Clearing Versus Settlement

7.0 What this chapter gives you#

1. You will be able to say precisely what clearing is, what settlement is, and why “the payment went through” carries almost no information.
2. You will be able to name the four separate events that sentence collapses, and say whose record holds each one.
3. You will be able to explain why a Faster Payment credited at two o’clock on a Sunday morning is not settled between the banks until Monday.
4. You will be able to state the trade-off between real-time gross settlement and deferred net settlement as an exchange of liquidity for settlement risk.
5. You will be able to explain what happened to Bankhaus Herstatt’s counterparties on 26 June 1974, and why the loss was the whole principal rather than a fraction of it.
6. You will be able to say why the New York clearing process then ran until one in the morning for several nights running, and what that failure mode is called.
7. You will be able to explain why finality is a legally defined moment under the Settlement Finality Regulations 1999 rather than a feeling.
8. You will be able to keep finality between direct participants distinct from consumer reimbursement for authorised push payment fraud.
9. You will be able to explain why a clearing file and a settlement advice will never tie out item by item, and what reconciliation therefore has to prove.
10. You will be able to decide, before releasing goods against an incoming payment, which of the four events has actually occurred and who can tell you.

Ask anybody who works in payments what the hardest thing is about explaining their job, and a good number of them will give you the same answer. It is that the public has one word — “payment” — for what the industry treats as at least four separate events, occurring at four different times, on four different ledgers, with four different sets of consequences if something goes wrong.

The most important of those distinctions is the one this chapter is about. Clearing is the process of working out who owes what to whom. Settlement is the money actually moving. They are not the same thing, they very rarely happen at the same moment, and almost every strange behaviour in the payments world — the three-day wait, the payment that “arrived” on Sunday but was not paid for until Monday, the refund that takes a week, the transaction that shows as pending and then vanishes — is a consequence of the gap between them.

The previous chapter established that there are two kinds of money in circulation: commercial bank money, which is what sits in your account and is a promise from your bank, and central bank money, which is what banks hold in reserves accounts at the Bank of England. That distinction is the raw material of this one. Clearing happens in the world of obligations. Settlement happens in the world of central bank money. Clearing produces a number. Settlement makes the number true.

The phrase “the payment went through” contains no information about which of these has happened. That is not pedantry. In 1974 the difference between them destroyed a German bank’s counterparties, froze the New York clearing process for several nights running, and led directly to the creation of the international committee structure that still governs payment system oversight today. The word for the risk is named after that bank.

The plain version#

Imagine two shops facing each other across a small high street. On one side is a bakery run by Nadia. On the other is a hardware shop run by Owen. Their staff buy from each other constantly. The bakery’s staff need string, bin bags, light bulbs and a new mop. The hardware shop’s staff want coffee, sandwiches and a birthday cake.

At first they paid each other in cash every time. Somebody would walk across the road with a five-pound note, wait for change, and walk back. It worked, but it was tedious, and both tills ended up short of coins at awkward moments.

So they changed the arrangement. Now, when somebody from the bakery buys a mop, Owen writes it in a notebook by the till: “Bakery, mop, £8.50.” When somebody from the hardware shop buys a cake, Nadia writes it in hers: “Hardware, cake, £22.” Nobody hands over money at the moment of purchase. Goods change hands, and a note gets made.

At six o’clock, one of them walks across the road with their notebook and they sit down together for two minutes.

Agreeing the list#

The first thing they do is read out the entries and check that both notebooks agree. Owen has “Bakery, mop, £8.50” and Nadia has the same. Owen has “Bakery, bin bags, £4.20” — Nadia has that too. Then Owen reads out “Bakery, extension lead, £11” and Nadia frowns, because she has no record of anybody buying an extension lead. They talk about it. It turns out one of Nadia’s Saturday staff bought it and forgot to write it down. Fine. Both notebooks now agree.

This step — reading out the entries, comparing them, resolving the ones that do not match, and arriving at a list both sides accept — is clearing. Nothing has been paid. Not a penny has moved. What has been produced is agreement: a shared, undisputed statement of who owes what.

That is genuinely all clearing is. It is bookkeeping and argument. It is the part of a payment where two institutions establish, to their mutual satisfaction, the size of the debt between them.

