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Evolution of Payment Systems based on Technological Progress
Masashi NakajimaProfessor
Reitaku University
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1. Payment Systems
1.1 Importance of Payment SystemsPayment system is a mechanism that facilitates smooth transfer of
funds am ong finan cial inst itu tions. Genera lly, it consists of a set of
instruments, procedures, rules and technical bases, like computers and
networks. It sometimes referred as int erbank funds tra nsfer system.
Payment systems 1 are the important social infrastructures that
support t he whole nat iona l economic activities. Every comm ercial tr ade
an d fina ncial t ra nsa ction will be finalized, only when t he final sett lement is
ma de th rough payment systems. If some malfunctions ever happen in a
payment system, which prevent th e smooth tr ansfer of funds, th e na tiona l
economy and finan cial ma rk ets would be thr own int o extrem e confusion a nd
seriously dam aged. Therefore, safe an d efficient payment system s ar e
critical to the effective functioning of national economies and financial
systems.
1.2 Payment Systems and Information Technology
In the early stages, settlements among the banks used to make by
exchan ging paper payment instr uctions. But, as th e number of payments
increased substantially, it became quite difficult to transfer of funds
smooth ly by paper instr uctions and man ua l ha ndling, So, people tr ied to
ut ilize th e inform at ion technology (IT) to payment system . This endeavor
resulted in developing electronic payment systems which were equipped
with comput ers an d networks.
Host comput ers of settlement institut ions a re linked to the t erminals
or compu ter s of th e par ticipan ts via n etworks in electr onic payment systems,.
These systems used to be called electronic payment systems at first, but
the name shortly became obsolete and these systems came to be called
simply as payment systems, since most major payment systems became
1 Pa yment systems a re genera lly divided into two cat egories: lar ge-value paymen t
systems and retail payment systems. Large-value payment systems facilitat e
paymen ts, genera lly of very lar ge am ount s, which ar e mainly excha nged between bank s
and usua lly require urgent and timely settlement. Retail payment systems han dle
ma inly consu mer paymen ts of relat ively low value an d urgency. As large-value
paymen t syst ems ar e the most significan t pa yment s ystems for t he na tional economy,
hereinafter payment system means large-value payment system in th is chapt er, if nototherwise specified.
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electronic.
In Japan, it was April of 1973 for the Zengin System, October 1988
for BOJ-NET and March 1989 for the FXYCS to become electronic paymentsystems.
2. Evolution of Payment Systems
Dur ing th e past fifteen year s, payment systems h ave evolved in step
with the progress of inform at ion technology. In th e ear ly days, electr onic
paymen t systems could m ake net ting pr ocessing only once a da y an d pr ocess
payments in ra th er simple man ner. Gradu ally, payment systems have
become to be capable of real-time settlement, continuous processing and
ha ndling of payment s with complicat ed algorit hm s.
2.1 From DTNS to RTGS
(1) DTNS System and RTGS System
The first evolution of payment systems wer e observed in th e systems
th at were opera ted by cent ra l bank s. The evolut ion was from the DTNS
systems t o th e RTGS systems.
In many countries, when the electronic payment systems were
int roduced, they were th e Designat ed-Time Net Sett lement (DTNS) systems.
The DTNS is a net sett lement syst em, th us t he sett lement of fun ds occur s on
a net basis. In concrete term s, a net position of each par ticipat ing bank is
calculated, which is defined as the sum of the value of all the transfers a
par ticipant has received up t o a part icular point in time minu s th e value of
all tr ansfers it has sent . The DTNS is a designated-time settlement system,
in which final sett lement ta kes place at a cert ain t ime, usua lly at th e end of
th e day. In short , fina l sett lement of net positions occur s at t he end of th e
day in th e DTNS system.
On t he other h an d, the Real-Time Gross Settlemen t (RTGS) systems
ha ve two feat ur es. The first featu re is th at t he sett lement of funds occur s
on a gross basis, which means payment instructions are processed
one-by-one basis without net tin g. The second feat ur e is final sett lement is
ma de on a rea l-tim e basis dur ing th e day. Thu s th e paymen ts become final
immediately.
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(2) Merits of RTGS System
The RTGS system is superior in reducing settlement risks to the
DTNS system. Settlement risk is the risk that pa rt icipant of paymentsystem su ffer a loss becau se oth er pa rt y does not ma ke paymen ts a s expected.
Sett lement risk includes credit r isk, liquidity risk, legal risk, opera tional risk
and systemic risk.
The DTNS system tends to be vulnerable to settlement risks.
First ly, unsett led payment instr uctions a ccum ulate unt il the end of the day
in the DTNS system . Therefore, un til th e final settlemen t is completed at
th e end of th e day, th e sett lement r isks still exist. On the oth er han d, th e
RTGS system processes each payment instruction one-by-one and makes
th em final durin g th e daytim e. Thus , th e RTGS system can effectively
reduce th e sett lement risk.
Secondly, systemic risk is the keyword. This is the risk t ha t t he
failure of one participant to meet its required obligations will cause other
par ticipan ts to be un able to meet th eir obligations when due. Such a failur e
may cause widespread liquidity or credit risk problems and, as a result,
might th rea ten th e sta bility of finan cial ma rk ets. As overseers of paymen t
systems, cent ra l ban ks ar e par ticularly concerned with systemic risk. The
DTNS system ha s potent iality of system ic risk, becau se if one pa rt icipant is
un able to sett le its n et debit position, th e payment system h as t o recalculat e
a n ew set of net positions for ea ch of th e rem ainin g par ticipan ts by deleting
th e tr an sfers involving defau lt par ticipan t. This procedur e is called
un winding. The un winding could lead to un expected cha nges to th e net
positions of remaining participants, which could result in further knock-on
effects or a cascade of sett lement failures. On th e oth er ha nd, ther e is no
possibility of systemic risk in the RTGS system, because each transfer of
funds becomes fina l inst an tly dur ing th e day and n o need for u nwinding.
