Payment and Settlement Risks in International Financial Markets

Abstract

Wholesale payment and settlement systems are the core infrastructure for today’s modern financial markets. They consist of the systems that are used to settle commercial and financial transactions including foreign exchange trades, securities transactions—both the stock market and the corporate bond market—as well as derivative transactions. Most of the transactions that flow through what we call wholesale payment and settlement systems are high-value, meaning at least in the millions of dollars, and in some cases the tens and occasionally even the hundreds of millions or billions of dollars per transaction. The volume of this activity is extremely large on a daily basis through the two major payment systems in the United States: the Fedwire system which the Federal Reserve operates, and the Clearing House Interbank Payments System (CHIPS), which is a private system operated by the New York Clearing House Association. Over three trillion dollars a day goes through those systems, so the amounts involved are quite significant.