Introduction

(1) Payment systems, (2) clearing houses, (3) central securities depositories and (4) securities settlement systems are key institutions in the US financial market infrastructure. Payment systems in the United States include mechanisms for processing both wholesale and retail funds transfers.

At the wholesale level, two large-value electronic funds transfer systems settle the bulk of the dollar value of all payments in the United States [FedWire and CHIPS].

At the retail level, non-cash payments are processed over a number of systems, including cheque clearing systems, automated clearing house systems and credit and debit card networks. While a significant but unknown number of payments continue to be settled in cash, almost all non-cash payment instruments, including cheques, settle electronically. In addition, innovation and competition have facilitated the use of new instruments and payment channels that rely increasingly on electronic payment mechanisms.

(3) Central securities depositories and (4) securities settlement systems facilitate the safekeeping of securities and the guarantee and settlement of different types of securities transactions. Generally in the United States, a single system acts as both a central securities depository and a securities settlement system for a specific set of securities. Central counterparties (CCPs) facilitate the clearing and guarantee of various types of financial transactions, including securities and derivatives transactions, traded either on exchanges or over the counter (OTC). Generally, each CCP clears a specific set of contracts. In recent years, trade repositories have been developed to collect and maintain information on various financial transactions, in particular those involving OTC derivatives. Trade repositories have improved the overall transparency in the OTC derivatives markets.

As the central bank of the United States, the (1) Federal Reserve provides certain payment and settlement services to depository institutions. (2) Private sector operators of payment, clearing and settlement systems also provide such services to financial institutions. Several (3) government agencies play active roles in the oversight and regulation of private sector payment, clearing and settlement systems, most notably the Federal Reserve, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA) provides additional authorities for these or other relevant regulatory agencies over payment, clearing and settlement systems designated by the new Financial Stability Oversight Council (FSOC) as systemically important.

1. Legal and regulatory aspects

1.1 The general legal framework

Payment, clearing and settlement systems in the United States are governed by statutes, regulations and case law at the state and federal levels. In addition, the DFA, enacted on 21 July 2010, was one of the most significant pieces of legislation affecting the US financial regulatory framework in many years.

1.2 The role of the Federal Reserve

1.2.1 Supervision of payment, settlement and clearing activities and infrastructures

The Federal Reserve supervises and regulates US bank holding companies, financial holding companies and state-chartered commercial banks that are members of the Federal Reserve System. The Federal Reserve is also responsible for the supervision of Edge Act and agreement corporations as well as the operations of foreign banking organizations in the United States.

1.2.2 Provision of payment and settlement services

1.2.2.1 Note issuance

Virtually all US dollar paper currency in circulation is in the form of Federal Reserve notes

(FR notes).

1.2.2.2 Payment services to depository institutions

The Federal Reserve Banks provide a variety of payment and other services to depository institutions. Federal Reserve payment services include the distribution of FR notes and coins; the collection and return of cheques; the electronic transfer of funds via the Fedwire Funds Service, FedACH and the National Settlement Service (NSS); and the electronic transfer of federal government securities via the Fedwire Securities Service.

1.2.2.3 Fiscal agency and depository services

As fiscal agents and depositories for the federal government, the Reserve Banks auction Treasury securities, process electronic and cheque payments for the Treasury, collect certain funds owed to the federal government, maintain the Treasury’s bank account and invest excess Treasury balances.

1.3 The role of other private and public sector bodies

1.3.1 Financial intermediaries

Financial intermediaries that provide payment services in the United States include more than 15,000 depository institutions. These institutions can be classified as commercial banks or as thrift institutions, such as credit unions and savings and loan associations (S&Ls). These classifications determine what services financial institutions may provide to the public and the regulatory structure to which the institutions are subject.

1.3.2 Other institutions that provide payment services

Payment card companies license credit and debit card trademarks to financial institutions, authorise transactions and provide certain clearing and settlement services for transactions between banks. Visa and MasterCard are the two largest payment card networks operating in the United States.

