Insufficient Information Summary
The International Monetary Fund (IMF), in its 2003 Financial System Stability Assessment (FSSA) noted that the Bank of Japan (BoJ) had, at the time, designated four systems, namely, the BoJ-NET Funds Transfer System (BoJ-NET FTS), the Tokyo Clearing House's Bill and Check Clearing Systems (TCH-BCCS), the Zengin Data Telecommunication System (Zengin System), and the Foreign Exchange Yen Clearing System (FXYCS) as systemically important payment systems (SIPS). The latter three systems are privately-run. Of the four, the BoJ-NET FTS is the core system, and in 2003 accounted for about 65 percent of the aggregate value settled by the four SIPS. Furthermore, the three private systems settle their net obligations over the BoJ-NET FTS. The IMF FSSA concluded that both modes of the BoJ-NET FTS, the real-time gross settlement mode and the deferred gross settlement mode, followed closely the Core Principles for Systemically Important Payment Systems (CPSIPS). The 2003 IMF assessment also noted that the Zengin System and the FXYCS observed all core principles with the exception of CP I, which they partly observed. The TCH-BCCS was found deficient in several respects and less robust in its observance of the CPSIPS by the FSSA. However, since these assessments the BoJ-NET FTS has been overhauled and in October 2008 its RTGS settlement mode was upgraded to the BoJ's Next-Generation RTGS. The upgrade included changes to the FXYCS and the Zengin System. In light of the above developments, there is insufficient information publicly available as to Japan’s current compliance with the CPSIPS.
General Overview
The International Monetary Fund's (IMF) 2003 Financial System Stability Assessment (FSSA) stated that the Bank of Japan (BoJ) had designated four systemically important payment systems (SIPS) that included the BoJ NET Funds Transfer System (BoJ-NET FTS), the Zengin Data Telecommunication System (Zengin System), the Foreign Exchange Yen Clearing System (FXYCS), and the Tokyo Clearing House's Bill and Check Clearing Systems (TCH-BCCS), the latter three of which are privately-run systems operated by the Tokyo Bankers Association (TBA). The BoJ-NET FTS, owned and operated by the BoJ, has two modes, the real-time gross settlement mode and the deferred gross settlement or simultaneous processing mode. The IMF FSSA concludes that both modes of the BoJ-NET FTS accorded closely with the Committee on Payments and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). According to the report, the deferred gross settlement mode of the BoJ-NET FTS broadly observed Core Principle (CP) III, and did not fully observe CP IV. Other than these two minor shortcomings, the system generally observed the CPs. Furthermore, the BoJ's 2003 "Self-Assessment of Compliance with the Core Principles for Systemically Important Payment Systems: The BoJ-NET Funds Transfer System" concluded that the BoJ-NET FTS was compliant with all 10 Core Principles. However, even though the report was conducted against the CPSIPS, it is a self-assessment, and the IMF's conclusions are judged to be a more adequate evaluation of Japan's compliance with this standard. Moreover, the BoJ-NET RTGS system has undergone major reforms, and its RTGS settlement mode was upgraded to the BoJ's Next-Generation RTGS, which includes transformations in the settlement interfaces with two other previously designated SIPS, the FXYCS (launched in 2008) and the Zengin System (anticipated in 2011). The reform is discussed in detail later on in this section. These factors result in an “Insufficient Information” rating to Japan against this standard.
The 2003 IMF report, which also assessed the three privately owned systems, concluded that the Zengin System and the FXYCS observed all core principles with the exception of CP I, which they partly observed. In the case of CP I, the deferred net settlement mode of the FXYCS partly observed this principle. Other than these minor shortcomings, the systems were identified as well functioning, sound, and efficient systems. Similarly, a 2001 self-assessment report by the Japanese Bankers Association on the privately-run SIPS concluded that the Zengin System and the FXYCS were basically in compliance with all of the CPs (ZENGINKYO 2003). However, the self-assessment itself was not published. The system identified by the 2003 IMF FSSA as most problematic was the TCH-BCCS. This system, according to the IMF, partially observed CP III, did not observe CPs IV and V, lacked an effective business continuity arrangement (CP VII), and in regards to CP VIII the report observed that the system was "relatively cost-inefficient and impractical for the large-value and time-sensitive payments that typically characterize systemically important payment systems" (p. 58). The IMF noted that the BoJ-NET FTS was the core system, then accounting for about 65 percent of the aggregate value settled by the four SIPS. Furthermore, the three private systems settle their net obligations over the BoJ-NET FTS. Moreover, the TCH-BCCS, according to the 2003 FSSA, accounted "for only about 5 percent of the aggregate volume of payments cleared and settled by the four principal systems and [even] this share ha[d] been declining in recent years" (p. 56).
