What distinguishes Fedwire from CHIPS?

The correct choice highlights a fundamental distinction between Fedwire and CHIPS based on their operational mechanisms. Fedwire, which is run by the Federal Reserve, operates as a Real-Time Gross Settlement (RTGS) system. This means that transactions are settled individually and immediately upon receipt, ensuring that the funds are transferred in real-time without any waiting period. This feature is crucial for high-value and time-sensitive transactions, as it reduces settlement risk and provides immediate certainty of funds.

On the other hand, CHIPS (Clearing House Interbank Payments System) does not settle transactions on a real-time basis. Instead, it uses a Deferred Net Settlement (DNS) system, where payments are accumulated throughout the day and settled in net amounts at specific intervals. This allows for efficiency in processing a high volume of transactions, but it inherently involves a delay in the actual settlement of funds compared to the immediate settlement provided by Fedwire.

Understanding this distinction between RTGS and DNS systems is essential in the context of payments, especially for institutions that must choose the appropriate system based on the nature of the payment they are processing, be it for immediacy or for batching transactions over time.