The United States Postal Service sells postal money orders, which can be used to make payments.

Other entities that play a role in the United States payment system include those that provide specialized payment and settlement services and those that perform standard-setting or rule writing functions.

2. Payment media used by non-financial entities

2.1 Cash payments

At year-end 2010, the value of notes and coins in circulation was USD 983 billion. US currency is also widely used outside the United States both for transactions and as a store of value. As much as two thirds of the value of US currency in circulation is estimated to be held abroad.

2.2 Non-cash payments

2.2.1 Non-cash payment instruments

In the United States, the money balances used by consumers and non-financial businesses to effect transactions are generally held as transaction deposits at depository institutions. These typically take the form of demand deposits, such as chequing accounts, NOW (negotiable order of withdrawal account) accounts and credit union share-draft accounts. At year-end 2010, the value of transaction accounts held at depository institutions was USD 1.1 trillion.

Savings accounts, money market deposit accounts, certain small and large time deposits, money market mutual funds and liquid investment assets, such as repurchase agreements and Eurodollar deposits, are less liquid but may nonetheless be used to fund payment activity. Some of these accounts, such as money market deposit accounts and mutual funds, may permit withdrawals of funds by cheque, often in minimum dollar amounts or in limited numbers. Savings deposits (including money market deposit accounts), retail money market mutual funds (general purpose only) and small time deposits totalled approximately USD 7.0 trillion at year-end 2010.

2.2.1.1 Paper cheques

An estimated 22.8 billion cheques were paid in the United States in 2010, with a value of

USD 29.0 trillion.13 In 2009, cheques accounted for about 22% of US non-cash payments, compared to 32% of non-cash payments in 2006. From 2006 to 2009, the number of cheques paid declined about 7.1% per year whereas the overall number of non-cash retail payments rose 4.6% per year.

In December 2010, about 99.7% of interbank cheques received by the Federal Reserve Banks were deposited in electronic form and about 98.4% of the interbank cheques delivered by the

Reserve Banks were presented electronically to the banks on which they were drawn.

2.2.1.2 ACH credits and debits

ACH transactions are a common form of electronic funds transfer used to make recurring and non-recurring payments. There were about 19.1 billion ACH transactions during 2010, representing USD 38.4 trillion, more than twice as many transactions as there were in 2000 and 30% more than there were in 2006.14 ACH payments may be either credit or debit transactions. In an ACH credit transaction, funds flow from the originator to receiver and in a debit transaction, as with a cheque, funds flow from the receiver to the originator. ACH credit payments include direct deposit of payrolls, government benefit payments and corporate payments to contractors and vendors. Debit payments include cheques converted to ACH debits, one-time payments authorised via the internet or telephone, recurring mortgage and loan payments, insurance premiums, consumer bill payments and corporate cash concentration transactions. (Credit is billing the money from the receive who need to pay some money to originator, usually recurring basis.) In addition, businesses and individuals may use the ACH to make payments to or receive reimbursement from the federal government related to federal tax obligations. Much of the growth in ACH payments over the last decade has been for nonrecurring transactions such as consumer cheques that are converted into ACH payments by merchants and billers and for transactions initiated via the internet or telephone.

2.2.1.3 Credit cards

Credit cards combine a payment instrument with a credit arrangement. Some 21.4 billion credit card transactions were processed during 2010, valued at USD 2.0 trillion. General purpose credit cards are generally issued by a bank under a license from a payment card network, such as Visa or MasterCard, and typically involve a revolving credit agreement. There were 18.9 billion general purpose credit card transactions during 2010 valued at USD 1.7 trillion, along with 2.6 billion private label transactions valued at USD 175 billion.

2.2.1.4 Debit cards

Among non-cash payment types, debit cards grew the most over the past decade and have replaced cheques as the most frequently used non-cash payment instrument in the United States.