Hence, the RTGS system is more robust to sett lement r isk tha n t he
DTND system. However, the elimina t ion of r isk comes at t he cost of an
increased deman d for int ra day liquidity. This is only th e demer it of RTGS.
Due to make up for such liquidity demand, central banks usually provide
intr aday credit to th e part icipants in th e RTGS system. Even th e intr aday
credit is provided with no fee, the in tr ada y liquidity is n ot cost-free, becau se
collater al is r equired for th e int ra day credit, which leads t o collater al cost.
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(3) Introduction of RTGS System
By 1985, th ere were only thr ee coun tr ies tha t implemen ted t he RTGS
system; nam ely, United Sta tes, Denmar k and Nether lands. Fr om the lat e1980s, th e nu mber of RTGS system s increa sed gra dually especially in
industrialized countries, which include RIX in Sweden (1986), SIC in
Switzerlan d (1987), EIL-ZV in Ger ma ny (1988) an d BI-REL in It aly (1989).
In E ur opean Un ion (EU), th e RTGS system spread r apidly in th e late
1990s. It was becau se th e TARGET 2 system was planned to accommodate
th e Economic an d Monet ar y Un ion (EMU). TARGET is the payment
system for th e whole eur o area an d be developed by conn ecting t he pa yment
systems of each member coun tr y. The cent ra l ban ks of EU were obliged to
adopt t he RTGS system as a precondition t o link t o the TARGET system. F or
th is purpose, they reconstr ucted their payment systems a s th e RTGS system
in 1996-97 one a fter a nother.
Influenced by these movements, some Asia-Pacific countries also
int roduced t he RTGS system s in la te 1990s, which included t he BOK-Wire in
South Korea (1994), the BAHTN ET (1995), th e CHART in H ong Kong (1996),
the MEPS in Singapore (1996), RITS in Australia (1998), and the EAES in
New Zealan d (1998).
The use of the RTGS also grew outside industrialized countries.
Some countries in Eastern Europe, Latin America, Middle East, and Africa
were similar ly reported to ha ve th e RTGS systems. Some of th ese coun tr ies
were char acterized to const ru ct t he electr onic payment systems from scra tch
as a RTGS system. According to the sur vey of Feder al Reserve Ban k of New
York , 90 out of the 174 coun tr ies in th e world a dopted a RTGS system a t th e
end of 2005 (Bech & Hobijn 2006). By this mean s, the adoption of RTGS
system becam e th e global tr end of paymen t syst ems.
(4) Adoption of RTGS in Japan
The adoption of th e RTGS system in J apa n is ra th er special. When
th e Bank of J apa n (BOJ ) developed the BOJ -NE T in 1988, th e BOJ-NET ha d
two modes; th e DTNS mode an d th e RTGS mode. Some argues th at t he
RTGS system was int roduced to th e BOJ-NET a t t ha t point (Bech & Hobijn
2 TARGET (Trans-European Automated Real-time Gross settlement Express Transfer)
system. TARGET links th e RTGS systems of EU coun tr ies to facilita te the
cross-border sett lement of Eu ro. Only RTGS systems were permitt ed to be linked toTARGET system becau se TARGET was d esigned as a RTGS system a s a whole.
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2006). But actua lly, th is wan not th e case. The RTGS mode was seldom
used3 by part icipant s due t o th e liquidity cost, an d we should conclude t ha t
the characteristic of old BOJ-NET was basically the DTNS system then.The BOJ changed the BOJ-NET into the RTGS system by abolishing the
DTNS mode in J anu ar y 2001. At this moment, the BOJ-NET was
tr an sform ed from t he de facto DTNS system int o th e real RTGS system.
Table 1 Timing of th e int roduction of RTGS system in selected coun t ries
Figur e 1 Num ber of coun tr ies th at adopt th e RTGS system
2.2 Hybrid System
(1) Feature of Hybrid System
The second evolution of payment system was emergence of Hybrid
System. The Hybrid System mea ns th e combina tion of th e best feat ur es of
th e DTNS system a nd t he RTGS system.
The Hybrid System derived from the DTNS system, in which final
sett lement t ak es place only once at t he end of th e day. In th e Hybrid
System, net settlements ar e made a t frequent intervals or cont inuously and
tr an sfer of fun ds become final at th e tim e of frequen t net sett lement s. The
DTNS ha s a disadvan ta ge th at tr an sfer of funds become fina l only at t he end
of the day, even though it has an advantage that settlement can be made
with sma ll liquidity only for th e net position. With t he frequen t net
settlement, the Hybrid System keeps the merit of the DTNS system, i.e. the
sett lement capa bility with sm all liquidity, and a dditiona lly rea lizes th e merit
of th e RTGS, th at is early finality. Tha t is th e rea son why this system is
called Hybrid System. This system is also somet imes referr ed as the
Cont inuous Net Set tlemen t (CNS) system, compa red t o th e DTNS system.
3
In Sept ember 2000, only 0.1% in t erms of am ount was pr ocessed by th e RTGS mode,th e rest were han dled by the DTNS mode.