Moving the money#

The second thing they do takes ten seconds. Nadia’s total for the day is £46.30 owed to Owen. Owen’s total is £38.90 owed to Nadia. Rather than one of them handing over £46.30 and the other handing back £38.90, they take the difference. Nadia opens the till, counts out £7.40, and puts it in Owen’s hand.

That is settlement. The obligation has been discharged. Whatever happens tomorrow — if the bakery burns down, if Owen is run over by a bus, if either of them stops trading — nobody can come back and claim that day’s trading was not paid for. It was. There is a £7.40 gap in Nadia’s till and £7.40 more in Owen’s, and that is not an entry in a notebook. It is the money.

Notice how much smaller the settlement is than the trading. Over the day, £85.20 of goods changed hands. The amount of actual cash that moved was £7.40. That compression is the whole reason the notebook system exists, and it is the subject of the next chapter. What matters here is the sequence: agree first, pay after.

The same thing, with banks#

Now replace Nadia with Barclays and Owen with Lloyds, and replace mops and cakes with customer payments.

On Monday, four of Barclays’ customers send money to Lloyds customers, and three of Lloyds’ customers send money to Barclays customers.

Seven payments. £7,800 of money as the customers experience it — seven people saw a debit, seven people saw a credit, and every one of those amounts was correct and complete from the customer’s point of view.

Clearing is the process by which the two banks exchange the records of those seven payments, check that each side has the same list, sort out anything that does not match, and arrive at a single agreed statement: Barclays owes Lloyds £4,000, Lloyds owes Barclays £3,800, and therefore Barclays owes Lloyds £200.

Settlement is the moment somebody moves £200.

And here is the part that surprises people the first time they hear it. In several of the systems that move most of Britain’s money, that £200 does not move at the moment the customers see their balances change. It moves later. Sometimes hours later. Sometimes three days later. In the meantime, the receiving bank has given real, spendable money to its customer on the strength of a promise from the sending bank that has not yet been honoured.

Two clocks#

There are broadly two ways to organise this, and Britain runs both.

The first way is the notebook. Let everything accumulate, add it all up at a set time, and move one figure. This is cheap, because you move money once instead of thousands of times, and it needs very little cash sitting around waiting. Its cost is the gap. Between the moment a customer’s payment is accepted and the moment the banks square up, one bank is exposed to the other. In Britain, Bacs works this way, and so does the Faster Payments Service, and so do the cheque and card systems.

The second way is to settle every payment on its own, one at a time, as it happens. No notebook, no waiting, no gap. Its cost is that each bank must have enough money sitting in its account at the Bank of England to cover each payment at the moment it is made, which is expensive, because money sitting in an account is money not being used for anything else. In Britain, CHAPS works this way — the system used for house purchases, corporate treasury and the very large payments financial institutions make to each other.

Those two designs have names, and the names are worth learning because they will appear throughout the rest of this book. The notebook way is deferred net settlement. The one-at-a-time way is real-time gross settlement, usually shortened to RTGS.

Why the gap is dangerous#

In June 1974 there was a bank in Cologne called Bankhaus Herstatt. It was not large. It had, however, been trading foreign currency very badly, and on 26 June the German banking supervisor took its licence away.

The timing is the whole story. The licence was withdrawn during the banking day in Germany but after the German interbank payment system had closed for the afternoon. Herstatt’s counterparties — other banks around the world that had agreed to swap Deutschmarks for dollars with it — had already, that morning, paid their Deutschmarks into Herstatt’s German account. That was their side of the bargain, done, irrevocably.

The dollars were supposed to come back to them in New York later the same day, because New York is five or six hours behind Cologne and its business day was still going. At half past ten New York time, Herstatt’s New York correspondent bank stopped making dollar payments on its behalf.

So a set of perfectly ordinary banks had handed over the full amount of one currency and received nothing at all in return. Not a reduced amount. Not a delayed amount. Nothing, with a claim against a liquidated German bank as the only consolation.

What happened next was almost worse. Banks in New York, suddenly aware that paying first and hoping was a losing strategy, started holding back their own outgoing payments until they could see the incoming ones arrive. Everybody doing that at once meant nobody could go first. The clearing process in New York seized up and, on two or three consecutive nights, ran until one in the morning before it finished.

That is why the industry has a special word for this. When one party to a currency exchange pays out what it owes and does not receive what it is due, the loss is not a fraction of the trade. It is the entire principal. The industry calls it Herstatt risk, after a bank that had been out of business for a day.

