Information Disclosure Based on the Principles
for Financial Market Infrastructures:
The JGB Book-Entry Transfer System

Bank of Japan
June 2019Table of Contents

1. Executive Summary .................................................................................................... 2
2. Summary of Major Changes since the Last Update of the Disclosure .................. 6
3. Outline ......................................................................................................................... 7
4. Explanations of Each Principle ............................................................................... 18

1

1. Executive Summary
1-1.

The Purpose of This Document

The Bank of Japan (the Bank) operates the JGB Book-Entry Transfer System as abook-entry transfer institution for the Japanese government bond (JGB)1 based on the
Act on Book-Entry of Corporate Bonds and Shares (Book-Entry Transfer Law). The
JGB Book-Entry Transfer System provides for JGB deliveries and receipts stemmingfrom transactions in these instruments between participants to be made in the form of
book-entry transfers. The Bank has built the Bank of Japan Financial Network System-- BOJ-NET Funds Transfer System (FTS) and the BOJ-NET JGB Services2 -- with theaim to settle funds and JGBs between the Bank and financial institutions efficiently andsafely online. With regard to JGB book-entry transfers under the JGB Book-Entry
Transfer System, Direct Participants (DPs) can make use of the BOJ-NET.
This document is designed to meet the disclosure requirement stipulated in "Principles
for Financial Market Infrastructures" (PFMI), an international standard adopted in April
2012 by the Committee on Payments and Market Infrastructure (CPMI) of the Bank forInternational Settlements (BIS) and the Board of the International Organization of
Securities Commissions (IOSCO), and it covers primarily the JGB Book-Entry Transfer
System and the BOJ-NET JGB Services operated by the Bank. References are madeto the BOJ-NET's business associated with JGB book-entry transfers (such as Delivery
Versus Payment [DVP] settlement for JGB and in-transit collateral) as required.
Principles 6, 10, 14, 15, and 24 of the PFMI does not apply to the JGB Book-Entry
Transfer System due to the nature of their provisions.

1

The JGB Book-Entry Transfer System covers exclusively dematerialized JGBs (book-entry JGBs)
in accordance with Book-Entry Transfer Law.
2
The BOJ-NET was established and is operated with the aim of efficiently and safely executing
online funds and JGB settlements between the Bank and financial institutions through a computer
network. The BOJ-NET connects the Bank's computer center with the Bank's head/branch offices
and the financial institutions participating in the network with communication circuits that allow thedata entered at the Bank's head/branch offices or financial institutions to be processed online at the
Bank's computer center. In addition to connections with terminals, direct connection with financial
institutions' computers is possible.
The functions of the BOJ-NET comprise (1) JGB Services for JGB settlements and (2) FTS forfunds settlements. The former executes the JGB settlements arising from purchase and sale of
JGBs, and transactions on auction, and issuance. The latter executes funds settlement on JGB
transactions as well as other market transactions.
2

1-2.

Outline of the JGB Book-Entry Transfer System

The Bank offers real time gross settlement (RTGS) using the BOJ-NET JGB Services
for the delivery of JGBs among DPs or between the Bank and DPs. Under the RTGS,
each transfer request or notice (transfer instruction) given in the BOJ-NET JGB
Services by the Bank or DPs is settled immediately per transfer instruction once the
BOJ-NET JGB Services confirms that it has secured a sufficient outstanding amount of
the JGBs. Most of the DPs are users of the BOJ-NET JGB Services.
In addition, by linking the BOJ-NET (FTS) and the BOJ-NET JGB Services, the Bank
offers DVP settlement of JGB (under which the funds transfer in the BOJ-NET [FTS]
and the corresponding JGB transfer in the BOJ-NET JGB Services are linked so that
one is executed on the condition that the other is executed). In order to reduce theparticipants' burden of carrying intraday liquidity required by RTGS settlements and toensure the smooth execution of JGB settlements, the Bank offers the intraday overdraft
facility3 and the in-transit collateral facility (which enables, for example, a DP topledge to the Bank JGBs received through DVP settlement to simultaneously draw an
intraday overdraft from the Bank to pay for the JGBs).
The legal basis of the JGB Book-Entry Transfer System is provided by the Book-Entry
Transfer Law, the Bank of Japan Regulations Concerning the JGB Book-Entry System(the Regulations) set by the Bank pursuant to the Book-Entry Transfer Law, and theRules Concerning the JGB Book-Entry System (the Rules) that provides specifics of theRegulations. The legal basis of the BOJ-NET JGB Services is provided by the rules
for its usage. A high degree of legal certainty on (1) the dematerialization of securities(acquisition, transfer and extinguishment of rights resulting from the entry or record in
the transfer account ledger), (2) the tiered structure, (3) the finality of the settlement,and (4) the DVP settlements between funds settlements and JGB settlements is ensured
by relevant laws and regulations.
1-3.