More recently, based on the results of the World Bank’s 2008 Global Payment Systems Survey involving 142 countries, Cirasino and Garcia in their report “Measuring Payment System Development” published in the same year, evaluates Japan’s compliance with four distinct sub components which are broadly based on the CPSS' CPSIPS. The four components of the Cirasino and Garcia assessment are the (1) legal and regulatory framework; (2) large-value payment systems; (3) retail payment systems; and (4) the enabling environment for the payment system oversight function. The first component, the legal and regulatory framework, covers CP I and to some extent CP II. The second component large-value payment systems "is based on two subcomponents: i) system design and key policy decisions that affect the safety, soundness and efficiency of the system; and, ii) the actual usage of the large-value system in terms of the share of the settlement throughput that flows through the system being rated versus other systems that process large-value payments" (p. 5). The fourth component basically focuses on the Central Bank's payment system oversight function. The 2008 report by Cirasino and Garcia concludes that Japan. achieves a "medium-low level of development” for component one; a “medium-high level of development” for sub-component one of component two, and component four; and a “high level of development” for sub-component two of component two (check systems are not commonly used for large-value payments, and the RTGS system processes more than 90 percent of the total value settled through the combined systems) as well as for both sub-components of component two. However, the information contained in this report, although informative, does not directly address Japan’s compliance with the CPSIPS.
According to the BoJ's 2007 Payment and Settlement Systems Report, in 2006, the volume and value processed by payment and settlement systems in Japan expanded or steadied at a high level due to improvements in monetary policy and overall economic growth. The BoJ-NET FTS is a real-time gross settlement (RTGS) that settles call loans, the cash legs of securities transactions (i.e. those of Japan Government Bonds or JGBs), and the net positions of private-sector deferred net settlement (DNS) systems. The BoJ report observes that the BoJ-NET FTS recorded (in 2006 and the first quarter of 2007) the highest level of activity since 2001. In March 2007, BoJ-NET FTS settled JPY 188 trillion, which represents the highest daily value since the BoJ-NET FTS converted to RTGS in 2001. The BoJ attributed this recent growth to the introduction (in January 2007) of the delivery-versus-payment (DVP) technique for the settlement of dematerialized investment trusts. The BoJ’s payment and settlement statistics publication of March 2010 provides the latest published figures for these systems, i.e. for February 2010. On an average that month, BoJ-NET settled 46,992 transactions per day, including funds transfers for call market transactions, DVP for Japanese Government Bond transactions, and FXYCS transactions, as well as settlement for private clearing systems, TCH-BCCS and Zengin System. The value of these settlements was 94.7 trillion yen.
The FXYCS processes yen payments from cross-border financial transactions, such as foreign exchange transactions. According to the BoJ’s 2010 statistical publication, prior to October 2008, when the RTGS-XG was launched and brought all of FXYCS transactions under the RTGS mode, the FXYCS had two modes, the real-time gross settlement and deferred net settlement modes, and most transactions were settled on a net basis. However, starting October 14, 2008, all transactions are settled exclusively on an RTGS basis. Per the same publication, the average daily volume of settlement in the system in February 2010 was 24,636 transactions, while the value was 440 million yen. The Zengin System is an inter-bank clearing system for retail credit transfers. According to the BoJ’s 2006 report, there was a slight increase in the daily average value processed by the Zengin System in 2006, which represented a trend of such increases since 2003. However, this trend showed signs of reversing in 2010 and in February, per the 2010 publication, the average daily volume was 5.8 million and the value was 963.5 billion. The TCH-BCCS, which clears bills and checks, is the largest Bill and Check Clearing System (BCCS) in Japan, processing more than 70 percent of the total value of bills and checks exchanged at BCCSs. According to the 2010 BoJ statistical publication, in February 2010, the daily average transactions processed by TCH-BCCS showed a continued decline year on year, ending at 1.1 trillion yen in value and 117 thousand in volume. The BoJ in 2006 attributed this to "a long-term shift away from bills and checks to credit transfers, which are usually processed by the Zengin System" (p. 7).
