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Introduction of DVP Mechanism for Settlement of Commercial Paper 1

  1. The Bank released the Japanese original of this statement on March 31, 2003.

June 19, 2003
Bank of Japan

On March 31, 2003, the Japan Securities Depository Center (JASDEC) started operation of a book-entry transfer system for dematerialized commercial paper (CP).This new system, together with the Bank of Japan's BOJ-NET Funds Transfer System with newly added functions, have achieved delivery versus payment (DVP)2for settlement of CP transactions.

  1. 2DVP is a link between a securities transfer system and a funds transfer system that ensures that delivery occurs if, and only if, payment occurs, and vice versa.The settlement of securities transactions on a DVP basis eliminates principal risk.

CP is issued by firms and banks for financing, and is traded as a financial instrument in the money markets.Before the start of the new system, since CP could be issued only as promissory notes, physical certificates were required to create, transfer, and exercise the rights of holders.This caused significant difficulties in achieving the safety and efficiency of CP settlement.For example, it was costly and time-consuming to create and transport certificates.It was also impossible to achieve DVP settlement with physical securities.To address these problems, a new legal framework 3was established, making possible the dematerialization of CP, and the online system was developed for operation under the new framework.

  1. 3The Law Concerning Book-Entry Transfer of Short-Term Corporate Debt Securities, which enabled dematerialization and book-entry transfer of CP, became effective on April 1, 2002.The Law was later amended and renamed the Law Concerning Book-Entry Transfer of Corporate and Other Debt Securities (hereafter "Transfer of Corporate Debt Securities Law"), which became effective on January 6, 2003.The amended Law made possible the dematerialization of various types of debt securities including Japanese government bonds and bills and corporate bonds, as well as the book-entry transfer of these debt securities in a tiering arrangement, where the transfer institution is in the top tier and account-management institutions in the lower tiers.In the law, CP is referred to as "short-term corporate debt securities."

To achieve DVP for settlement of CP transactions, the Bank added new functions to the BOJ-NET Funds Transfer System, enabling processing of individual transfers of CP in JASDEC to be linked with processing of funds transfers over current accounts with the Bank.Specifically, payments for CP transactions are distinguished from other payments processed within the BOJ-NET Funds Transfer System.In addition, JASDEC is notified of the processing of these payments. By using these functions, it has become possible for JASDEC to transfer CP if, and only if, the payment for that transaction has been completed.

An institution that would like to receive notification from the Bank regarding the processing of funds transfers over current accounts at the Bank is approved if the following conditions are satisfied: (1) the applicant is a transfer institution for short-term corporate debt securities designated under the Transfer of Corporate Debt Securities Law; (2) it requests such information for the purpose of achieving DVP using funds transfers over current accounts with the Bank; and (3) it has adequate operational capabilities.

It is expected that the dematerialization of CP and the achievement of book-entry transfer on a DVP basis will significantly enhance the safety and efficiency of CP settlement.The Bank will continue to contribute to the further improvement of Japan's securities settlement systems, in cooperation with relevant parties.