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(2) Examples of Hybrid System
The first Hybrid System in th e world was EAF2 in Germ an y. It
becam e Hybrid system from th e DTNS system in Mar ch 1996. In EAF2,bilateral netting settlements were made every twenty minutes in the
morning session a nd t wo mu ltilat eral nett ing sett lement s were made in th e
after noon session. The sett lement s becam e fina l at each net tin g sett lement .
Following EAF2, LVTS in Can ada , PNS in F ra nce, an d CHIP S in US
becam e Hybrid during 1999-2001. In th ese systems, net ting was made
cont inuously based on t he sett lement event , like receipt of new paymen t a nd
addit ion of liquidity, instea d of at r egular t ime int ervals. In th is way, th e
adoption of the Hybrid system for net settlement systems became the trend
in industrialized countries.
The CHIPS is the latest and the most advanced Hybrid System, in
which the system judges the capability of net settlement for each payment
inst ru ction, an d net sett lement is made cont inuously, if possible. The
system, which is called balanced release engine, selects the processing
mode from the three types: individual release, bilateral release and
multilateral release, according to the available balance of payer and payee
an d incoming and out going paymen t situa tion. Bilat era l release is just like
bilat era l net ting between two par ticipan ts. Multilat era l release is a kind of
mu ltilat eral netting among more th an t hr ee part icipants.
Even though these systems belong to the same category of Hybrid
System, the processing method of the payments has been progressed in
accordance with the technological progress.
(3) Situation in Japan
In J apa n, the FXYCS is still opera ted as a simple DTNS system. We
find ourselves with no choice but to feel uneasy to look at the out-of-date net
set t lemen t system . To our r elief, however, th e project is going on to enh an ce
th e FXYCS and redu ce the settlemen t r isk. This project will be described
below.
Table 2 Int roduction of Hybrid System in selected coun tr ies
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2.3 Integrated System
(1) Feature of Integrated SystemNext evolution of payment system was the transition to the
Int egra ted System. The Int egra ted System is defined as the payment
system which has both the RTGS function and the Hybrid function.
Pa rt icipants of the Int egra ted System can u se both functions a s th e situat ion
dema nds. For exam ple, par ticipan ts can use th e RTGS fun ction for th e
urgent payment and time-critical payment, while they can use the Hybrid
function for non-ur gent payment . The Hybrid fun ction perform s cont inuous
or frequent settlement and is often referred as liquidity saving mode,
because pa rt icipants can execut e th eir payment with sm all balance in t heir
deposit a nd can save th e liquidity.
(2) LVTS in Canada
The pioneer of the Integrated System was the Large Value Transfer
System (LVTS) in Cana da. The LVTS sta rt ed its opera tion in Febru ar y
1999. The LVTS ha s two functions of paymen t. One is called Tran che 1,
which is the RTGS mode. The oth er is called Tra nche 2, which is th e
liquidity saving mode. Pa rt icipant s can select either Tra nche 1 or Tra nche
2 and send t heir payment instru ction t o th e appropriate Tra nche.
(3) PIS in France
The second In tegrat ed System was th e Par is Integrat ed System (PIS)
in Fr an ce. Fr an ce ha s two large-value paymen t systems of Eu ro. One is
th e Pa ris Net Settlement (PNS), which became the Hybrid System from th e
DTNS system in April 1999, operated by CRI 4. Another is th e Tra nsferts
th e Banqu e de Fra nce (TBF), which is th e RTGS system operat ed by Banqu e
de Fra nce. In Apr il 1999, CRI developed liquidity bridge between t he TBF
an d the PNS. Liquidity bridge is th e scheme that pa rt icipants can tr ansfer
liquidity between the two paymen t systems at an y time of th e day. In th is
way, although t he PNS and th e TBF a re t wo payment systems, th ey became
4 Centrale des Rglements Interban caires. Created in J anu ary 1995, CRI man ages
th e PNS. The shareholders of CRI are French credit inst itut ions and Banque de
France.
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closely linked. So even th ough th ese ar e two independent pa yment systems,
th ey look to th e par ticipan ts as one combined payment system . Therefore,
th ese two systems ar e called PIS (Par is Integrat ed System) as a whole andregarded as a kind of Int egra ted System.
(4) RTGSplus in Germany
The RTGSplus in Germany was the third Integrated System, which
sta rt ed opera tion in November 2001. RTGSplus ha s t wo modes; EX payment
mode an d Limit payment m ode. The EX paymen t mode is th e RTGS
sett lement for high priority paymen t. And the Limit payment m ode is
liquidity saving element with cont inuous offsett ing sett lement . When a
payment instru ction is sent to the system, a special algorith m searches the
central queue to see if some set of payment instructions might offset each
oth er. Once such a set of paymen t inst ru ctions is foun d, th ese inst ru ctions
ar e sett led in the form of offsett ing. Offsett ing mea ns th e simu ltan eous
booking of outgoing payment and incoming payment, and the effect of the
offsett ing is quite similar t o th e net tin g. In th e Limit payment mode,
par ticipan ts can set sender limit bilat era lly or m ult ilater ally to cont rol th eir
own liquidity. Pa rt icipant s can ma na ge th eir liquidity in a single liquidity
pool an d can use t wo modes accordin g to th e priority of th e paymen t.
(5) TARGET2
In EU, there is a project to reconstruct the decentralized TARGET
and make it into the system with common infrastructure, which is called
TARGET2. The TARGET is plan ned to sta rt operat ion in November 2007.