These cards draw funds from a cardholder’s transaction account (for instance, transaction account) at an issuing bank. Some 43.8 billion debit card transactions were processed during 2010, valued at USD 1.6 trillion, compared with 26.0 billion processed during 2006, valued at USD 1.0 trillion. Debit cards are processed using either single message systems or two-message systems. A single-message system is based on ATM/POS network technology that combines authorisation and clearing into one step in which transactions are usually authorised by entering a personal identification number (PIN) into a merchant’s online terminal. A two-message system is based on credit card processing systems, in which the authorisation is completed in the first step and clearing is completed in a separate second step. Over 60% of debit card transactions were authorised using a two message system, virtually all of which were processed over the Visa and MasterCard networks. In 2010, there were 14 single-message networks. The majority of single-message payments were processed over the Visa and MasterCard single-message networks.

Prepaid cards have also grown substantially over the past decade. Prepaid cards facilitate access to non-traditional financial accounts. These cards include general purpose reloadable cards, sometimes used as a substitute for a traditional bank chequing account, and payroll and government benefit transfer (EBT) cards issued to take the place of pay cheques and government benefit cheques. Prepaid cards include specific-purpose restricted-use EBT cards provided by governments, private label and general purpose gift cards issued by retail merchants and card networks and rebate cards. In 2009, prepaid cards were used for 6.0 billion transactions valued at USD 142 billion. Of these, there were 2.7 billion private label prepaid card payments, 1.3 billion general purpose card payments and 2.0 billion EBT card payments valued at USD 44.7 billion, USD 42.8 billion and USD 54.5 billion, respectively.

3.2.1 Fedwire Funds Service

3.2.1.1 Institutional framework

The Fedwire Funds Service (Fedwire Funds), owned and operated by the Federal Reserve Banks, is a real-time gross settlement system that enables participants to send and receive final payments in central bank money for their own accounts and on behalf of customers. Under the Federal Reserve Act, the Federal Reserve Board is responsible for general supervision and oversight of the Reserve Banks’ provision of Fedwire Funds.

3.2.1.2 Participation

An institution that maintains an account at a Federal Reserve Bank is allowed to be a Fedwire Funds participant. Institutions with accounts at a Reserve Bank may access the Fedwire Funds Service subject to the conditions detailed in Operating Circular 6 and the PSR policy. These institutions include Federal Reserve member banks, non-member depository institutions and certain other institutions, such as US branches and agencies of foreign banks. The US Treasury and other federal agencies also participate in the Fedwire Funds Service as fiscal principals. Some 8,300 participants are able to initiate or receive funds transfers over Fedwire Funds.

3.2.1.3 Types of transactions

Participants use the Fedwire Funds Service to send or receive time-critical payments for their own accounts or on behalf of corporate or individual clients, to settle positions with other financial institutions or clearing arrangements and to submit federal tax payments. The Fedwire Funds Service processed an average of approximately 497,000 payments per day in 2010. The total value of funds transfers originated during 2010 was approximately USD 608 trillion.

3.2.1.4 Operation of the system and settlement procedures

The Fedwire Funds Service is a real-time credit transfer service. Participants originate funds transfers by instructing a Federal Reserve Bank to debit funds from the originator’s account at the Reserve Bank and credit funds to the account of another participant. Fedwire Funds processes and settles payment orders individually throughout the operating day.

Participants can access Fedwire Funds through computer-to-computer and browser-based electronic access services. Participants conducting large volumes of funds transfers typically use the computer-to-computer service, FedLine Direct. Participants conducting small to moderate volumes of funds transfers typically use the browser-based service, FedLine Advantage. In addition, participants can access the Federal Funds Service by telephone using the Federal Reserve Banks’ offline access channel.

The Fedwire Funds operating hours for each business day begin at 21:00 eastern time (ET) on the preceding calendar day and end at 18:30 ET, Monday through Friday, excluding designated holidays.

3.2.1.5 Risk management

Intraday central bank credit in the form of daylight account overdrafts may be available to holders of accounts at the Federal Reserve Banks, including participants in Fedwire Funds, subject to the terms and conditions set forth in the Federal Reserve Board’s PSR policy.