What this means for “the payment went through”#

Put the pieces together and you can see why that sentence carries almost no information.

It might mean the sending bank has checked the payment and taken the money off its customer. It might mean the two banks have agreed that one owes the other. It might mean the money has actually moved between them at the Bank of England. It might mean the receiving customer can see it and spend it. Those are four different facts, and depending on which payment system you are using they occur in different orders, minutes or days apart.

If somebody tells you a payment went through and you are about to hand over a car, a house or a shipping container, the useful question is not “has it gone through”. It is “has it settled, and where can I see that”.

Where the plain version stops being true#

The notebook picture is the right shape, and practitioners carry something like it in their heads. Four things about it are wrong in ways that cause real errors.

Clearing is not a meeting at six o’clock#

The high-street analogy makes clearing sound like a discrete event at the end of the day: two parties sit down, compare lists, agree. Nothing in a modern payment system works like that.

Clearing is a continuous pipeline, running all day, made of several distinct stages that the analogy compresses into one. A payment instruction is transmitted. It is validated for format and for the existence of the destination account. It is screened against sanctions lists and fraud rules. It is matched against the counterparty’s record of the same instruction. It is placed in a queue and given a position in the sequence. Only at the end of that pipeline does it contribute to a figure that anyone would recognise as “what we owe you”.

The Committee on Payments and Market Infrastructures, which is the body at the Bank for International Settlements that maintains the industry’s shared vocabulary, defines clearing as “the process of transmitting, reconciling and, in some cases, confirming transactions prior to settlement, potentially including the netting of transactions and the establishment of final positions for settlement”. Read that carefully. Netting is optional — “in some cases”, “potentially including”. Clearing is the whole pipeline. Netting is one thing that may happen inside it.

The same glossary then adds a sentence that ought to be printed on the wall of every payments team in the country: “Sometimes this term is also used (imprecisely) to cover settlement.” The standards body itself is warning you that the industry misuses its own word. When somebody says a payment has “cleared”, you cannot safely infer anything about whether money has moved.

Netting and clearing are not the same idea, and RTGS still clears#

The analogy makes it look as though clearing exists in order to produce a net figure, and therefore that a system which settles every payment individually has no clearing at all. Both halves of that are wrong.

CHAPS payments settle one by one, gross, for full value, with no netting anywhere in the process. CHAPS nevertheless has a substantial clearing function: messages are validated, sequenced, checked against liquidity, queued when a participant is short, and released when it is not. What CHAPS does not do is defer. Clearing and settlement in CHAPS are separated by fractions of a second rather than by hours, which makes them easy to conflate, but they remain two distinct operations and the system’s rules treat them as such.

Conversely, netting can happen without clearing in any interesting sense — two counterparties can agree bilaterally to offset positions under a contract with no infrastructure involved at all.

The useful axis is not “netted or not”. It is when settlement occurs relative to the obligation, and in what asset. Netting is the subject of the next chapter and deserves its own treatment.

Your balance changing is not settlement#

This is the correction with the largest practical consequences, and it is the one that catches out software teams building on top of payment rails.

When your bank shows the money as arrived, your bank has updated its own ledger — the record of what it owes you. That is commercial bank money, and it is entirely under your bank’s control. It required no cooperation from any other institution and no involvement from the Bank of England. Under Faster Payments, this typically happens within seconds, at any hour, on any day of the year.

Settlement is a different ledger entirely: the settlement accounts held at the Bank of England, in central bank money. Faster Payments net settlement takes place three times each business day. So a payment received at two o’clock on a Sunday morning has been credited to a customer, spent, perhaps withdrawn as cash, and none of that has been settled between the banks until Monday.

The receiving bank has extended credit to the sending bank in the interval, on the initiative of a customer, without anybody’s credit committee being consulted. This is not an oversight; it is the deliberate design of every deferred net system, and it is why those systems need risk controls that RTGS does not.

The practical rule for anyone building or reconciling systems: the timestamp on a customer credit and the timestamp on a settlement are different fields with different meanings, and the interval between them is a real exposure held by a real institution. Treating them as the same event is the single most common error in payments engineering.