Advanced features of RTGSplus, new BI-REL and PIS are planned to be
tr ansplant ed to the TARGET2. Thus, it is designed as an Integrated
System with RTGS mode an d liquidity saving mode. In addit ion, new
features would be introduced in the TARGET2, including liquidity control
with sender limits, prioritization of payments, and liquidity reservation for
ur gent payment . Thu s, th e TARGET2 would be th e one of th e most
advan ced payment syst ems, tra nsform ed from th e simple RTGS system.
Table 3 Int roduction of Int egrat ed System
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3. Next-Generation RTGS Project in Japan
The Bank of Japan (BOJ) plans to enhance its RTGS system to asophist icat ed system. This project is called Next-Gener at ion RTGS
(RTGS-XG) project of the BOJ-NET.
3.1 Background of the RTGS-XG Project
In Japan, there are three payment systems: the Bank of Japan
Financial Network System (BOJ-NET5), th e Foreign Exchange Yen Clear ing
System (FXYCS), and the Zengin Data Telecommunication System (Zengin
System). The BOJ-NET is opera ted by th e BOJ , an d two privat e-sector
paymen t syst ems, th e FXYCS an d th e Zengin System, ar e opera ted by Tokyo
Ban ker s Associat ion (TBA).
The BOJ-NET is the RTGS system and mainly used for the funds
tr ansfers for m oney mar ket t ran sactions a nd govern ment bond t ra nsactions,
settlement of net positions of private-sector netting systems, and funds
tr an sfers ar ising from BOJ s open ma rk et opera tions. Pa yment
instr uctions pr ocessed in th e BOJ-NET a re m ainly inter-bank tr ansa ctions
an d ar e very high value payment s. As mentioned above, th e BOJ -NE T
became t he RTGS system form th e DTNS system in J anu ar y 2001.
The FXYCS is basically a DTNS system that handles yen payments
to sett le foreign excha nge tr ades. Most of th e tr an sactions tha t are
processed by this system are yen leg settlements of foreign exchange
tr ansa ctions and intern at ional treasur y settlements. The FXYCS has the
RTGS mode as well as t he DTNS m ode, although t he u se of the RTGS mode,
which includes the sett lement for CLS ban k, is quit e limit ed.
The Zengin System is a nationwide electronic fund transfer network
ma inly for cust omer payment s. Almost all fina ncial instit ut ions in Ja pan ,
more than 2 thousand institutions, are participants of the Zengin System
an d use this system ma inly for cust omer paymen ts. As ma ny of th e
payments made through this system are consumer and commercial
payments, th e tr ansa ction volume ar e huge, but amount of each payment is
ra th er small. In addition to single payments, the system also support s
5 The BOJ-NET compr ises two systems : a system for funds t ra nsfer (BOJ -NE T Fun ds
Tran sfer System) and a system for the settlement of Ja panese Government Bonds
(BOJ -NET J GB Services). In th is cha pter, BOJ -NET Fu nds Tra nsfer System (FTS) isreferred simply as BOJ -NE T.
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bat ch payment s, such as payroll an d pension payment s. The Zengin
System is a DTNS system, whose final set tlemen t of net positions t ak es place
at th e end of th e day at th e curr ent a ccount of th e BOJ .The BOJ-NET and the FXYCS are mainly for the interbank
payments and char acterized as lar ge-value payment systems. On the oth er
ha nd, the Zengin System is ma inly for th e customer payment s an d regarded
as a retail payment system. But, we have to pay some atten tion tha t some
lar ge-value payment s are also processed in the Zengin System . Tha t is
because of a historical reason; international related payments are assigned
to the FXYCS by law, and domestic payments are handled by the Zengin
System.
3.2 Outline of the RTGS-XG project
The RTGS-XG pr oject cons ists of two sub-project s. The first
sub-project is to add liquidity-saving featu res (LSF) to th e pur e RTGS mode
of th e BOJ -NET. The second sub-pr oject is to incorp orat e lar ge-value
payments currently handled by two private-sector DTNS systems, the
FXYCS an d th e Zengin System, int o th e new RTGS system with t he LSF.
(1) Sub-project A
The sub-project A is to add t he LSF int o th e BOJ -NE T. The LSF
consist s of Centr alized Queu ing Fu nction a nd Offsett ing Fu nction.
i ) Centralized Queuing Function
As th e cur ren t BOJ -NE T doesnt h ave cent ra lized queue, if a sen ding
bank doesnt have enough liquidity at th e cur rent accoun t a t th e BOJ, th e
payment instruction is rejected by the system and send back to the bank.
Once centralized queue is constructed in the BOJ-NET, the payment order
that is not covered by adequate liquidity would be suspended in the queue.
Each participant can actively control the payment instructions in the queue
for the efficient settlement, which includes monitoring, setting the priority,
reordering an d can cellat ion of th e payment inst ru ctions.
ii ) Offsetting Function
Offsetting means the simultaneous processing of outgoing and
incomin g paymen t order s. The offsett ing algorit hm sear ches for the
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participants who have submitted payment orders for each other, and
calcula tes the net inflow an d out flow. If th e net out flow ha s sufficient cover,
which m eans t he credit balance of the debited par ticipant is lar ger th an th enet outflow, the system process the incoming and outgoing payment order
simu ltan eously. The out come of th e offsett ing is exactly th e same as t he
netting of the two payment orders. Only the difference is whether two
individua l payment order s ar e processed or a net am oun t is processed.
