year record by 38,000 (13%). Ongoing steady growth in CHAPS volumes over the previous five years outstripped migration to newer alternative methods of payment.
Values: The all-time peak value day was on 18 March 2020, when £479 billion was settled in CHAPS. This is in part due to increased trade settlement and is aligned to the quarterly International Monetary Market (IMM) maturity date for futures, options and swaps. This new record exceeded the previous record of £468 billion on 20 December 2017 which also aligned to the quarterly IMM maturity date for futures, options and swaps.
Data source: Bank of England.
RTGS Renewal Programme
The Bank of England have incepted a RTGS Renewal Programme that will deliver the next generation of the UK’s real-time gross settlement (RTGS) service.
As well as replicating the functionality provided today, the new RTGS service will deliver a range of new features and capabilities for payments and settlements between financial institutions.
The Bank of England’s vision is to develop an RTGS service which is fit for the future, increasing resilience and access, and offering wider interoperability, improved user functionality and strengthened end-to-end risk management of the UK’s High Value Payment System.
Source: Bank of England.
For more on the RTGS Renewal Programme visit: RTGS Renewal.
To dig deeper into the CHAPS system and its operation by the Bank of England the following sources will provide further material:
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The Payments:Unpacked newsletter from Mike Chambers at Northey Point explores a wide range of the UK’s payment news including: Open Banking, Request to Pay, Direct Debit, Confirmation of Payee, Bacs, CHAPS, Faster Payments, LINK, cash, cards, cheques and Central Bank Digital Currencies (CBDCs) and unpacks the eco-system that supports the operation of these systemically important payment systems.
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