The BoJ's self-assessment observes that the Bank of Japan Law, specifically Article 33, Article 39 and Article 61-2, provides the legal basis for the BoJ's operation of the BoJ-NET FTS. Beyond the BoJ Law, the BoJ NET FTS is also governed by general Japanese law, statutes and contracts between the BoJ and system participants. The system rules governing BoJ-NET also provide for prompt final settlement, which is achieved for both the RTGS and simultaneous processing modes of the BoJ-NET FTS. The BoJ self-assessment also notes that the rules and procedures of the BoJ-NET FTS, which are part of contracts between the system participants and the BoJ, enable participants to have a clear understanding of the financial risks they incur through their participation in the system. In addition, the self-assessment states that "credit and liquidity risks to the participants are managed and contained effectively under the rules and procedures of the BoJ-NET FTS, which provide appropriate incentives for the participants to identify and manage those risks" (p. 6). Specifically regarding potential credit risk to the participants, the BoJ's self-assessment observes that the BoJ-NET FTS' RTGS mode is not exposed to credit risk since settlement is completed immediately upon receipt of the payment instruction by the system. Furthermore, according to the assessment, there are no credit risks to the participants of the BoJ-NET FTS' simultaneous processing mode, despite the fact that settlement of payment instructions is deferred until designated times in this mode. This is so because the simultaneous processing mode is used to settle payments between the BoJ and participants.
According to BoJ's 2007 Payment and Settlement Systems Report, during 2006 and the first quarter of 2007, the value and volume of payment and settlement activity increased significantly. Providing an update to this trend, the 2009 Payment and Settlement Systems Report (published in 2010; hereafter referred to as the 2010 BoJ report) notes that although the volume and value remained constant through the end of 2007, years 2008 and 2009 saw a sharp decrease in both numbers and value of transactions, especially in the wake of the bankruptcy of Lehman Brothers Japan (LBJ) in September 2008. Decline in trading activity, shrinking of the foreign exchange market, concerns of counterparty risk, and other such manifestations of the global financial crisis took their toll on the Japanese payment and settlement systems’ output in these years. However, the 2009 report does observe that “overall, the risk management measures embedded in payment and settlement systems, including payment-versus-payment (PVP) and the delivery-versus-payment (DVP) mechanisms, functioned well during the LBJ bankruptcy event” (p. ii). The report attributes the smooth functioning to the enhancements in risk management achieved by the various parties over the years, and the continuous dialogue the BoJ maintained with all participants as part of its oversight activities. The 2007 Payment and Settlement Systems Report had notably mentioned that growth in transactions presented new challenges for the BoJ-NET FTS and its participants regarding liquidity management, risk management and operational reliability. Due to these realities, the BoJ had introduced and improved several mechanisms for reducing and managing risks. For example, the BoJ had made continuous advances in information technology to facilitate "automation of clearing and settlement processes, straight-through processing of payments, and delivery-versus-payment (DVP) for securities settlement" (p. 1). Specifically, in February 2006, the BoJ launched the next-generation RTGS (RTGS-XG) project.