“Final” is a legal status, not a feeling#

The notebook analogy ends with cash in a hand, which feels final because it is physical. In electronic systems, finality is a legal construct, and it exists because insolvency law would otherwise be able to reach back in time and unwind transfers that everybody had treated as complete.

The CPMI definition is exact: final settlement is “the irrevocable and unconditional transfer of an asset or financial instrument, or the discharge of an obligation by the FMI or its participants in accordance with the terms of the underlying contract”, and it adds that “final settlement is a legally defined moment”.

In the United Kingdom the relevant instrument is the Financial Markets and Insolvency (Settlement Finality) Regulations 1999, which implemented the EU Settlement Finality Directive. Systems apply to be designated under them, and the Bank of England is the designating authority for everything except systems that are, or whose operator is, a recognised investment exchange, where it is the Financial Conduct Authority. Designation gives a system protection against the ordinary operation of insolvency law, so that transfer orders already entered into the system, and the netting of them, survive the insolvency of a participant instead of being reversed.

Two further corrections follow from this. First, finality attaches to the interbank transfer, not to the customer’s experience. The Bank of England states that in CHAPS “the transfer of funds is irrevocable between the direct participants” — between the direct participants. That is not a statement that a defrauded consumer cannot be reimbursed. Since 7 October 2024 the Bank has operated CHAPS reimbursement rules for authorised push payment fraud, with a maximum reimbursement level for UK retail CHAPS payments set at £85,000, aligned with the Payment Systems Regulator’s approach for Faster Payments. Settlement finality and consumer redress are different mechanisms operating on different parties.

Second, and less comfortably, finality is not identical across systems. A payment can be final in one legal sense and still be sitting inside a clearing cycle whose settlement has not occurred. If you need to know whether a specific payment is beyond recall, the answer is in the rulebook of the specific system, not in a general principle.

The technical version#

The vocabulary, defined#

Because the terms are used loosely in commerce and precisely in the rulebooks, it is worth setting out the CPMI definitions verbatim. These are the definitions that scheme rulebooks and central bank documentation are written against.

Three of these repay close attention. “Settlement lag” names the interval this chapter is about and makes it a measurable quantity rather than a vague unease. “Principal risk” is the specific, severe form of settlement risk in which the exposure is the whole trade rather than the cost of replacing it. And “payment versus payment” is the engineering answer to principal risk in foreign exchange, which we come to below.

The two models, and the trade-off they encode#

The choice between real-time gross settlement and deferred net settlement is a straight exchange of one scarce resource for another. RTGS spends liquidity to buy the elimination of settlement risk. DNS spends settlement risk to buy liquidity efficiency.

The Bank of England states the trade-off in exactly those terms in its description of CHAPS: “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.”

That last clause is the design principle. You put the expensive, risk-free model where the exposures would be catastrophic, and the cheap, exposed model where the exposures are small and manageable — and then you bolt risk controls onto the cheap model until its residual exposure is acceptable.

Britain’s arrangement follows this exactly. All of it settles across accounts at the Bank of England; what differs is when, and on what basis.

CHAPS as the worked example of RTGS#

CHAPS is a sterling same-day system for high-value wholesale payments and for time-critical lower-value payments such as property purchases. Responsibility for it transferred from the CHAPS Clearing Company to the Bank of England in November 2017, which means the Bank is simultaneously the system’s operator, its settlement agent and its supervisor’s colleague — an arrangement it manages through internal separation and an exchange of letters with the Payment Systems Regulator, most recently updated in January 2025.

The mechanics are as follows. Payment instructions are routed over SWIFT to the RTGS system. Settlement occurs across settlement accounts at the Bank of England by debiting the sending participant and crediting the receiving participant, individually, for full value. Only once that has happened is the full payment message forwarded onward to the receiving bank. This is the “Y-copy” arrangement, and its consequence is worth stating plainly: in CHAPS, interbank settlement is complete before the beneficiary’s bank has even received the complete instruction. The order of events is the reverse of the retail intuition.

The scale is instructive. In 2024 CHAPS settled over £87 trillion of payments, an average of over £344 billion each working day across around 208,000 payments, giving an average payment value of about £1.7 million. The Bank’s own summary of what that means: CHAPS represents around 0.5 per cent of UK total payment volumes but 92 per cent of total sterling payment values.

More recent quarterly figures show the same picture and a rising trend.