3.2.2 Clearing House Interbank Payments System (CHIPS)

3.2.2.1 Institutional framework

CHIPS is a real-time computerised system for transmitting and settling US dollar payments among its participating banks. CHIPS is operated by The Clearing House Payment Company LLC (PaymentsCo), which is an affiliate of The Clearing House Association LLC (The Clearing House). CHIPS is subject to supervision and examination by the Federal Reserve and other federal bank supervisory agencies, under the auspices of the Federal Financial Institutions Examination Council. Also, PaymentsCo, on the basis of its role as the operator of CHIPS, has been designated as systemically important by the FSOC, and under Title VIII of the DFA the Federal Reserve is its supervisory agency.

3.2.2.2 Participation

Participation in CHIPS is available to depository institutions resident in the US that meet the requirements detailed in the CHIPS rules. CHIPS participants must reside in the United States and be subject to supervision by US state or federal banking supervisors. A non-participant wishing to send payments over CHIPS must employ a CHIPS participant to act as its correspondent or agent. There are approximately 50 participants in CHIPS.

3.2.2.3 Types of transactions

Participants use CHIPS to settle a variety of large-value international and domestic payments, including those associated with the adjustment of correspondent balances, commercial transactions, bank loans and securities transactions. CHIPS processed an average of approximately 361,000 payments per day during 2010. The total value of transfers originated during 2010 was approximately USD 365 trillion.

3.2.2.4 Operation of the system and settlement procedures

CHIPS is a real-time final settlement system that continuously matches, nets and settles payment messages. Payment messages are sent to CHIPS through a multiprotocol label switching network or, as a backup, an integrated-services digital network. On a daily basis, the system provides real-time finality for all payment orders released from the CHIPS queue. To achieve real-time finality, payment orders are settled on the books of CHIPS against positive positions, simultaneously offset by incoming payment orders or both. To facilitate settlement, the CHIPS prefunded balance account (CHIPS account) was established at the Federal Reserve Bank of New York. Under the real-time finality arrangement, each CHIPS participant has a pre-established opening position requirement, which, once funded via a Fedwire Funds transfer to the CHIPS account, is used to settle payment orders throughout the day.18 A participant cannot send or receive CHIPS payment orders until it transfers its opening position requirement to the CHIPS account. Opening position requirements can be transferred into the CHIPS account any time after the opening of CHIPS and Fedwire Funds at 21:00 ET. All participants must transfer their requirement no later than 09:00 ET. After a participant has paid its opening position requirement, it is permitted to transfer additional funds (known as supplemental funds) to the CHIPS account throughout the day to facilitate the settlement of priority and non-priority payments.19

During the operating day, participants submit payment orders to a centralised queue maintained by CHIPS. An optimisation algorithm searches the centralised queue for payment orders to settle, subject to restrictions contained in the CHIPS rules. When an opportunity for settlement involving one, two or more payment order(s) is found, the optimisation algorithm releases the relevant payment orders from the central queue and simultaneously marks the CHIPS records to reflect the associated debits and credits to the relevant participants’ positions. Submitting participants may remove payment orders from the queue at any time prior to the daily cut-off time for the system (17:00 ET). Debits and credits are only reflected in CHIPS’s records and are not recorded on the books of the Federal Reserve Bank of New York. Under New York law and CHIPS rules, payment orders are finally settled at the time of release from the central CHIPS queue.

