Outline Of Payment And Settlement Systems, And Market Infrastructures

Settlement is a process in an economic transaction that involves the exchange of money or securities. A settlement asset is an asset such as money (cash and deposit money) that is exchanged in settlement. Payment and settlement systems are the arrangements that enable settlement to take place in an organized manner. They consist of facilities such as computer network systems and a common set of rules and agreements among relevant parties. In some cases, they include relevant laws and regulations, and the term is used to mean the nation’s payment and settlement systems as a whole.

Settlement is a process in an economic transaction that involves the exchange of money or securities. A settlement asset is an asset such as money (cash and deposit money) that is exchanged in settlement. Payment and settlement systems are the arrangements that enable settlement to take place in an organized manner. They consist of facilities such as computer network systems and a common set of rules and agreements among relevant parties. In some cases, they include relevant laws and regulations, and the term is used to mean the nation’s payment and settlement systems as a whole.

Cash and deposit money are used as settlement assets. The Bank plays a major role in Japan’s payment and settlement systems as a provider of settlement assets such as Bank of Japan notes (banknotes) and deposits in financial institutions’ current accounts held at the Bank (deposits in BOJ accounts). In addition, the Bank operates a system for transferring Japanese government securities (JGSs), the Japanese government bond (JGB) Book-entry System, in its capacity as a book-entry transfer institution.

The Bank enhances the functionality and efficiency of Japan’s market infrastructures including payment and settlement systems, and contributes to ensuring that they meet international standards. 

Providing Settlement Assets and Payment and Settlement Services

The Bank provides two types of safe and convenient settlement assets. One is banknotes, which are used by many individuals (for details, see Banknotes and Coins), and the other is deposits in BOJ accounts, which are used by financial institutions. Banknotes and deposits in BOJ accounts are risk-free assets provided by Japan’s central bank, which never goes bankrupt. The key feature of deposits in BOJ accounts is that they are used to make the settlement between financial institutions final (unconditional and irrevocable).

The Bank also provides a system to settle financial transactions by using BOJ accounts. Funds transfers between BOJ accounts are used to settle interbank money market transactions, cash legs of JGB and other securities transactions, and net positions arising from private clearing systems. Debits and credits to BOJ accounts are used to settle transactions related to the Bank’s money market operations and lending transactions with financial institutions, payments and receipts of treasury funds, and the issuance and redemption of JGSs. In addition, the Bank provides a system to settle JGS transactions by debiting and crediting securities accounts.

To ensure the safety and efficiency of the payment and settlement services, the Bank operates a computer network system for the settlement of funds and JGSs, the Bank of Japan Financial Network System (BOJ-NET). 

Attaining Safer and More Efficient Payment and Settlement Systems

To ensure and further enhance the safety and efficiency of Japan’s payment and settlement systems, the Bank has taken the following measures.
The Bank has implemented countermeasures against counterfeiting and altering of banknotes, and has modified settlement methods for funds and JGS transactions.

For example, the Bank has introduced a delivery-versus-payment (DVP) mechanism for JGS transactions, in which the delivery of JGS occurs if and only if the corresponding transfer of funds occurs, and has eliminated the risk that the seller delivers JGSs but does not receive payment and vice versa.

The Bank has abolished designated-time settlement, in which payment instructions are accumulated until a specified settlement time and settled on a net basis, and has introduced real-time gross settlement (RTGS), in which payment instructions are processed immediately and individually upon receipt, provided sufficient funds and securities are available. RTGS is now the sole settlement mode for the settlement of funds and JGSs over the BOJ-NET. The introduction of RTGS contributes to the reduction of systemic risk, the possibility that a failure of one participant in a payment or settlement system will spread, through a chain of settlement failures, to other systems or to the nation’s payment and settlement systems as a whole or to the overall financial system. At the same time, given that settlement under RTGS requires a large amount of liquidity during the day, the Bank has established an intraday overdraft facility to support financial institutions’ funding.

The Bank has set out and disclosed eligibility criteria for participants in its funds transfer system and the JGB Book-entry System. Upon receiving an application from an entity seeking to make use of the Bank’s funds transfer system, for example, the Bank determines whether the applicant satisfies the requirements set out in the criteria. The eligible applicant must have, inter alia, adequate business procedures, a sound financial condition, and sufficient operational capabilities. Establishing access criteria contributes to the safe and efficient settlement in the Bank’s payment and settlement systems and eventually to that in the nation’s payment and settlement systems as a whole.

The Bank also carefully monitors and assesses the safety and efficiency of payment and settlement systems provided by institutions other than the Bank, and induces them to improve their systems if necessary. These forms of central bank activities aiming to promote the smooth functioning of payment and settlement systems are referred to as oversight. The Bank conducts cooperative oversight activities for the relevant cross-border private payment and settlement systems in cooperation with other central banks concerned.

Furthermore, the Bank participates in the Committee on Payment and Settlement Systems (CPSS), a committee established at the Bank for International Settlements (BIS), where various policy guidelines for the reduction of settlement risk are discussed. 

Improving the Market Infrastructure

To further facilitate money market operations, ensure functions of financial markets, and promote smooth corporate financing, the Bank has made various revisions/amendments to guidelines for its market operations to respond to changes in financial market conditions and the introduction of new systems. Such revisions include changes to the range of assets and collateral eligible for money market operations and operational instruments.

The Bank also works with market participants to improve the infrastructure of the money market, JGS markets, and credit markets to make Japan’s financial markets safe and highly functional and ensure that they meet international standards. 

 

. "Bank Of Japan." . . Bank Of Japan. 1.31.08 <http://www.boj.or.jp/en/index.htm>.