In the RTGS-XG project, two kinds of offsetting are planned to be
int roduced. One is bilat era l offsett ing, in which paymen t order s are
processed between the two par ticipan ts. Bilat era l offsett ing is regar ded as
the main function for settlement, and the algorithm will run when certain
movemen ts t ake place in th e system, including subm ission of a n ew payment
instruction, increase in credit balance, and settlement, reordering or
can cellat ion of a top-queu ed paymen t. The oth er is mu ltilater al
offsetting, in which payment orders are processed among more than three
par ticipan ts. Multilat era l offsett ing is regar ded as th e complemen ta ry
function to the bilateral offsetting, and the algorithm will run at designated
t imes of the day. The execution times of mu ltila ter al offsett ing will be set
when there are fewer events initiating bilateral offsetting, since while the
multilateral algorithm runs, the receipt of the new payment orders will be
suspen ded. With th ese two offsett ing functions, rea l-tim e gross sett lement
will be possible in a faster pace with less liqu idity.
iii ) LSF account
Participant who wants to use the LSF should open the special
accoun t , th e LSF account , in th e RTGS-XG. The LSF account is
independent from th e cur ren t a ccoun t of th e BOJ -NE T, thu s each pa rt icipant
should ma na ge the liquidity of two accoun ts 6.
Par ticipant can tr an sfer th e liquidity at a nytime during the daytime
between th e cur ren t accoun t and the LSF accoun t. Alth ough the overdra ft
is not a dmit ted at th e LSF accoun t, par ticipan t can obta in liquidity from th e
BOJ th rough th e overdra ft facility at th e cur ren t accoun t. While th e
opera tin g hour of the cur ren t accoun t is from 9:00 to 17:007, participant can
6 Reasons to set up indepen dent LSF account include t he considera tions for t ra nsa ction
processing perform an ce an d for sm ooth system development.7 Par ticipant can extend the operating hour unt il 19:00 with a perm ission of th e BOJ.
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use th e LSF accoun t from 9:00 to 16:30. At 16:30, all the balan ces at t he
LSF accounts will be automatically transferred to the current accounts,
which mea n t he balan ce of th e LSF will be zero at th e end of th e day. Ifth ere ar e some rema ining payment orders in t he queue at th e end of the day,
these orders will be cancelled automatically.
The incomin g and out going paymen t to/from a LSF a ccoun t should be
processed only against th e LSF a ccoun t of oth er pa rt icipant s, an d cant be
processed against t he cur ren t accoun ts of oth er par ticipan ts.
Most t ra nsa ctions between par ticipan ts can be processed th rough th e
LSF. Although some tr an sactions should be execut ed only at t he cur ren t
account, which includes the transaction involving the BOJ and the
government, net settlement of clearing systems (Bill and Check Clearance
and Zengin System), the Delivery versus Payment (DVP) settlement of
J apa nese Governm ent Bonds (J GB) an d corpora te bonds.
(2) Sub-project B
i ) Current situation of large-value payment in Japan
The large-value payments in Japan are divided into three payment
systems. First of all, th e BOJ-NET is the main settlement channel of
lar ge-value paymen ts a nd set tled 88.3 tr illion yen on a da ily avera ge basis in
2005. The second one is th e FXYCS, which han dles ma inly foreign
excha nge related payment s. The FXYCS sett led 16.4 trillion yen per day in
2005. The last one is th e Zengin System , which is usu ally regar ded as a
ret ail paymen t system. However, a par t of paymen ts in Zengin System,
0.2% of tota l volume, ar e large-value paymen ts t ha t a re 100 million yen a nd
up . These 0.2% lar ge-value paymen ts account s for 65% of tota l value, which
is equivalent t o 6.2 tr illion yen per day in 2005.
These divided lar ge-value payment s lead to some issues. Fir st of all,
despite t he Zengin System is char acterized as a reta il payment system and
deploys the risk management scheme for small value payment, the System
also handles large-value payments and there is a mismatch between the
payments an d the risk ma nagement. Secondly, th e Zengin System and th e
FXYCS ar e both th e same kind of paymen t system , i.e. the DTNS at th e end
of th e day. It used to be th e request of th e law8 to divide foreign exchange
8 Foreign Excha nge an d Foreign Tra de Cont rol Law us ed to strictly restr ict t he foreign
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relat ed payment s from domest ic paymen ts, but th e law was r adically revised
in 1996 an d there is no need for th e distinction an y more. This
environmental change created the duplication as a result, more specifically,to opera te t he t wo sam e kind of end of day net sett lement systems.
ii ) Consolidation of large-value payment flows
The sub-project B of the RTGS-XG project is to incorporate
large-value payments on the FXYCS and the Zengin System into the
BOJ -NET. The two benefits are pointed out for incorpora ting the payment s
in th e privat e-sector DTNS systems int o th e BOJ -NE T. Fir stly, par ticipan ts
can obta in int ra day finality with th e cont inuously sett lement of th e LSF. It
is a significan t r isk mit igat ion compa red t o the curr ent scheme of end of day
fina lity in the pr ivate-sector system s. Second ly, the RTGS-XG achieves
great er efficiency in liquidity usa ge. The LSF can sa ve the liquidity by
offsetting the outgoing payment and incoming payment compared to the
pur e RTGS system, in which a ll th e settlemen t is ma de on gross basis.
The FXYCS payment will be forwarded to BOJ-NET via FYXCS.
