August 1997
Bank of Japan

Introduction

In December 1996, the Bank of Japan published a consultation paper that outlined its plans to restructure the funds transfer system of the Bank of Japan Financial Network System (BOJ-NET). The Bank plans to abolish designated-time settlement and make real-time gross settlement (RTGS) the only settlement mode by the end of the year 2000. The paper also drafted the main features of RTGS after the restructuring, and the Bank requested comments and suggestions from current account holders with the Bank of Japan (BOJ account holders), the operators of private clearing systems, and other interested parties. Overall, the Bank's proposal was strongly supported, and the Bank received a number of constructive comments and suggestions on its proposal.

On the basis of its December proposal and the comments and suggestions received, the Bank released on April 1, 1997 a framework for abolishing designated-time settlement and making RTGS the only settlement mode in the BOJ-NET funds transfer system (see Box 1).

I. The Framework for Restructuring the BOJ-NET Funds Transfer System
A. Abolition of Designated-Time Settlement to Make RTGS the Only Settlement Mode for BOJ-NET by the End of the Year 2000

Bank of Japan will abolish designated-time settlement, thereby making real-time settlement the only way to settle funds transfers among participants by the end of the year 2000.

Settlement for funds transfers resulting from the Bank's market operations for bonds and bills and the Bank's payments/receipts related to treasury funds and Japanese government securities (e.g., payment of principal and interest), most of which are currently made by designated-time settlement, will be effected by "simultaneous settlement." Simultaneous settlement is a form of net settlement whereby individual participants' payments to and receipts from the Bank are netted out on a bilateral basis between the Bank and that participant, and the resulting net settlement positions of participants are credited and debited on their BOJ accounts simultaneously at designated times. The Bank will adopt simultaneous settlement for most of these types of funds transfers between the Bank and participants because systemic risk is not involved in the settlement process and there is a need to ensure the simultaneity, or equality, of the timing of crediting and debiting among participants. Simultaneous settlement is distinct from the current designated-time settlement, which is made on a multilateral netting basis, in that the Bank can exclude funds transfers vis-a-vis a defaulting participant promptly and complete the settlement of funds transfers vis-a-vis the remaining participants on schedule.

B. Intraday Liquidity to Be Provided by the Bank of Japan

Bank of Japan will provide intraday credit to cover a liquidity shortfall for individual participants.¹ Terms for providing intraday liquidity will be as follows.
(1) Liquidity will be provided in the form of fully collateralized intraday overdrafts. Collateral is subject to the current eligible collateral the Bank defines for credit extension.
(2) Intraday liquidity will be provided for all BOJ account holders that apply for the liquidity facility.
(3) A quantitative limit will not be imposed on the amount of intraday liquidity at the outset of the restructured system.
(4) Interest will not be charged on intraday overdrafts.
(5) If the provided intraday liquidity is not repaid by the end of the business day, a considerable penalty interest rate to be determined will be applied. If a participant repeatedly causes such a situation, the Bank may take further steps to avoid repetition by that participant.

C. Net Settlement Positions of Private Clearing Systems to Be Settled through Special Settlement Accounts via BOJ-NET

Settlement of participants' net positions stemming from privately operated clearing systems, which is currently made by designated-time settlement, will be effected on an RTGS basis through a settlement account each private clearing system will open at the Bank.² For each clearing system, settlement will occur in the following manner: funds from debtor participants will first be transferred on an RTGS basis to the settlement account of that system by a specified time and, after the transfer of all debtor participants' funds is completed, the transfer of funds from the settlement account to all creditors' participants will be made on an RTGS basis.

To facilitate business processing of participants and other concerned parties, the Bank is considering the business specification of the transfer method through the settlement account so that operators of private clearing systems, as agents of all debtor participants, can initiate RTGS transfers from all debtor participants to the settlement account, as in the case of transfers from the settlement account to creditor participants.

D. Japanese Government Securities (JGS) Will Be Settled on an RTGS Basis over the BOJ-NET JGS Transfer System

Based on the opinions received during the consultation process, the Bank also intends to abolish designated-time settlement (currently at 3 p.m.) and make RTGS the only mode of settlement for JGS over the BOJ-NET JGS transfer system by the end of the year 2000, in accordance with the restructuring of the BOJ-NET funds transfer system.³

This may require participants to review their current settlement practices to a considerable extent. For example, they might be required to introduce a clearing mechanism outside the central bank and streamline business processing to ensure the smooth settlement of JGS transactions on an RTGS basis. The Bank will give its utmost support to efforts to establish new settlement practices under the RTGS environment. Furthermore, the Bank is examining the possibility of setting up an arrangement to provide intraday liquidity for delivery-versus-payment (DVP) transactions so that a buyer of JGS can post the incoming securities as collateral at the Bank in order to obtain the intraday funds needed for the payment for the transaction concerned. Further details of the arrangement will be determined on the basis of the ways in which new settlement practices will be established, as well as institutional and technical constraints.

1. No central queuing arrangement will be provided.

2. The systems include the Bill and Cheque Clearing System, the Foreign Exchange Yen Clearing System (FEYCS), the Zengin System, and the Tokyo International Financial Futures Exchange (TIFFE). At present, settlements of net positions resulting from these systems occur at the following designated times:

	Bill and Cheque Clearing System and TIFFE:	1 p.m.
	FEYCS:	3 p.m.
	Zengin System:	5 p.m.

3. The exact time frame for the abolition of designated-time settlement for JGS will be determined by taking account of progress made in settlement practices and the time required to develop the system supporting a special arrangement for intraday liquidity as stated above.
As in the BOJ-NET funds transfer system, the BOJ-NET JGS transfer system enables participants to choose either real-time or designated-time (3 p.m.) settlement for JGS. In this sense, the BOJ-NET DVP system, which was introduced in April 1994, is considered to have the functions of both Model 1 (real-time mode) and Model 3 (designated-time mode). The Bank's proposal means that it intends to base the BOJ-NET DVP system solely on Model 1 DVP operating in real time. See Delivery versus Payment in Securities Settlement Systems, the Bank for International Settlements (September 1992).