There are over 35 CHAPS direct participants, with several thousand financial institutions reaching the system indirectly through them. The list is more varied than the phrase “high-street banks” suggests: alongside Barclays UK, Lloyds Bank plc, NatWest, HSBC UK Bank plc and Santander UK plc, the direct participants include CLS Bank International, LCH Limited, Euroclear Bank SA/NV, Fnality UK Limited, ClearBank Limited, iFAST Global Bank Limited and Banking Circle S.A., plus a long list of London branches of foreign banks.

The liquidity cost of gross settlement is managed by two devices. The first is the CHAPS Throughput Rules, which oblige direct participants to have settled specified proportions of their daily CHAPS value by fixed points in the day — currently 12:00, 15:00 and 17:00. Without such a rule, every participant’s individually rational strategy is to delay outgoing payments and fund them from incoming ones, which collectively produces the New York failure mode of 1974 in slow motion. The second is queueing and central scheduling inside RTGS, so that payments a participant cannot yet fund wait in an ordered queue rather than being rejected.

CHAPS currently opens at 06:00 and closes at 18:00 for bank-to-bank payments, with customer payments to be submitted by 17:40. Direct participants must be open to receive by 08:00 and to send by 10:00. In 2026 the Bank confirmed an early-morning extension under which CHAPS will open at 01:30, with all direct participants required to receive payments from that time whether or not they choose to send; the target is September 2027, and the Throughput Rules will continue to be measured from 06:00.

Bacs as the worked example of DNS#

Bacs is the opposite design and demonstrates every property of deferred net settlement.

Payments submitted to Bacs go through a three-day clearing and processing cycle. The deadline for receipt of payment instructions from service users is 22:30 on Day 1. Processing and distribution to the receiving banks happens on Day 2. Debits and credits reach customer accounts on Day 3.

The interbank obligations arising in Bacs are settled at the Bank of England on a multilateral net basis on Day 3 of the cycle. Settlement occurs at 09:30, through the posting of multilateral net settlement positions directly to settlement accounts in the RTGS processor. One posting, once a day, for the whole system.

The compression this achieves is the point of the design. In 2025 Bacs facilitated 6.86 billion payments with a value of £6.05 trillion, including a record 5.0 billion Direct Debits. Spread over roughly 250 working days, that is on the order of £24 billion of customer payments a day. The corresponding amount of central bank money that actually moved averaged £5,587 million a day across 2025 to date, and £6,205 million a day in the second quarter of 2026. Those two figures come from different publications measuring slightly different things, so the ratio should be treated as indicative rather than exact, but the order of magnitude is not in doubt: something like three-quarters of the value entering Bacs never needs to be settled at all, because it offsets against value going the other way.

Since its inception in 1968, over 183.6 billion transactions have been debited or credited to British bank accounts through Bacs.

The cost of that efficiency is the settlement lag. From 22:30 on Day 1 to 09:30 on Day 3 there exist agreed obligations between banks that have not been discharged. If a participant failed inside that window, the surviving participants would be holding claims rather than money.

The risk controls that make DNS survivable#

The industry’s answer to that window is not to shorten it but to collateralise it.

The Bank of England’s RTGS supports both prefunded and non-prefunded deferred net settlement models. Under the prefunded model, each participant’s maximum possible net debit position is capped, and the participant “must hold funds in a special prefunding account in RTGS equal to that cap”. If a participant fails, the money required to complete settlement is already segregated at the central bank and settlement proceeds regardless. The exposure between participants is not reduced; it is removed, by being funded in advance.

Faster Payments operates on this basis, with each participant subject to a Net Sender Cap limiting its indebtedness to other participants per settlement cycle. The design has an obvious cost — prefunding is idle liquidity — and that cost is a barrier to entry, particularly for non-bank payment firms. In 2026 Pay.UK introduced a more flexible Net Sender Cap model intended to reduce the amount of prefunding required and widen direct access to Faster Payments.

The 2012 CPSS Red Book chapter on the United Kingdom recorded the three Faster Payments clearing cycles as settling at 07:15, 13:00 and 15:45. The Bank of England’s current published description states only that net settlement takes place three times each business day, so the precise times should be taken from the scheme’s current documentation rather than from the Red Book.

Herstatt, precisely#

The canonical settlement failure deserves stating in exact terms, because it is invoked constantly and described loosely.

