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The Role of the Bank of Japan in Payment and Settlement Systems

  • This is an English translation of the Japanese original paper released on September 24, 2002. The English version of the full report, which will be published in the November 2002 issue of the Bank of Japan Quarterly Bulletin, can be obtained from "set0211a.pdf" (74KB).

November 8, 2002
Bank of Japan

Introduction

The Bank of Japan performs various roles in the payment and settlement field in order to fulfill its responsibility to ensure the safety and efficiency of Japan's overall payment and settlement system. 1

The Bank provides the economy with the settlement assets with the lowest credit risk, in the form of banknotes and deposit money. Banknotes are widely used for face-to-face settlement of small-value transactions, while deposits held with the Bank 2 are mainly used to settle large-value transactions between financial institutions. Besides the two forms of money provided by the central bank, deposits held with commercial banks are also used as settlement assets, particularly for retail payments.

Since the volume and value of transactions between financial institutions are very large in total, smooth interbank settlement of funds is critical for maintaining the safety and efficiency of the nation's payment and settlement system and hence for its overall economic activity. The Bank therefore operates its own funds transfer system, which settles payment obligations between financial institutions using deposits held with the Bank as settlement assets.

In addition, the Bank oversees private-sector clearing systems that play a significant role in interbank payments, and also other payment systems it does not operate, with a view to preventing systemic disruption. In overseeing such payment systems, the Bank closely monitors their safety and efficiency in accordance with the "Core Principles for Systemically Important Payment Systems" (Core Principles; see Annex 1),3 and encourages the system operators to make necessary improvements.

The Bank also plays an important role in the securities settlement field. The safety and efficiency of securities settlement systems is essential for that of Japan's overall payment and settlement system because the completion of a securities transaction in most cases requires a transfer of funds in parallel with the transfer of securities. The Bank operates the settlement system for Japanese government bonds and bills (JGBs) and oversees securities settlement systems it does not operate, such as those for stocks. As the oversight standards for securities settlement systems, the Bank employs the "Recommendations for Securities Settlement Systems" (Recommendations; see Annex 2)4 and, where the system has payment system aspects, also the Core Principles.

Section II of this paper describes the Bank's role as a provider of settlement assets and an operator of payment and settlement systems. Section III discussesits role as the overseer of systems it does not operate. Section IV then highlights some of the Bank's recent activities in the area of payment and settlementsystems.

  1. In this paper, the term "payment and settlement systems" refers to arrangements for clearing and settling payments and securities transactions between participants according to certain standard procedures. This includes operational infrastructures such as computer systems, as well as various rules and contracts that govern the procedures.
  2. Deposits held in current accounts with the Bank.
  3. Developed by the Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries. See Core Principles for Systemically Important Payment Systems, Bank for International Settlements (BIS), January 2001.
  4. Developed by the CPSS and the Technical Committee of the International Organization of Securities Commissions (IOSCO). See Recommendations for Securities Settlement Systems, BIS, November 2001.