Participants in the JGB Book-Entry Transfer System

The types of participants in the JGB Book-Entry Transfer System comprise (1) DPs that3

In order to facilitate JGB settlements and accompanying funds settlements, the Bank provides theparticipants it has authorized, when requested, with intraday liquidity to be repaid by the closing
hour in the form of an overdraft (i.e., intraday overdraft facility) up to the assessed value of collateralpledged in advance.
3

hold their accounts at the Bank, (2) Indirect Participants (IPs) that hold their accounts at
DPs, (3) Foreign Indirect Participants (FIPs) that hold their accounts at DPs, IPs or
FIPs; and (4) Customers that hold their accounts at the Bank, DPs, IPs, or FIPs. The
JGB Book-Entry Transfer System takes a tiered structure, whereby the Bank opens
accounts and manages JGBs for banks and financial instruments business operators, thatare, DPs, who open accounts and manage JGBs for their customers (including IPs andFIPs). The eligibility criteria for the participation of the JGB Book-Entry Transfer
System are stipulated in "Requirements for Establishing Direct Participants' Accounts
and Customers' Accounts and Requirements for Approval as Indirect Participants andForeign Indirect Participants in the JGB Book-Entry System," and are made public.
DPs include banks and financial instruments business operators located in Japan, while
IPs include shinkin banks and financial instruments business operators located in Japan,
and FIPs include foreign banks and foreign securities brokers located overseas. Of
these participants, only DPs can use the BOJ-NET JGB Services.
1-4.

Risk Management Pertaining to This System

The JGB Book-Entry Transfer System's operational stability and risk management are
ensured by the governance structure of the Bank.4
The Bank does not bear credit or funds liquidity risk in individual JGB settlements
made by participants under the JGB Book-Entry Transfer System, as it is not acounterparty to these transactions. Although the Bank provides an intraday overdraft
facility, as mentioned earlier, it appropriately manages risks associated with such credit
provision by receiving in advance eligible collateral covering the amount of credit
extended and by managing the amount of extended credit so that it remains within thevalue of the collateral pledged. The Regulations stipulate procedures such as toterminate an account in the event of a participant default and to port the outstanding
amount of JGBs of defaulted participants’ customers. It also stipulates that the Bank
may additionally set or act on necessary matters so long as it aims at securing smooth
operations of the JGB Book-Entry Transfer System.

4

The Bank operates the JGB Book-Entry Transfer System as the business pertaining to book-entry
transfers of JGBs as a book-entry transfer institution designated under Article 47, Paragraph 1 of theBook-Entry Transfer Law and as business authorized under Article 39, Paragraph 1 of the Bank ofJapan Act.
4

As to operational risks, the Bank sets detailed operational procedures for participants
and itself based on the detailed analysis of the JGB Book-Entry Transfer System's
operations and on the operational flows established to control such risks. The
BOJ-NET JGB Services are developed by identifying and curbing the operational risks
in the design phase of system development. For business continuity planning,
important IT systems are duplicated, data at the Bank's main center are reflected at its
backup center near real time, and the switchover to the backup center can be executed toresume operations within two hours.

52. Summary of Major Changes since the Last Update of the Disclosure
The Bank published the last disclosure document based on "Principles for financial
market infrastructures: disclosure framework and assessment methodology" in 2017.5
There has been no major change since the last disclosure.