On 26 June 1974 the Bundesaufsichtsamt für das Kreditwesen, the German federal banking supervisory office, withdrew the banking licence of Bankhaus Herstatt of Cologne. The BIS account is specific about the timing: the withdrawal occurred during the banking day but after the close of the interbank payments system in Germany. At 10:30 New York time on the same day, Herstatt’s New York correspondent suspended dollar payments on its account.

The consequence was that Herstatt’s counterparty banks were exposed for the full value of the Deutschmark deliveries they had already made. They had performed their side of foreign exchange contracts irrevocably and received nothing. The Basel Committee’s own case study of the failure, published in April 2004 as Working Paper No. 13, Bank Failures in Mature Economies, records that by June 1974 Herstatt’s losses on its foreign exchange operations amounted to DM 470 million, and that a special audit authorised by the supervisor in March of that year had already found open exchange positions of DM 2 billion against an internal limit of DM 25 million.

The 1996 BIS report on settlement risk in foreign exchange transactions — usually called the Allsopp Report — sets out the resulting definition: “One party to an FX trade could pay out the currency it sold but not receive the currency it bought. This principal risk in the settlement of foreign exchange transactions is variously called foreign exchange settlement risk or cross-currency settlement risk. It is also referred to as Herstatt risk.” The report itself notes that naming the risk after one institution is in some respects inappropriate, since the circumstances of subsequent failures differed.

The second-order effect is the one the Bank of England’s own archives illuminate, in research published on the Bank Underground blog in June 2015. Banks in New York reacted by holding up outgoing payments until their accounts were sufficiently in credit. The Federal Reserve’s Charles Coombs recorded that this “had the effect of virtually freezing up the clearing process, which on two or three consecutive days ran until 1am”. A payment system in which everybody waits for everybody else does not fail loudly; it congeals. The archives show a chain reaction of payment delays across international financial centres, threatening the stability of the international payment system as a whole.

The institutional response was durable. The G10 members, together with Luxembourg and Spain, established a standing committee under the auspices of the Bank for International Settlements. That lineage runs through the Basel Committee on Banking Supervision and the Committee on Payment and Settlement Systems, now the Committee on Payments and Market Infrastructures, whose glossary supplied the definitions above.

Payment versus payment, and how much risk is left#

The engineering fix for principal risk in foreign exchange is payment versus payment: a settlement mechanism that ensures the final transfer of one currency occurs if and only if the final transfer of the other does. Neither leg can complete alone, so neither party can be left having paid without being paid.

The dominant implementation is CLSSettlement, operated by CLS Bank International, which provides PvP settlement for 18 of the world’s most traded currencies. CLS reports settling an average daily value of over USD 7 trillion of payment instructions for more than 70 settlement members and over 37,000 indirect participants; its product materials cite a figure of over USD 8.0 trillion of payments each day. CLS Bank International is a CHAPS direct participant and Continuous Linked Settlement is designated under the UK Settlement Finality Regulations, which is a compact illustration of how these arrangements interlock: sterling PvP legs settle in central bank money at the Bank of England.

The 2025 BIS Triennial Survey put numbers on how much of the problem remains. Of roughly USD 14 trillion of gross financial obligations settled daily in April 2025, USD 5.2 trillion — 36 per cent — settled via PvP, eliminating settlement risk. About USD 7.6 trillion, 54 per cent, settled by methods that mitigate but do not eliminate the risk, such as pre-settlement netting, intragroup settlement and timing controls. And more than USD 1.4 trillion, 10 per cent, settled on a gross bilateral basis, fully exposed. More than four fifths of daily settlement — USD 12.2 trillion — involved CLS-eligible currency pairs, of which 40 per cent settled via PvP.

Fifty-one years after Herstatt, on an ordinary day in April 2025, well over a trillion dollars a day of foreign exchange still settled in exactly the manner that destroyed Herstatt’s counterparties.

Settlement finality in UK law#

The Financial Markets and Insolvency (Settlement Finality) Regulations 1999 allow payment and settlement systems to apply for protection against the normal operation of insolvency law. The designating authority is the Bank of England, except where the system is, or its operator is, a recognised investment exchange for the purposes of the Financial Services and Markets Act 2000, in which case it is the FCA.