At 17:00 ET, CHIPS attempts to match, net and release as many of the remaining payment orders as possible, although no participant is allowed to incur a negative position. As soon as this process is complete, any unreleased payment orders remaining in the queue are tallied on a multilateral net basis. The resulting net position for each participant is provisionally combined with that participant’s current position (which is always zero or positive) to calculate the participant’s final net position, and if that position is negative, it is the participant’s closing position requirement. Each participant with a closing position requirement must transfer its requirement to the CHIPS account via Fedwire Funds in order to release its remaining payment orders. These funds, once paid via a Fedwire Funds transfer, are credited to participants’ balances in CHIPS. Once all of the Fedwire Funds transfers have been received, CHIPS can release and settle all remaining payment orders in the CHIPS queue. Although each participant with a closing position requirement is expected to send a Fedwire Funds payment order in the amount of that requirement to the CHIPS account, it is possible that a bank may not do so. In that case, unreleased payment orders remaining in the queue are tallied again on a multilateral basis, adjusted by the addition of amounts from the other participants that have paid their closing position requirements. This procedure allows CHIPS to release as many payment orders as possible. Payment orders still remaining in the queue will expire.20 After completion of this process, CHIPS transfers to those participants who have any balances remaining the full amount of those positions, reducing the amount of funds in the CHIPS account at the Federal Reserve to zero by the end of the day.

3.2.2.5 Risk management

CHIPS requires participants to deposit a predetermined amount each day prior to the start of business. During the operating day, CHIPS does not release any payment message from the queue, and therefore does not settle any payment message, unless it can be debited against the participant’s current position and no participant’s current position is permitted to fall below zero. CHIPS also caps the maximum positive position that any participant can accumulate; this mitigates against the risk of too much liquidity pooling among a few participants, thus affecting the efficiency of the overall settlement process. All payment messages are final upon release to the receiving participant.

Each CHIPS participant is required to have access to sources of credit and liquidity sufficient to pay promptly each day its opening position requirement and its closing position requirement. Participants must be regulated by a US state or a federal bank regulatory authority to ensure that participants are examined on a regular basis and are operating in a sound manner. Each participant is also subject to a credit evaluation by PaymentsCo. CHIPS participants are required to file copies of their annual financial statements and are subject to a periodic review by the PaymentsCo board.

3.2.3 National Settlement Service (NSS)

3.2.3.1 Institutional framework

The National Settlement Service, owned and operated by the Federal Reserve Banks, is a multilateral settlement service used to settle for clearing houses, financial exchanges and other clearing and settlement arrangements. Under the Federal Reserve Act, the Federal Reserve Board is responsible for general supervision and oversight of the Reserve Banks’ provision of NSS.

3.2.3.2 Participation

An NSS arrangement consists of a designated settlement agent and a group of depository institutions with accounts at a Reserve Bank that settles for the participants in the clearing arrangement. Each arrangement designates a settlement agent to submit settlement files to a Reserve Bank on behalf of the settlers. Settlement agents are not required to be depository institutions or to have accounts at the Federal Reserve. Their responsibilities include determination of settlement amounts by settler and electronic submission of NSS settlement files to the Federal Reserve Banks. At year-end 2010, 1,097 active settlers were part of 19 NSS arrangements established by financial market infrastructures, cheque clearing associations and ACH networks.

3.2.3.3 Types of transactions

NSS files multilaterally settle payments among a group of settlers in the private sector cheque clearing houses, the private sector ACH network and the securities settlement systems or other clearing houses that use NSS. In 2010, NSS processed approximately 7,000 settlement files and around 520,000 settlement entries. The total value of settlements during 2010 was approximately USD 14.5 trillion.

(It looks like NSS are doing large trunk transaction and on top of ACH/cheques systems..)

3.2.3.4 Operation of the system and settlement procedures

NSS provides an automated electronic mechanism for submitting multilateral settlement files to the Federal Reserve Banks. A settlement file contains a listing of the participants, the settlers (either the participant itself or the participant’s correspondent) and the dollar amount of the debit or credit to be posted to the settler’s account. For each file to be valid, debits must equal credits. If various validity checks are satisfied, the Federal Reserve accepts the file for processing and sends an acknowledgement to the agent. Settlement is final at the point when the settlement file is processed. OC 12 governs settlement over NSS. Each debit on the NSS settlement file is checked against the account balance and intraday credit available to the settlers in their Reserve Bank accounts to determine if it can be posted. In some instances, debits may be rejected if a settler does not have a sufficient balance, or sufficient intraday credit, to cover the debit. When all debit entries on the settlement file have been posted, NSS posts the corresponding credit balances. All postings are final and irrevocable when processed. When all credits have been posted, the settlement for that file is complete and an acknowledgement message is sent to the settlement agent. The NSS business day begins at 08:30 and ends at 17:00 ET, Monday through Friday, excluding designated holidays. Under certain circumstances, hours can be extended. Files submitted earlier than 08:30 ET are queued for processing beginning at 08:30 ET.