Elaborating upon the RTGS-XG, a 2009 BoJ report states that Phase 1 of the RTGS-XG was launched in October 2008 with the aim of improving the safety and efficiency of large-value payment and settlement systems in Japan. The report provides an analysis of the functioning of the new system in its first six months of operations. The analysis concludes that the above mentioned objective of the initiative of RTGS-XG “has been successfully achieved for Phase 1” (p. 1). Specifically, the average settlement time for transactions in the system was reduced by one hour and the aggregate liquidity requirement in the system was reduced by 2 trillion yen. The project, besides enhancing safety and efficiency, also intends to shift large-value payment systems previously processed by private sector deferred net settlement systems, the FXYCS and the Zengin System, to the BoJ-NET so that they settle on an RTGS basis. The first phase introduced the safety and efficiency mechanisms as also the shift of the FXYCS to the BoJ-NET system for RTGS transactions. The second phase, scheduled for November 2011, will achieve the latter for the Zengin System. The Zengin System will be connected to the BoJ-NET’s RTGS system through a newly created interface and the RTGS system will consider a payment in the Zengin System as “large-value” and thereby eligible for such settlement in the system if it equals or exceeds 100 million yen. The BoJ, in its 2009 report, expects the transition in Phase 2 to be as smooth as in Phase 1, given the possible changes in BoJ-NET payment flows ex-post the project. As the report observes, 70 percent of the value processed by the Zengin System are large-value payments, although they make up only 0.2 percent of the system’s volume. The report further expects that similar to the case of the FXYCS, “the combination of the reduction of intraday exposure and the use of liquidity-saving features will enhance the level of safety and efficiency achieved for large-value Zengin System payments” (p. 7). Per the 2010 BoJ report, the Zengin System, as well as the central bank, is in the midst of system development and other preparations in anticipation of the RTGS link-up as well as the sixth generation upgrades to the Zengin System. The report mentions that all participants are also conducting extensive consultations to ensure smooth transition.
The BoJ, Japan’s central bank, is the main oversight agency for the country’s payment and settlement systems, and as the 2010 BoJ report remarks, the Bank “oversees payment and settlement systems with primary focus on those that are systemically important. In assessing the management of risks in these systems, the Bank uses as a benchmark the standards developed by the Committee on Payment and Settlement Systems (CPSS)” (p. 29). The BoJ is engaged in initiating and effecting improvement in the payment systems operated by the private sector on an ongoing basis, and as its 2010 report observes, this has taken the form of supporting DVP implementation projects, cooperation with foreign central banks in introducing PVP for foreign exchange settlement, and participation in the establishment and upgradation of central counterparties. On the international front also, the BoJ, per the report, continues to cooperate with cross border and cross system operators and overseers to learn lessons from the global crisis and enhance the oversight framework of payment infrastructures. International cooperation in crisis management is also one of its main agendas in the present year, the report adds.
The World Bank’s 2008 Global Payment Systems Survey also provides some insight, however generalized, into the BoJ’s oversight over the national payment systems. Per the report, the BoJ has formal and defined powers of oversight over payment systems in the country and they can be found in the central bank law. These powers, in general, ensure "the adequate and safe functioning of payments in the country” (p. 17). Nonetheless, as the World Bank survey elaborates, the oversight function of the BoJ is well-established and performed regularly on an ongoing basis through a specific unit/department. In addition, the BoJ has spelled out its payment system oversight objectives in a regulation or policy document, and that the objectives include only the safety and efficiency of the payment systems, as opposed to ensuring competitiveness, avoiding collusive practices, fostering consumer protection, and other such issues. The survey further notes that the BoJ’s payment system oversight is performed over all systemically important payment systems, regardless of who operates them. As for cooperation, the survey notes that the BoJ cooperates with other relevant authorities mostly on an informal/ad-hoc basis. Consultation with stakeholders also occurs mostly on a sporadic and bilateral basis. The World Bank survey acknowledges reforms in the national payment systems, notably the RTGS system, the other large-value payment systems, and the legal and regulatory framework of payment systems in the country. The reforms, per the survey, were undertaken primarily to reduce systemic risk, improve overall efficiency, as well as in response to demands from the market for better payment and settlement services and to incorporate technological innovations.
The Principles
III. The system should have a well-founded legal basis under all relevant jurisdictions.
According to the IMF's 2003 FSSA, the BoJ-NET FTS and the TCH-BCCS observed this principle. The FXYCS' deferred net settlement mode and the Zengin System, however, only partly observed this principle. The IMF noted that "under the corporate reorganization laws for financial institutions, stays of execution could be imposed on the liquidation of collateral pledged by a defaulting institution," adding that "under these circumstances, the risk containment arrangements in these systems would be vulnerable to failure with a default by the systems' largest net debtor" (p. 57). To address this problem, the IMF recommended the BoJ to begin negotiations with all relevant parties to facilitate the legal changes required to shield collateral pledged to key SIPS counterparties from stays on execution. The Japanese authorities' response to the FSSA and its recommendation is that "the risk control arrangements in the Zengin System and the FXYCS have already been introduced so that the legal risk pointed out in the assessment would be effectively contained and mitigated even in the event of default by the participant with the largest net debit position" (p. 60).