And DTNS mode of FXYCS will be abolished. As for t he Zengin System , a
newly developed interface will pick up the large-value payments and send
them to the BOJ-NET, while the remaining small-value payments are
processed in the Zengin System as th e DTNS. When th e int erface sends
large-value payments to the BOJ-NET, only interbank payment information
will be sent, while cust omer inform at ion will be kept in t he Zengin S ystem.
Figu re 2 Consolidat ion of lar ge-value paym ent flows
3.3 Implementation timetable
Ph ased implemen ta tion is plann ed for the RTGS-XG project. In the
phase 1, development of the LSF an d modificat ion for F XYCS will be rea lized
an d th e new system a re plan ned to be laun ched in fiscal year9 2008.
In the phase 2, modification for large-value Zengin payments,
excha nge tran sactions. In 1996, th e law was dras tically revised an d foreign excha nge
tr ansa ction was fully deregulated.9
J apan ese fiscal year st art s in April and finish at the end of March of the next calendaryear.
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including the development of interface to the BOJ-NET, will be completed in
2011, when th e next u pgradin g of the Zengin System is plann ed.
3.4 The RTGS-XG project and the global trend
Lets discuss the cha ra cterist ics of th e RTGS-XG from th e perspect ive
of the global t ren d of paymen t systems.
(1) Integrated System
Since 2001, th e BOJ -NET ha s been the pure RTGS system . The
RTGS-XG will ha ve two modes for sett lement . At t he cur ren t accoun t,
participant will be able to make a simple RTGS, just as the same as the
cur ren t BOJ -NE T. This mode can be called as pure RTGS mode. On th e
oth er h and, a t th e LSF a ccoun t, real-time settlement with liquidity saving
featu re will be possible. The lat ter m ode, liquidity saving mode, can be
regarded as a Hybrid mode, where offsetting will be executed on a
cont inuous ba sis.
Having both RTGS mode and Hybrid mode, the RTGS-XG will be
defined as an Integrat ed System as a whole. Pa rt icipant can select th e
mode of sett lement according to th e cha ra cter of th e paymen t. It is
expected that most of the payment will be made in liquidity saving mode,
because participant will be able to make settlement with fewer liquidity,
which mean s th e cost-saving for th e par ticipan t. As for the urgent pa yment
or time-critical payment, such as a payment to the Continuous Linked
Settlement (CLS) Bank, it is expected to be processed in the pure RTGS
mode. Also some tra nsa ctions, including BOJ an d governm ent relat ed
transaction and DVP settlement of JGB, will be assigned to the pure RTGS
mode.
The RTGS-XG will be one of the cutting edges of the world payment
system, along with TARGET2 in EU an d LVTS in Can ada .
(2 ) Two-account system
The RTGS-XG will have two separate accounts in one system: the
cur rent a ccount a nd the LSF account . Par ticipant will have to monitor and
ma na ge th e two liquidities in each accoun t dur ing th e day. In some
Integrated Systems, like RTGSplus
in Germany, single liquidity pool is
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adopted, and participant can control the liquidity in the single account.
Single liquidity pool would be more user-friendly than two-account system.
But, the RTGS-XG will allow participants to transfer the liquidity flexiblybetween th e two accoun ts dur ing th e day. Thu s, it is presu med tha t
ma na gement bur den of two liquidity would not be significan t. It is
appa ren t wh en compa red t o th e case of th e EAF2 in Germ an y, which a llowed
tr an sferr ing th e liquidity only once every h our.
In terms of two accounts, the RTGS-XG has similar structure to the
PIS in France, where liquidity bridge combines the PNS account and the
TBF a ccoun t.
(3) Offsetting system
The RTGS-XG will adopt the offsetting scheme as well as RTGS plus
an d TARGET2. As ment ioned ear lier, th ere is not much difference between
net tin g an d offsett ing, with regar d to th e out come of th e processing. In both
cases, th e net position of out going paymen t an d incoming pa yment would be
added or debited from th e pa rt icipan t s accoun t . Only th e differen ce is
whet her both incoming a nd out going paymen ts ar e processed individually or
th e net am ount is processed.
4. Mechanisms that support the advanced payment systems
With the development of IT, payment systems have been evolved
grad ua lly to th e sophist icat ed processing schem e. Some mecha nisms which
support th e advan ced paymen t syst ems a re described below.
4.1 Frequent netting and continuous processing
When the DTNS system was developed, most systems executed
net ting only once a da y, mostly at t he end of the da y, due t o the const ra int of
compu ter capacity. Fu rt her more, in some system s, it took such a long time
to calculate t he net ting positions of all par ticipan ts t ha t t hey could not m ake
th e final settlement on th e day and th e final settlement of the net position
was ma de on t he next day10.
In recent years, thanks to the enhanced processing capability of
computer and other technical progress, frequent netting became possible,
10
For example, the Zengin Syst em was chan ged over from th e next-day settlemen tsystem to th e curr ent-day settlement system in March 1993.
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which lead to th e emer gence of th e Hybrid System . Fr equency of net ting
progressed from net ting with regular int ervals to cont inuous net ting. The
latt er pr ocess nett ing consta nt ly when some sett lement events happen, suchas addit ion of liquidity, new pa yment order or cha nge of sender limit .
4.2 Partial netting
In the DTNS system, the full netting was executed, in which all the
payment instructions in the system was included to calculate the net
positions.
Due t o the pr ogress of IT, th e par tia l net tin g becam e possible, which
execute the netting only for the some payments extracted from the queue.
Partial netting includes the bilateral partial netting between two
participants and multilateral partial netting among more than three
par ticipan ts. Liquidity saving mode was realized with th e capa bility of
partial n etting.