5"Information Disclosure Based on the Principles for Financial Market Infrastructures: The JGB
Book-Entry Transfer System" (2017)https://www.boj.or.jp/en/announcements/release_2017/rel170630g.pdf
6

3. Outline
3-1. Outline of the JGB Book-Entry Transfer System and the BOJ-NET JGB
Services Operated by the Bank
The Bank operates the JGB Book-Entry Transfer System as a book-entry transfer
institution for JGBs based on the Book-Entry Transfer Law. The JGB Book-Entry
Transfer System provides for JGB deliveries and receipts stemming from transactions inthese instruments between participants to be made in the form of book-entry transfers.
The JGB Book-Entry Transfer System takes a tiered structure; the Bank opens accounts
and manages JGBs for banks and financial instruments business operators, who also
open accounts and manage JGBs for their customers (including IPs and FIPs).
The types of participants in the JGB Book-Entry Transfer System comprise (1) DPs that
hold their accounts at the Bank; (2) IPs that hold their accounts at DPs; (3) FIPs that
hold their accounts at DPs, IPs or FIPs; and (4) Customers that hold their accounts at the
Bank, DPs, IPs, or FIPs (see Chart 3-5). The eligibility criteria for the participation of
the JGB Book-Entry Transfer System are stipulated in "Requirements for Establishing
Direct Participants' Accounts and Customers' Accounts and Requirements for Approval
as Indirect Participants and Foreign Indirect Participants in the JGB Book-Entry
System," and are made public.
As of the end of March 2019, there were 273 DPs including banks and financial
instruments business operators, 904 IPs including shinkin banks and financial
instruments business operators located in Japan, and 142 FIPs including foreign banks
and foreign securities brokers located overseas.
The Bank offers online RTGS6 using the BOJ-NET JGB Services for delivery of JGBs
among DPs or between the Bank and DPs. Of the 273 DPs, there were 263 BOJ-NETJGB Services users.
A large part of funds settlements arising from JGB settlements under the JGB
Book-Entry Transfer System is executed online in the BOJ-NET (FTS) that effects
6

Under RTGS, each transfer instruction given in the BOJ-NET JGB Services by the Bank or DPs issettled immediately per transfer instruction once the BOJ-NET JGB Services confirms that it has
secured the sufficient outstanding amount of JGBs.

7

transfers between participants' current account held at the Bank. 7 By linking the
BOJ-NET (FTS) and the BOJ-NET JGB Services, the Bank offers DVP settlement,
under which each funds transfer in the BOJ-NET (FTS) and the corresponding JGB
transfer in the BOJ-NET JGB Services are linked so that one is executed on condition
that the other is executed. In order to reduce the participants' burden of carrying
intraday liquidity for RTGS settlements and to ensure smooth execution of JGB
settlements, the Bank offers intraday overdraft facility and a facility called in-transit
collateral that enables, for example, a participant to pledge to the Bank JGBs received
through DVP settlement and to simultaneously draw an intraday overdraft from the
Bank to pay for the JGBs (see Section 3-4).
This document mainly covers the JGB book-entry transfer settlements under the JGB
Book-Entry Transfer System and the BOJ-NET JGB Services operated by the Bank, andmakes reference to the BOJ-NET's business associated with JGB book-entry transfers(such as DVP settlement for JGBs and in-transit collateral) and the Bank's operationalarrangements as required.

7

Those that do not participate in the BOJ-NET make settlement requests in paper form at the Bank's
window; the Bank then enters the requests into the BOJ-NET to execute settlements.
8

Securities Settlement Systems

Payment Systems(Chart 3-1) Major FMIs in Japan and Their Connection with the JGB Book-Entry
Transfer System

Notes: 1. JSCC is required to report data to relevant authorities for OTC derivatives transactions it has cleared. Transactions notcleared by JSCC are required to be reported to authorities either via DDRJ or directly by financial institutions.
2. Japan Bankers Association, which operates FXYCS, entrusts operations related to funds transfers to the Bank of Japan,
and the Bank processes such operations via the BOJ-NET FTS
Source: Bank of Japan.

9

JGBs, as high-credit and highly liquid securities, occupy a central position in financial
markets and are traded in very large amounts each day in the JGB market. In fiscal
2018, JGB settlement in the BOJ-NET JGB Services stood at approximately 84 trillion
yen in terms of value and 21 thousand transactions in terms of volume per business day,respectively (Chart 3-2).
(Chart 3-2) Value and Volume of Payments and Settlements by Major FMIs (Fiscal
20181)
Value(tril.yen)

Payments

Y/Y ％ chg.