The BoJ's 2003 self-assessment noted that the BoJ-NET FTS, a systemically important payment system operated by the BoJ, is governed by a "sound legal framework" (p. 3). The Bank of Japan Act, specifically Article 33, Article 39 and Article 61-2, provides the legal basis for the BoJ's operation of the BoJ-NET FTS. Beyond the BoJ Law, the BoJ-NET FTS is also governed by general Japanese law, statutes and contracts between the BoJ and system participants. The system rules governing the BoJ-NET FTS also provide for the timing of final settlement. Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIII. The system's rules and procedures should enable participants to have a clear understanding of the systems impact on each of the financial risks they incur through participation in it.
The 2003 IMF assessment concluded that all SIPS in Japan observed this principle. According to the BoJ's 2003 self-assessment, "the rules and procedures of the BoJ-NET FTS enable participants to have a clear understanding of the financial risks they incur through their participation in the system" (p. 5). The BoJ report noted that these rules and procedures are part of contracts between the system participants and the BoJ, adding that the rules are constantly being updated and are readily available to all interested parties, including non-participants as necessary. Specifically, the rules explain the design of the BoJ-NET FTS, its daily timetable and operating processes, including the BoJ's decision and notification procedures for handling abnormal situations, such as system failures and the inability of participants to settle. The BoJ also publicly discloses important rules pertaining to financial risks, such as the participation criteria and guidelines governing intra-day overdraft facilities and eligible collateral. Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIIII. The system should have clearly defined procedures for the management of credit risks and liquidity risks, which specify the respective responsibilities of the system operator and the participants and which provide appropriate incentives to manage and contain those risks.
According to the IMF's 2003 FSSA, this principle was broadly observed in the deferred gross settlement mode of the BoJ-NET FTS and partially observed by the TCH-BCCS. The FXYCS and Zengin System observed this principle. According to the 2003 FSSA "there are no controls to cover the liquidity risks to surviving participants from a default of a counter party in the cash leg of a non-JGB transaction settled in the deferred gross settlement mode of the BoJ-NET FTS" (p. 57). In the case of the TCH-BCCS, the report notes that system has no settlement risk controls. Thus, "in the event of default by a participant, payments would be unwound, which would leave some surviving participants exposed to liquidity and possibly credit risk" (p. 57). The IMF recommended that the BoJ and the TBA equip the TCH-BCCS with effective mechanisms (i.e. an enhanced settlement fund and a loss-sharing arrangement) to limit settlement risks to surviving participants in the event of a default by another participant. In response, the Japanese authorities noted that "no practical way exists for the TCH-BCCS, due to its characteristic as a debit transfer system, to satisfy Core Principle III. Although the FSAP team recommends a range of actions, it seems to be virtually impossible to implement them as they are all either too costly or impractical" (p. 60). The IMF did note that owing to the decreasing value and volume of transactions being settled through the TCH-BCCS, the likelihood of a systemic risk owing to a default by a participant in the system had diminished.
The BoJ's 2003 self-assessment noted that "credit and liquidity risks to the participants are managed and contained effectively under the rules and procedures of the BoJ-NET FTS, which provide appropriate incentives for the participants to identify and manage those risks" (p. 6). Regarding potential credit risk to the participants, the BoJ's self-assessment observed that the BoJ-NET FTS' RTGS mode is not exposed to credit risk since settlement is completed immediately upon receipt of the payment instruction by the system. Furthermore, according to the assessment, there are no credit risks to the participants of the BoJ-NET FTS' simultaneous processing mode, despite the fact that settlement of payment instructions is deferred until designated times in this mode. This is so because the simultaneous processing mode is used to settle payments between the BoJ and participants.