In some systems, bilateral and multilateral partial netting are
tr eated separ at ely. For example, bilatera l netting is regar ded as a ma in
function and is run during the day, and multilateral netting is regarded as
supplemen t way an d is execut ed at certa in time or when gridlock ha ppens.
4.3 Searching and matching facility
Techn ology progres s ma de it possible to sear ch some app ropr iat e pair
of paymen t inst ru ctions in th e queue based on t he conditions of paymen t a nd
liquidity. Such conditions include liquidity situ at ion of th e sender, ava ilable
valance of the receiver, sender limit, credit limit of the receiver and so on.
The searching engine can find out and match the appropriate pair of
paymen ts to be net ted or offset. In addition, th e sear ching and mat ching
can be made for the vast number of payments in the queue as quick as a
flash . This capa bility of swift searching an d ma tching resu lted in invent ing
th e liquidity sa ving function.
4.4 Queue Management
Queue is a scheme whereby payment instructions are held pending
according to certain rule until sufficient cover is available in the account of
th e sender. In a few RTGS systems, there ar e no queuin g mechan isms, like
th e cur rent BOJ -NET. But most RTGS systems have centr al queue to
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bett er cont rol paymen t flows. By accum ulat ing th e un sett led paymen ts in
the queue, the system is capable of extracting some of them and netting
them or the participants can control his payment flow and liquidityeffectively.
(1) Processing rule of the Queue
The most basic rule of queue processing is first-in first-out (FIFO).
In t he FIF O rule, payments a re waiting in order of ar rival to th e system, and
th e processing would be tr ied in order from t he t op paymen t in t he queu e.
Recently, diversified rules other than the FIFO are observed, which
include th e Bypass FIFO an d the first -available, first -out (FAFO). In th e
Bypass FIFO11, when the first payment in the queue does not satisfy the
condit ion of settlement , th e second paymen t would be t ried t o be processed.
In the RTGSplus of Germany, the strict FIFO rule is adopted for the EX
Payment mode and the Bypass FIFO rule is applied to the Limit Payment
mode. The FAFO ru le tr ies to execut e as ma ny payment s as possible to
sett le, regar dless of th e order in th e queue. In some system s including new
BI-REL in Ita ly, the FAFO r ule is applied instea d of th e FIFO r ule at th e end
of th e day in order to process the u nset tled paymen ts a s ma ny as possible.
(Table 4) Processing r ule of the Qu eue
(2) Advanced queue management functions
It is the tendency of newly designed payment systems to add the
queue management functions which enable participants to actively control
payment in the queue. These advanced queue mana gement functions
include 1) prioritization of payments, 2) reordering of payments, 3) timed
paymen ts, an d 4) optim izat ion.
Prioritization is to add priority code to each payment to assign the
priority in th e queue. Once th e paymen ts with high priorit y ha s processed
and deleted from the queue, the payments with low priority starts to be
processed.
11
This is the scheme which a voids the situ ation th at th e first large payment blocks allthe other payments.
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Reorder ing mea ns the cha nge of th e order in the queue. For
example, when t he str ict FIFO r ule is applied an d th e large payments on the
top block all the payments, it is possible to promote the processing of thepaymen ts by put t he top payment to the lower order tem pora lly.
Timed payment is a function to appoint the execution time for each
paymen t. This fun ction includes till paymen t fun ction which appoint s the
finish t ime, and from paymen t fun ction which a ppoints t he st ar tin g time.
Optimization is a mechanism which promotes the processing of
unsettled payments in the queue, typically when a gridlock situation
ha ppens. When t his mechan ism is executed, th e FIFO is usually substituted
by the FAFO and promote the processing as many payments as possible
regardless of th e orders in the queue. The system operat or put t he
optim ization in motion a t regular tim e of th e day or when gridlock comes u p.
These queue management functions heavily depend on the real-time
capability of monitoring and controlling of payments in the queue by
par ticipan ts, which a re r ealized by ut ilizing int era ctive network.
4.5 Pre-funding Account
It is often the case that advanced payment systems have special
accoun ts for sett lement . Pa rt icipant s ha ve to ma ke pre-fun ding; to put th e
fund t o th e accoun t for t he sett lement for t he da y at th e beginning of th e day.
The DTNS system is based on the concept of pay later, in which
par ticipant should pay th e net debit position t hat was calculated a t th e end
of th e day. The DTNS system requires some risk mit igat ion arr an gements
including t o set sender limit an d t o pledge collater al, becau se th ere ar e some
possibilities of defau lt in th e pay lat er scheme. In th e pre-fun ding system,
as set tlemen ts a re pr ocessed using the fund pa id in ad vance, th ere is no need
for the risk mitigation arrangement, which would reduce the risk
ma nagement bur den for th e participants.
However, it should be noted that pre-funding scheme is workable
only in the payment system which have the considerable high speed of
circulation of liquidity in th e system . If pre-fun ding schem e is int roduced to
the payment system with inefficient liquidity circulation, huge amount of
funds should be paid in advance, which is the big burden to participants.
For example, in CHIP S, the sett lement a mount of th e day is 500 to 600 times
of th e initial fun ding am oun t. Thus, pre-fun ding an d efficient circulation of
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liquidity ar e closely conn ected each oth er.
4.6 Multiple Functions in Single Payment SystemHistorically, it was quite common that one payment system support
only one scheme of processing, like RTGS or DTNS. It wa s becau se it was
quite difficult to realize multiple functions in one system from the
perspective of system development as well as risk management scheme and
loss-share rule is different according to the processing type.
