Real-Time Gross Settlement (RTGS) in Japan: An Evaluation of the First Six Months *
November 1, 2001
Bank of Japan
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- On the first business day of January 2001, the Bank of Japan introduced the new RTGS system, making real-time gross settlement (RTGS) the only mode for its settlement system for funds and Japanese government securities (JGSs) and abolishing designated-time net settlement.
As a preliminary to the changeover to the RTGS system, the Bank sought public comment on specific issues relating to the scheme in 1996, and then began the necessary preparations including system development. In this process, the Bank received significant cooperation from market participants with regard to changes that would need to be made in computer systems and market practices, especially those in trade and settlement, to accommodate to the RTGS system.
- Since the start of the RTGS system, the Bank's settlement system (the BOJ-NET) has been operating stably, and funds and JGS settlement between financial institutions has taken place smoothly. Financial institutions and private clearing systems have also accommodated to the new settlement method smoothly.
Examining the daily volume of transactions settled through the BOJ-NET under the RTGS system in comparison with designated-time net settlement, for funds settlement, i.e., funds transfers via current accounts at the Bank (BOJ accounts), the total value of transactions has fallen sharply. The main reason for this is that the changeover to the RTGS system has made financial institutions more aware of the risks and costs involved in settlement, leading them to review market practices for transactions such as call money transactions. For JGS settlement, the total value of transactions settled has remained more or less unchanged since the start of the RTGS system, but the number of transactions has increased substantially. This is because the new market practices require market participants to set an upper limit of 5 billion yen on the size of trades for smooth settlement.
Examination of the way funds and JGS settlement are processed in the course of the day shows that a regular pattern has emerged. Settlement takes place at a fast pace starting early in the morning trading session, given the Bank's introduction of an intraday overdraft facility to provide liquidity throughout the day, and new market practices that facilitate smooth settlement.
- RTGS is a settlement mode that limits the direct effect of the inability to pay of one financial institution, in the event that the institution becomes unable to transfer either funds or JGSs for any reason, to the immediate counterparties of that institution. The changeover to the RTGS system was aimed at reducing the systemic risk1 inherent in designated-time net settlement.
1 The risk of systemic disruptions posed to financial institutions, and ultimately to the entire financial system, through a chain of settlement failures or delays in settlement.
Following the introduction of the RTGS system, funds and JGSs are transferred and settled on a transaction-by-transaction basis, i.e., "gross" basis, unlike in designated-time net settlement where each participant's net position (the sum of the value of all the payments it has received at a particular point of time less the sum of the value of payments it has made) was calculated and settled. In designated-time net settlement, each payment was interrelated with other payments settled at the same settlement time through the netting process, but in RTGS each payment is settled individually. As a result, the systemic risk has been significantly reduced. In addition, since the changeover to real-time settlement, settlement of most transactions at the Bank is completed early in the day. The earlier timing of settlement has also contributed to the reduction of systemic risk by significantly reducing the amount outstanding of transactions remaining unsettled on the settlement day.
- These developments show that the Bank's changeover to the RTGS system for funds and JGS settlement has taken place smoothly, successfully reducing systemic risk as planned. It constitutes a substantial improvement in the stability of Japan's financial infrastructure. The changeover to the RTGS system is an important factor contributing to more active trading in Japan's financial markets.
It is worth noting, however, that innovation in information technology has been going forward at a remarkable pace in recent years, and that the specific nature of services demanded of the settlement system continues to change. The challenges that the Bank will continue to face will be how best to incorporate technological innovations in the BOJ-NET to further enhance the safety and efficiency of the system for its participants.
The Bank of Japan will continue to make unceasing efforts to improve the safety and efficiency of the BOJ-NET and Japan's payment and settlement system as a whole in close cooperation with market participants and the operators of private clearing systems.