According to BoJ's 2007 Payment and Settlement Systems Report, during 2006 and the first quarter of 2007, the value and volume of payment and settlement activity increased significantly. Providing an update to this trend, the 2010 BoJ report notes that although the volume and value remained constant through the end of 2007, years 2008 and 2009 saw a sharp decrease in both numbers and value of transactions, especially in the wake of the bankruptcy of Lehman Brothers Japan (LBJ) in September 2008. Decline in trading activity, shrinking of the foreign exchange market, concerns of counterparty risk, and other such manifestations of the global financial crisis took their toll on the Japanese payment and settlement systems’ output in these years. However, the 2009 report does observe that “overall, the risk management measures embedded in payment and settlement systems, including payment-versus-payment (PVP) and the delivery-versus-payment (DVP) mechanisms, functioned well during the LBJ bankruptcy event” (p. ii). In this context, the 2009 BoJ report states that Phase 1 of the RTGS-XG was launched in October 2008 with the aim of improving the safety and efficiency of large-value payment and settlement systems in Japan. The report provides an analysis of the functioning of the new system in its first six months of operations. The analysis concludes that the above mentioned objective of the initiative of RTGS-XG “has been successfully achieved for Phase 1” (p. 1). Specifically, the average settlement time for transactions in the system was reduced by one hour and the aggregate liquidity requirement in the system was reduced by 2 trillion yen. The second phase, scheduled for November 2011, will achieve the latter for the Zengin System. The BoJ, in its 2009 report, expects that similar to the case of the FXYCS, “the combination of the reduction of intraday exposure and the use of liquidity-saving features will enhance the level of safety and efficiency achieved for large-value Zengin System payments” (p. 7). The above description notwithstanding, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIIV. The system should provide prompt final settlement on the day of value, preferably during the day and at a minimum at the end of the day. (Systems should seek to exceed the minima included in this Core Principle.)
The 2003 FSSA noted that the FXYCS and the Zengin System observed this principle. The TCH-BCCS did not observe this principle, and the deferred gross settlement mode of the BoJ-NET FTS also did not fully observe this principle. The 2003 IMF report, however, stated that "since the associated collateral available to surviving participants in a failed cash settlement of non-JGB delivery-versus-payment transactions in the deferred gross settlement mode of the BoJ-NET FTS allows ready access to intra-day credit, there would be no systemic consequences of the recalculation of settlement obligations and the associated settlement delays" (p. 57). To address the deficiencies, the IMF FSSA advised the BoJ to migrate payments processed through the deferred gross settlement mode of BoJ-NET FTS, which had inadequate risk controls, to its RTGS mode and implement it according to schedule. In response, the Japanese authorities noted that the BoJ would continue migrating payments still processed through deferred mode to the RTGS mode in line with the schedule published in April 2001. Further, at the time of FSSA in 2003, the TCH-BCCS was settling only 5 percent of the volume of transactions settled through the four SIPS. According to the 2010 BoJ statistical publication, in February 2010, the daily average value processed by TCH-BCCS showed a continued decline year on year. The BoJ, in its 2007 report, attributed this to "a long-term shift away from bills and checks to credit transfers, which are usually processed by the Zengin System" (p. 7). Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIV. A system in which multilateral netting takes place should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single settlement obligation. (Systems should seek to exceed the minima included in this Core Principle.)
According to the 2003 FSSA "because of inadequate risk controls in the TCH-BCCS" (p. 57), the system did not observe this principle. However, at the time of the 2003 FSSA, the TCH-BCCS was settling only 5 percent of the volume of transactions settled through the four SIPS. Further, according to the 2010 BoJ statistical publication, in February 2010, the daily average value processed by TCH-BCCS showed a continued decline year on year. The BoJ, in its 2007 report, attributed this to "a long-term shift away from bills and checks to credit transfers, which are usually processed by the Zengin System" (p. 7). No deficiencies were identified in the other systems in regards to this principle by the IMF. Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
FCVI. Assets used for settlement should preferably be a claim on the central bank; where other assets are used, they should carry little or no credit risk and little or no liquidity risk.
The 2003 IMF FSSA stated that "all the systems settle on BoJ current accounts to satisfy the requirement of CP VI for a virtually riskless settlement asset" (p. 57) and, in effect, observing this principle. According to the BoJ's 2003 self-assessment, too, settlement assets used in the BoJ-NET FTS are current account balances at the BoJ, which are claims on the central bank.