3.2.3.5 Risk management

Intraday central bank credit in the form of daylight account overdrafts may be available to NSS settlers to mitigate the liquidity risks they face intraday. In addition, immediate settlement finality and the ability for settlement agents to fund settlement accounts using the Fedwire Funds Service enable NSS settlers to manage their credit and liquidity risks. The Federal Reserve Banks manage operational risk using the tools discussed in Section 3.2.1.5. The primary source of liquidity risk to participants in an NSS arrangement is the inability of a settler to fund its debit balance. If a settler has insufficient funds to fund its balance, the agent is contacted and must either request that the rejected debit balance be re-processed, arrange for the amount of the rejected balance to be transferred to the settlement account via the Fedwire Funds Service or cancel the settlement file.

3.3 Retail payment systems

3.3.1 Cheque clearing systems

Depository institutions paid an estimated 22.8 billion cheques in the United States during 2010. Approximately 26% of those cheques were deposited in the same institution on which they were drawn (ie “on-us” cheques) and, therefore, were settled via accounting entries on the books of the paying institution. The remaining 74% were cleared and settled through interbank mechanisms. Approximately 52% of the cheques cleared through interbank mechanisms were cleared through direct exchange (presentment), local cheque clearing houses and correspondent bank networks; the rest were cleared through the Federal Reserve Banks.

3.3.1.1 Operation of the cheque collection mechanism

In the wake of the Check 21 Act (see Section 2.2.1.1), the vast preponderance of interbank

cheque clearing arrangements are now electronic. Accordingly, much of the infrastructure formerly used to process and deliver paper cheques between banks has ceased to exist. For example, as recently as 2003 the Federal Reserve Banks managed 45 cheque clearing centres. By February 2010, the Reserve Banks had ceased operations at all but one of these paper cheque processing centres. The Reserve Banks have also discontinued their air transportation networks for cheques. In addition, many of the private arrangements for exchanging paper cheques, including local clearing houses and ground courier services, have been discontinued.

Typically the first depository institution to receive a paper cheque “truncates” that cheque, using scanning equipment to capture both an image of the cheque and the information contained in the magnetic ink character recognition (MICR) line printed along the bottom of the cheque. A paper cheque may even be truncated prior to its receipt by the first bank that handles the item. For example, in a process known as “remote deposit capture”, a cheque’s payee, such as a merchant, uses scanning equipment at the point of sale to capture the aforementioned data elements from the paper cheque and, by agreement, deposits the cheque electronically with its bank.

Once a paper cheque has been truncated, banks typically handle the item electronically thereafter. A bank may collect an electronic item by depositing it with a correspondent bank or a Federal Reserve Bank. Correspondent banks that have established relationships with other correspondent banks may present electronic items drawn on each other directly. Smaller institutions generally use the electronic cheque handling services offered by clearing houses, correspondent banks or the Federal Reserve Banks. If necessary, as authorised by the Check 21 Act, a bank handling an electronic item may create a legally equivalent paper substitute cheque for delivery to a subsequent bank or bank customer that does not accept cheques electronically.

While the Check 21 Act has radically transformed the means by which cheques are cleared in the United States, it has not had a substantial effect on the settlement of cheques. Correspondent banks settle the cheques they collect for other institutions through accounts on their books. Paying banks generally settle with correspondent banks using the Federal Reserve’s Fedwire Funds Service. Cheque clearing houses generally net payments.

Settlement among cheque clearing house participants generally occurs through direct transactions between members, through designated settlement banks or through the Federal

Reserve’s NSS.

