April 23, 2013 - One year on after introducing new Tiering Criteria, Chaps (which processes real-time, high value, guaranteed sterling payments), has reviewed how the changes have reduced risks within this key payment system, which is critical to the economic infrastructure.

The new Tiering Criteria arrangements were introduced after the Bank of England highlighted potential stability risks of the CHAPS payment system, having a large number of indirect participants processing high values of payments via a small number of direct members. The changes were introduced to identify any indirect participant processing payments above a certain value threshold. CHAPS then engaged with the largest indirect participants to discuss ways to reduce the system risks they pose, including the option of joining the Scheme directly.

The Tiering Criteria changes (which were introduced on April 23rd 2012 in line with CPSS IOSCO Principle 19) impacted all CHAPS settlement members who process payments on behalf of other financial institutions, known as indirect participants. More than 4,500 financial institutions access CHAPS as Indirect Participants through an agreement with one or more of CHAPS' 19 Settlement Members.

These measures have helped to enhance stability in various ways, delivering the following key benefits to both direct and indirect participants:

• By encouraging significant indirect participants to join the Scheme directly, they are better protected from the impact that an operational outage of a direct member could bring to the CHAPS community. The changes have also helped to address the potential vulnerability facing indirect participants who may rely on an extension of credit from the direct member to fund their clearing - which could be removed if the direct member wanted to reduce their credit risk. Conversely, the reduction in credit that direct members can now extend allows them to eliminate some of their own risk.

• Reviewing protocols and changes to contingency processes between direct members and indirect participants has also contributed to lower day-to-day risks.

The commitment to join by five major indirect participants identified in this process will reduce indirect participant payment flows by 15% to 20% by 2015.

Phil Kenworthy, Managing Director of CHAPS Clearing Company said: "CHAPS is systemically important to the UK financial infrastructure as it processes high-value, instantaneous payments between banks in excess of £270 billion each day. The changes we have introduced have drawn real benefits to all CHAPS users, creating more stability within the financial market now, as well as establishing a positive template for mitigating risk in the future.

"We will continue to work with the Bank and our members to introduce further initiatives designed at decreasing risk."

Chris Salmon, Executive Director for Banking Services and Chief Cashier, Bank of England said: "It's encouraging to see that the vulnerabilities we outlined are being addressed. The CHAPS Tiering Criteria have contributed to the increase in direct membership of the Scheme, raising the value of payments made within the system directly, putting the Scheme in a better position to monitor and control these payments. We will continue to work with the CHAPS Scheme and other market participants to ensure that the UK's financial infrastructure remains robust."