IIVII. The system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing.
The 2003 IMF FSSA noted that all systems had "adequate back-up arrangements in primary and remote sites and all but the TCH-BCCS ha[d] effective business continuity arrangements" (p. 58). Hence, the remote concluded all the SIPS, with the exception of TCH-BCCS, observed this principle. The 2003 IMF report mentioned that the "TCH-BCCS ha[d] a contingency plan for switching to an off-site manual-entry PC system in the event of a failure of both its primary and back-up systems at its primary site. However, the contingency plans ha[d] not been adequately tested nor [were] the primary and back-up on-site and off-site systems of the TCH-BCCS independently audited" (p. 58). The IMF recommended that the TBA and the BoJ jointly design an "effective testing program for the primary site and PC-based back-up systems for the TCH-BCCS and institute periodic independent audits of the systems" (p. 60). Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIVIII. The system should provide a means of making payments which is practical for its users and efficient for the economy.
The 2003 FSSA concluded that "all systems with the exception of the TCH-BCCS are efficient and practical systemically important payment systems" (p. 58) and hence observe this principle. In the case of TCH-BCCS, the FSSA noted that the system was practical for participants that provided bill and check payment services to business customers, however, it was "relatively cost-inefficient and impractical for the large-value and time-sensitive payments that typically characterize systemically important payment systems" (p. 58). However, the IMF report noted that owing to the relatively low value and volume settled through this system and its ability to transfer business payments to the Zengin System, the significance of this shortcoming in the TCH-BCCS to the overall payment system in the country was limited. The IMF report made no particular recommendation with regards to this principle for Japan.
According to the BoJ's 2003 self-assessment, the BoJ "makes efficient use of its resources" (p. 14). The report stated that, when identifying ways to improve the system, the BoJ typically solicited suggestions from system participants and other relevant parties. For example, following public consultation with relevant parties, the BoJ decided in March 2002 to improve the BoJ-NET FTS' network infrastructure. Furthermore, according to the self-assessment, the BoJ performs a thorough analysis of potential safety and efficiency implications before altering the design and operation of the BoJ-NET FTS. The BoJ defines efficiency based on actual payment flows and the manner in which they are processed. As such, the BoJ carefully estimates the peak volume and distribution of payments. In addition, the BoJ "continuously monitors the capacity and performance of the system so that payment instructions are processed at an appropriate speed" (p. 15). Perhaps most importantly, the BoJ provides overdraft facility, which gives participants access to intraday liquidity, and helps prevent gridlocks and delays in the processing of BoJ-NET FTS payments. Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIIX. The system should have objective and publicly disclosed criteria for participation, which permit fair and open access.
The 2003 IMF FSSA noted that all SIPS in Japan observed this principle and the "access and participation criteria are objective and now publicly disclosed by all systems" (p. 58). According to the BoJ's 2003 self-assessment, "criteria for access to current accounts with the Bank permit fair and open access, and are publicly disclosed" (p. 17).
The BoJ self-assessment notes that Article 1 of the Bank of Japan Law lists the participation criteria to hold a BoJ current account and to have access to BoJ lending. Both sets of criteria are publicly available, including on the BoJ website. Additionally, the BoJ has a clearly-defined procedure for the exit of a participant from the BoJ-NET FTS, and this process is applicable whether the exit is at the participant's request or by the BoJ's decision. Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
IIX. The system's governance arrangements should be effective, accountable and transparent.
According to the 2003 IMF assessment, "the governance arrangements in all systems accord with Core Principle X" (p. 58). The report further stated that the "systems' operators all have effective communications and well-founded accountability arrangements with participating members and provide public documentation on the role and organization of the systemically important systems" (p. 58). The IMF assessors, however, recommended that the operator of the private systems consider greater transparency in terms of its governance arrangement in spite of its observance of this principle.
The BoJ's 2003 self-assessment observed that "the governance arrangements of the BOJ-NET Funds Transfer System are effective and accountable, with relevant information publicly disclosed" (p. 19). The Bank of Japan Law, the By-Laws of the Bank of Japan and the Rules on Organization of the Bank of Japan lay out the governance arrangements of the BoJ-NET FTS, and these laws are all publicly available, including on the BoJ website. As the BoJ's highest decision-making body, the Policy Board makes basic decisions regarding bank policy, operation, and governance, including making final decisions on all issues related to the BoJ-NET FTS. To maximize the transparency of governance arrangements, the Policy Board discloses all its decisions in the Monthly Report of the Policy Board of the Bank of Japan. Also, the Policy Board promptly notifies participants of all decisions regarding the BoJ-NET FTS. Conducting their duties independently from the Policy Board, the Executive Auditors, performs audits of the BoJ's overall business. The Internal Auditors' Office, which is independent from departments that oversee the daily operation of the BoJ-NET FTS, conducts all internal examinations, and the resulting audit reports are subsequently submitted to the Policy Board. Despite the above assessments, there is insufficient information publicly available that directly addresses the compliance of the reformed payment systems with this principle.
