- Jun. 29, 2020
- Jun. 29, 2020
- Jun. 5, 2020
Settlement is a process in an economic transaction that involves the transfer of money or securities. A settlement asset is an asset such as money (cash and deposit money) that has been transferred. 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 refer to the nation's payment and settlement system as a whole.
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.
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, the cash legs of Japanese government bonds (JGBs) and other securities transactions, and net positions arising from private-sector clearing systems. Debits and credits to BOJ accounts are also 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 Japanese government securities (JGSs). In addition, the Bank provides a system to transfer JGSs by debiting and crediting securities accounts.
To ensure the safety and efficiency of its settlement services for funds and JGSs, the Bank operates a computer network system, the Bank of Japan Financial Network System (BOJ-NET).
The Bank takes a range of measures to ensure and further enhance the safety and efficiency of Japan's payment and settlement systems.
One of the major contributions made by the Bank has been the enhancement of the BOJ-NET Funds Transfer System (BOJ-NET FTS) and BOJ-NET JGB Services. For example, the Bank has introduced a delivery-versus-payment (DVP) mechanism for JGS transactions, in which the delivery of JGSs occurs if and only if the corresponding transfer of funds occurs. The DVP mechanism eliminates the risk that the seller delivers JGSs but does not receive payment and vice versa.
The Bank has been taking other measures to reduce 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 overall financial system. In particular, the Bank has introduced real-time gross settlement (RTGS) as the sole settlement mode for BOJ-NET FTS and BOJ-NET JGB Services (in which payment instructions are processed immediately and individually upon receipt, provided sufficient funds and securities are available), abolishing designated-time settlement (in which payment instructions are accumulated until a specified settlement time and settled on a net basis). At the same time, given that settlement under RTGS requires a larger amount of liquidity during the day, the Bank has established an intraday overdraft facility to support financial institutions' funding.
Following the conversion to RTGS, the Bank has been working on the next-generation RTGS (RTGS-XG) project of the BOJ-NET FTS, which will enable large-value payments previously handled by the two private-sector deferred net settlement (DNS) systems -- the Zengin Data Telecommunication System (Zengin System) and the Foreign Exchange Yen Clearing System (FXYCS) -- to be brought within the BOJ-NET FTS. As part of the project, the Bank introduced liquidity-saving features into the BOJ-NET FTS.
The Bank sets out and discloses 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 system as a whole.
The Bank also carefully monitors and assesses the safety and efficiency of the design, risk management, and operation 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 are referred to as oversight. The Bank conducts cooperative oversight activities for the relevant cross-border payment and settlement systems in cooperation with other central banks concerned.
Furthermore, the Bank participates in the Committee on Payments and Market Infrastructures (CPMI), a central bank forum to discuss various policy issues and to develop internationally recognized standards on payment and settlement systems.