Rapid p rogress of t echn ology enabled to rea lize two modes in a single
paymen t system, which paved th e way for th e Int egrat ed System. To adopt
the offsetting concept also helped to combine two functions in one system by
avoiding the netting concept, which requires the different risk management
scheme.
6. Conclusion
Payment systems have evolved from the DTNS system to the RTGS
system, Hybrid system a nd Int egrat ed system. The driving force for th e
recent evolution was development of technology as well as other
environment al changes, which include 1) ra pid growth of sett lement values,
2) increased awareness for the settlement risks, 3) competition between
payment systems.
Looking ahead, payment systems are likely to continue to evolve as
technological pr ogress per mit s t he pr ocessing in m uch m ore in novat ive ways
or with more complicat ed algorit hm s. It was regret ta ble th at th e reform s of
payment systems in J apan have lagged behind t he movement in E ur ope and
th e U.S. It is desirable to wat ch closely to the global movement of paymen t
system innovations as well as technological progress, and to enhance the
Japanese payment systems in a timely manner for the improvement of the
convenience of th e par ticipan ts. These enha ncements of th e paymen t
systems would lead directly to the improvement of the efficiency of financial
ma rket functions an d financial tra des in J apan .
References
Bank for International Settlements, Core Principles for Systemically
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Importan t Pa yment Systems, J anu ar y 2001
Bank of Japan, Proposal for the Next-Generation RTGS Project of theBOJ -NET Fu nds Tra nsfer System, December 2005
Bank of Japan, Framework for the Next-Generation RTGS Project of the
BOJ -NET Fun ds Tra nsfer System, Febru ar y 2006
Bank of Japan, Outline of the 2005 Issue of the Payment and Settlement
Systems Report, March 2006
Bech, Morten L., Bart Hobijn, Technology Diffusion within Central
Ban king: The Case of Real-Time Gr oss Set tlemen t, Federa l Reserve Bank of
New York St aff Report s, Septem ber 2006
Imakubo, Kei, and James J. McAndrews, Initial Funding Levels for the
Special Accounts in the New BOJ-NET, Bank of Japan Working Paper
Series, August 2005
Japanese Bankers Association, Proposal for Reorganizing Fund Transfer
Systems in Japan Introducing a Large Value Settlement System
(overview), March 2004
Martin, Antoine, Recent Evolution of Large-Value Payment Systems:
Balancing Liquidity and Risk, Economic Review, First Quarter 2005,
Feder al Reserve Ban k of Kan sas City
McAndrews, James, and John Trundle, New Payment System Designs:
Causes and Consequences, Financial Stability Review, Bank of England,
December 2001
Nakajima, Masashi, and Junichi Shukuwa, All about Payment Systems,
(in J apan ese) , Toyo Keizai In c. Mar ch 2005
Nakajima, Masashi, Global Trends in Payment Systems and Their
Implications for Japan(in Japanese), Forum of International Development
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Studies, Nagoya University, March 2003
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Table 1 Timing of the introduction of RTGS system in selected countries
Country Payment System note Timing of th e int roduction
of RTGS syst em
US Fedwire 1982
Switzerland SIC 1987
Germa ny EIL-ZV 1988
UK CHAPS 1996
Belgium ELLIPS 1996Fr an ce TBF 1997
Italy BI-REL 1997
Netherlan ds TOP 1997
Korea BOK-Wire 1994
Hong Kong CHATS 1996
Singapore MEPS 1998
Austr alia RITS 1998
J apan BOJ-NET 2001
(note) : the na me when th e RTGS system was int roduced.
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Figure 1 Number of countries that adopt the RTGS system
0
10
20
30
40
50
60
70
80
90
100
1981
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
num ber of adoption
accum ulated num ber of
countries
source Bech&Hobijn 2006, modified
Table 2 Introduction of Hybrid System in selected countries
Coun tr y Pa yment System Timing of int roduction of
Hybrid System
Germa ny EAF2 March 1996
Cana da LVTS Febru ar y 1999
Fr an ce PNS April 1999
US CHIPS Februar y 2001
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Table 3 Introduction of Integrated System in selected countries
Coun tr y Pa yment System Timing of intr oduction of
Integrat ed System
Cana da LVTS Febru ar y 1999
France PIS PNS TBF April 1999
Germany RTGSplus November 2001
Ita ly new BIREL April 2004
EU TARGET2 November 2007(plan ned
Japan BOJ-NET RTGS-XG fiscal 2008 planned
Figur e 2 Consolidat ion of lar ge-value paymen t flows
BOJ-NET(RTG S)
FXYCS(DTN S)
Zengin System(DTN S)
(RTG S-XG )BOJ-NET
RTG S m ode
Hybrid m ode(LSF)
Zengin System(DTN S)
88.3 trillion
16.4 trillion
9.5 trillion
110.9trillion
3.3 trillion
sm all value
large value
Note: Settlem ent values are daily averages in 2005.
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Table 4 Pr ocessing rule of Queu e
FIF O Payment s ar e placed in th e queue in order of ar rival to th e
system. Pr ocessing is tr ied first -in first -out basis, which
mean s from the t op payment in t he queue.
by-pass FIF O When th e first payment in th e queue can not be processed, th e
second pa yment would be t ried.
FAFO Regar dless of th e order s in th e queue, processing is ma de as
mu ch as possible with th e available liquidity.
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