FCA. The central bank should define clearly its payment system objectives and should disclose publicly its role and major policies with respect to systemically important payment systems.
According to the IMF's 2003 FSSA, the BoJ observes this principle. The report noted that the BoJ's objectives, role and major policies with respect to systemically important payment systems are "publicly disclosed through a variety of media" (p. 59). According to the BoJ's 2003 self-assessment, the BoJ clearly describes its roles in managing Japan's payment and settlement systems in the paper "The Role of the Bank of Japan in Payment and Settlement Systems," published in September 2002. More recently, the 2010 BoJ report remarks that the Bank “oversees payment and settlement systems with primary focus on those that are systemically important. In assessing the management of risks in these systems, the Bank uses as a benchmark the standards developed by the Committee on Payment and Settlement Systems (CPSS)” (p. 29).
FCB. The central bank should ensure that the systems it operates comply with the Core Principles.
According to the IMF's 2003 FSSA, the BoJ observes this principle. The BoJ's 2003 self-assessment observes that the BoJ uses several governance arrangements to adequately manage the BoJ-NET FTS which in turn is "essential in order for the system to achieve compliance with the Core Principles" (p. 22). More recently, the 2010 BoJ report remarks that the Bank in assessing the management of risks in its SIPS uses as a benchmark the standards developed by the Committee on Payment and Settlement Systems.
CPC. The central bank should oversee compliance with the Core Principles by systems it does not operate and it should have the ability to carry out this oversight.
The 2003 IMF FSSA concluded that the BoJ broadly observes this principle. According to the same report, the BoJ oversees compliance by "private operators of the systemically important systems using the oversight and policy tools available to it within its statutory mandate" (p. 59). The 2003 BoJ self-assessment noted that the BoJ's primary oversight tool is moral suasion. For example, the BoJ constantly monitors the structure and operation of systems it does not operate. Through open discussions, the BoJ subsequently encourages and persuades system operators to follow its suggestions for improvements and advances. The IMF FSSA observed that the BoJ also uses contractual agreements (regarding access to the BoJ's settlement and credit facilities) between it and the participants and central counterparties in these private-sector payment systems as an added incentive and as a way to bolster the moral suasion tool. The 2010 BoJ report adds that the Bank is continually engaged in initiating and effecting improvement in the payment systems operated by the private sector on an ongoing basis, and this has taken the form of supporting DVP implementation projects, cooperation with foreign central banks in introducing PVP for foreign exchange settlement, and participation in the establishment and upgradation of central counterparties.
CPD. The central bank, in promoting payment system safety and efficiency through the Core Principles, should cooperate with other central banks and with any other relevant domestic or foreign authorities.
According to the 2003 IMF FSSA, to promote payment system safety and efficiency, the BoJ "cooperates effectively with other central banks, private system operators, principal participants in all the major payment systems and relevant public agencies through a network of consultative and advisory agencies" (p. 59). The IMF concluded that the BoJ broadly observes this principle.
Additionally, the BoJ's 2003 self-assessment observed that the BoJ is a member of the CPSS of the central banks of the Group of Ten countries, where central banks contemplate developments in the payment and settlement field. Regarding cooperation with relevant domestic authorities, the self assessment also noted that the BoJ regularly shares information with relevant domestic authorities, often persuading them to revise relevant laws, ordinances, and other regulations. The BoJ is a member of the Continuous Linked Settlement (CLS) Bank, which settles foreign exchange transactions. While the BoJ has not specifically designated the CLS as a systemically important payment system (SIPS), it oversees the CLS system based on the framework established among the central banks of the Group of Ten countries. The 2010 BoJ report also asserts that the Bank continues to cooperate with cross border and cross system operators and overseers to learn lessons from the global crisis and enhance the oversight framework of payment infrastructures. International cooperation in crisis management is also one of its main agendas in the present year, the report adds.