Systems designated under UK law include CHAPS, Bacs, the Faster Payments Service, the Image Clearing System, Continuous Linked Settlement, Visa Europe, Euroclear UK and International, LCH Limited, ICE Clear Europe, LME Clear Limited, SIX x-clear and the Sterling Fnality Payment System. A further set of non-UK-law systems is designated for these purposes, including EBA Clearing’s STEP2-T, EURO1 and RT1, Euroclear Bank SA/NV, Eurex Clearing AG, LCH SA, Clearstream Banking S.A., the Norges Bank Settlement System and RIX operated by Sveriges Riksbank.

Designation is not a badge. It is the legal machinery that makes settlement stick when a participant fails, and being a participant within the meaning of those Regulations is one of the stated conditions for direct participation in CHAPS.

The four events, and how to talk about them#

The chapter’s opening claim can now be made precisely. “The payment went through” collapses at least four distinct events.

The order of those four is not fixed. In CHAPS, settlement precedes the receiving bank getting the full message, which precedes the customer credit. In Faster Payments, the customer credit comes first, often within seconds, and settlement follows in the next of three daily cycles. In Bacs, the customer entries and the settlement both fall on Day 3, near each other but not identical, with settlement at 09:30. In the card systems, authorisation may precede clearing by days and settlement by days more — a sequence Volume III takes apart in detail.

This is why the diagnostic question in an incident is never “did the payment go through”. It is a sequence of narrower questions. Did the instruction get accepted, and by whom? Did it enter a clearing cycle, and which one? Has that cycle settled? And has the beneficiary’s bank posted to the customer account? Four questions, four different systems of record, and frequently four different organisations to ask.

What this means for people building on these rails#

Two practical consequences follow, and both cost money when ignored.

The first concerns reconciliation, the subject of a later chapter. A clearing file and a settlement advice are not two views of the same fact. The clearing file lists individual items; the settlement advice reports a position. They will not tie out item by item, and they are not supposed to. Reconciliation is the discipline of proving that a set of items produces the position that was settled, which is a different exercise from matching one list against another and considerably more subtle.

The second concerns the meaning of an incoming payment for risk purposes. If your business releases goods, credits an account, or allows a withdrawal on the strength of a payment that has been cleared but not settled, you have taken on a share of a bank’s settlement exposure without a bank’s balance sheet. For most retail-scale activity that is a reasonable commercial judgement, because prefunding and net sender caps stand behind the retail systems. For unusual amounts, unusual timing, or unusual counterparties, it is worth knowing exactly which of the four events has occurred before acting.

And that, ultimately, is why this distinction is worth a chapter. The public has one word for payment. The industry has a pipeline with several stages, several ledgers and several legally defined moments, and it built that pipeline the way it did because in June 1974 it discovered, expensively, what happens when the gap between agreeing and paying is left unmanaged.

7.98 Common wrong ideas#

Wrong: Clearing and settlement are two words for the same thing. Right: Clearing establishes who owes what and settlement discharges the obligation, and the CPMI glossary itself warns that the industry uses “clearing” imprecisely to cover both.

Wrong: A payment that has cleared has been paid for. Right: Clearing produces a number and only settlement makes the number true, and in Bacs those events are two days apart.

Wrong: Your balance going up means the banks have settled. Right: Your balance is your own bank’s record of what it owes you, updated without any cooperation from another institution or from the Bank of England.

Wrong: Clearing exists in order to net, so a system that settles gross does not clear. Right: CHAPS nets nothing yet validates, sequences, checks liquidity and queues, because clearing is the whole pipeline and netting is only one optional step inside it.

Wrong: Clearing is a discrete event at the end of the day. Right: It is a continuous pipeline of transmission, validation, sanctions and fraud screening, matching, queueing and position-building that runs all day.

Wrong: Herstatt risk is a currency risk. Right: It is principal risk: paying out the full amount of one currency and receiving nothing of the other, which is why payment versus payment was invented.

Wrong: CLS has solved foreign exchange settlement risk. Right: In April 2025 only 36 per cent of roughly USD 14 trillion of daily obligations settled by PvP, and more than USD 1.4 trillion settled on a gross bilateral basis, fully exposed.

Wrong: Settlement finality means a defrauded consumer cannot be reimbursed. Right: Finality is irrevocability between the direct participants, and since 7 October 2024 CHAPS has had its own reimbursement rules for authorised push payment fraud, capped at £85,000 for UK retail payments.