The Federal Reserve settles the cheques it collects by posting entries to the accounts that depository institutions maintain with the Federal Reserve. The account of the collecting institution is credited, and the account of the paying institution is debited, for the value of the deposited cheques in accordance with funds availability schedules maintained by the Federal

Reserve, which reflect the time normally needed for the Federal Reserve to receive settlement from the paying institutions. Collecting institutions usually receive credit on the day of deposit or the next business day.

3.3.2 Automated clearinghouse (ACH)

ACH is a nationwide electronic file transfer mechanism that processed 19.2 billion credit and debit transfers initiated by depository institutions through electronically originated batches during 2010. The Federal Reserve is one of the nation’s two ACH operators; The Clearing House’s Electronic Payments Network (EPN) is the sole private sector ACH operator.

3.3.2.1 Operation of the ACH system

The Federal Reserve maintains centralised application software used to process ACH payments submitted to the Federal Reserve Banks through the FedACH system. Depository institutions electronically deliver files to and receive files from the Federal Reserve Banks through a variety of electronic-access options. EPN and the Federal Reserve Banks rely on each other for the processing of ACH transactions in which either the originating depository institution or the receiving depository institution is not their customer. These inter-operator transactions are settled by the Federal Reserve.

ACH transactions processed by the Federal Reserve are settled through depository institutions’ accounts at the Federal Reserve. Settlement for ACH credit transactions processed by the Federal Reserve Banks is final when transactions are posted to the receiving depository institutions’ accounts, which is currently at 08:30 ET on the settlement date. Credit for Federal Reserve ACH debit transfers is not final at settlement. Credit for debit items is available to the originating depository institution on the settlement date but is not final until the banking day following the settlement date. FedACH is governed by Operating Circular 4, which, subject to certain exceptions, incorporates the Operating Rules of NACHA (see Section 1.3.2). Transactions processed by EPN are settled on a net basis using the National Settlement Service.

3.3.3 Payment card networks

Credit card and debit card networks provide communications, transaction authorisation and interbank financial settlement for financial institutions. Payment card networks establish uniform operating policies, procedures and controls. Some major networks are publicly traded companies. The largest credit card and signature-based debit card networks in the United States are Visa and MasterCard. American Express and Discover are also major card networks. There were also several smaller debit card networks operating in the United States during 2010.

3.3.3.1 Operation of payment card networks

Credit card and debit card networks sort and route transaction data from acquiring banks to issuing banks over proprietary networks. The networks generally settle on a net basis with the acquiring and issuing banks daily, although typically with a one- or two-day lag between payment initiation and settlement. Generally, the networks use the acquiring and issuing banks’ aggregated transaction information to compile each bank’s net settlement position. Member banks may be required to maintain collateral with the networks’ settlement banks to manage default risks. Acquiring and issuing banks may settle directly with each other, through regional settlement banks or through the Federal Reserve or by other net settlement arrangements. The settlement process can vary significantly, depending upon the banks involved.

4. Systems for post-trade processing, clearing and settlement

4.1 General overview

In the United States, a number of systems facilitate the post-trade processing, clearing and settlement of securities, derivatives and other financial transactions. These currently include trade repositories as well as central counterparties, central securities depositories and securities settlement systems.

4.2 Trade repositories

4.2.1 DTCC Data Repository (US) LLC

4.3 Central counterparties (CCPs) and clearing systems

4.3.1 National Securities Clearing Corporation (NSCC)

4.3.2 Fixed Income Clearing Corporation – Government Securities Division

(FICC/GSD)

4.3.3 Fixed Income Clearing Corporation – Mortgage-Backed Securities Division

(FICC/MBSD)

4.3.4 The Options Clearing Corporation (OCC)

4.3.5 CME Clearing

4.3.6 ICE Clear Credit LLC

4.4 Securities settlement systems

4.4.1 Fedwire Securities Service

4.4.2 The Depository Trust Company (DTC)

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