Wrong: Finality works the same way in every system. Right: A payment can be final in one legal sense and still sit inside a clearing cycle that has not settled, so the answer is in the specific rulebook rather than in a general principle.

Wrong: In CHAPS the beneficiary’s bank receives the message and then the banks settle. Right: Under the Y-copy arrangement interbank settlement completes first, and only then is the full payment message forwarded onward.

7.99 Chapter summary in 20 lines#

1. The public has one word, “payment”, for what the industry treats as at least four events on four ledgers at four different times.
2. Clearing is the process of working out who owes what to whom; settlement is the money actually moving.
3. Clearing produces a number and settlement makes the number true.
4. Clearing happens in the world of obligations and settlement in the world of central bank money at the Bank of England.
5. The CPMI defines clearing as transmitting, reconciling and sometimes confirming transactions prior to settlement, potentially including netting, and warns that the term is often used imprecisely to cover settlement.
6. Clearing is a continuous pipeline of validation, screening, matching, queueing and sequencing rather than a meeting at six o’clock.
7. Netting is one optional step inside clearing rather than its purpose, and CHAPS clears substantially while netting nothing at all.
8. There are two settlement models: real-time gross settlement, which spends liquidity to eliminate settlement risk, and deferred net settlement, which spends settlement risk to buy liquidity efficiency.
9. Britain puts the expensive model where the exposures would be catastrophic and the cheap model where they are small, then bolts risk controls onto the cheap one until the residue is acceptable.
10. CHAPS settles each payment individually across accounts at the Bank of England for full value, and forwards the complete message only afterwards, which is the Y-copy arrangement.
11. CHAPS is around 0.5 per cent of UK payment volumes and about 92 per cent of sterling payment values, with Throughput Rules at 12:00, 15:00 and 17:00 to stop every participant waiting for everybody else.
12. Bacs is the opposite design: submission by 22:30 on Day 1, processing on Day 2, and customer entries with settlement at 09:30 on Day 3.
13. Bacs compresses something like £24 billion of daily customer value into roughly £6 billion of central bank money moving once a day.
14. The price of that efficiency is the settlement lag, a window in which agreed obligations exist between banks that have not been discharged.
15. The industry’s answer is not to shorten that window but to collateralise it, through prefunding in a segregated RTGS account and through net sender caps.
16. Your balance changing is not settlement, and treating the customer credit timestamp and the settlement timestamp as one event is the commonest error in payments engineering.
17. On 26 June 1974 Bankhaus Herstatt lost its licence after the German interbank payment system had closed, and its counterparties lost the full principal of the Deutschmarks they had already delivered.
18. Banks in New York then held back their own payments until they could see incoming ones arrive, freezing the clearing process until one in the morning for several nights and prompting the committee structure that governs payment oversight to this day.
19. Finality is a legally defined moment, conferred in the United Kingdom by designation under the Financial Markets and Insolvency (Settlement Finality) Regulations 1999, and it is distinct from consumer redress.
20. The diagnostic question in an incident is therefore never “did the payment go through” but which of authorisation, clearing, settlement and customer credit has occurred, and in whose records it can be seen.

Sources used: Bank for International Settlements — CPMI, A glossary of terms used in payments and settlement systems; Settlement risk in foreign exchange transactions (Allsopp Report, 1996); Payment, clearing and settlement systems in the United Kingdom (CPSS Red Book country chapter); Uncovering FX settlement risk: new measures from the 2025 BIS Triennial Survey, BIS Quarterly Review. Bank of England — CHAPS; A brief introduction to the Real-Time Gross Settlement system and CHAPS; Payment and settlement; Payment and settlement statistics; Extending RTGS and CHAPS settlement hours: early morning extension (2026); Financial market infrastructure supervision — Who are we (designated systems lists); Bank Underground, “BoE archives reveal little known lesson from the 1974 failure of Herstatt Bank” (June 2015). Pay.UK — Bacs Payment System; Bacs Payment System statistics; Understanding changes to the Faster Payment System Net Sender Caps. CLS Group — Settlement; Reimagining same-day FX (ShapingFX series). legislation.gov.uk — The Financial Markets and Insolvency (Settlement Finality) Regulations 1999. Payment Systems Regulator — PS24/5, CHAPS APP scams reimbursement requirement.