BOJ-NET funds Transfer Systemof which: interbank transfers
DVP for JGBs
Large-value Zengin System payments
CLS (yen payments)
Foreign Exchange Yen Clearing System

150.7
61.2
55.2
8.4
62.1
17.5

Zengin System2
Bill and Check Clearing Systems 3

Y/Y ％ chg.

+ 5.0
+ 7.7
+ 2.4
▲ 0.2
+ 7.3
+ 7.9

70.1
―
―
―
122.2
29.5

11.8

+ 0.8

6,648.1

+ 2.0

0.5

▲ 7.6

66.2

▲ 5.4

Value
(tril.yen)

Securities Settlements

Volume(ten thousand)Y/Y ％ chg.

Volume(ten thousand)

+ 2.4
―
―
―
+ 9.5
+ 1.7

Y/Y ％ chg.

BOJ-NET Book-Entry System

83.6

▲ 0.2

20.9

+ 16.7

Japan Securities Clearing Corporation (JGB OTC Transactions) 4

67.0

+ 6.9

6.6

+ 7.4

4

3.7

▲ 4.8

―

―

JASDEC DVP Clearing Corporation 4

2.5

+ 5.5

141.6

+ 8.4

Japan Securities Depository Center5of which: stocks
dematerialized CP
corporate and other bonds
investment trusts

―
2.2
0.9
0.7

―
+ 2.7
+ 2.5
▲ 22.5

503.2
0.5
1.4
29.8

▲ 0.0
▲ 1.3
+ 0.9
+ 1.7

Japan Securities Clearing Corporation (Listed Products)

Notes:
1.
2.
3.

Average daily value and volume.
Figures for Zengin System show the value and volume of payments processed.
Figures for bill and check clearing systems show the value and volume of bills and checks processedat the Tokyo Clearing House.
4. Figures for Japan Securities Clearing Corporation (JSCC) and JASDEC DVP Clearing Corporation(JDCC) show the value of transactions processed by the central counterparties. Figures for JSCC
(Listed Products) are for stock transactions executed on stock exchanges. Figures for JDCC are forstocks traded off exchange between securities companies and their customers.
5. Figures for stocks and investment trusts show the total amount of issuance, redemption and transfers.
Figures for dematerialized CP and corporate and other bonds show the total amount of underwriting,redemption, redemption by purchase and transfers.
Sources: Japan Securities Clearing Corporation; Japan Securities Depository Center; Japanese Bankers
Association; Japanese Banks' Payment Clearing Network; JASDEC DVP Clearing
Corporation; CLS; and Bank of Japan.
10(Chart 3-3) Value and Volume of Settlements via the BOJ-NET JGB Services<Value and Volume of Transactions>trillion yen

120
100

< Growth of Transaction Value and Volume>

ten thousand
Value
Volume (right scale)

80

2.5

30

2.0

20

1.5

10

1.0

0

60
40

20

0.5

0

0.0

FY 04

06

08

10

12

14

16

18

y/y % chg.
Value
Volume

▲10

▲20
FY 04

06

08

10

12

14

16

Notes: Average daily value and volume.
Source: Bank of JapanThe fees for the use of the settlement services offered by the Bank under the JGB
Book-Entry Transfer System are in principle set based on the following policy. First,
the Bank considers that it should basically bear the costs for putting its infrastructure inplace to offer its settlement services (including the costs of the development andmaintenance of the systems). This is because the FMI operated by the Bank to execute
funds and JGB settlements among financial institutions is a public infrastructure that isfundamental to the functioning of the financial and capital markets. Moreover, it isconsidered that investing to further enhance the safety and efficiency of its FMI in
response to changes in the surrounding environment such as technological innovation isan inherent function of central banks. On the other hand, DPs using these services
online via the BOJ-NET can expect to benefit from the lighter operational burden andshorter processing time compared with those using these services via paper-based
requests to the Bank. Therefore, when an access is made via the BOJ-NET, the Bank
collects the costs from DPs for the connection with the BOJ-NET and the use ofcommunication circuits in the form of fixed fees and transaction fees, which correspondto the benefits from online processing. The fixed fees are determined by the type ofcommunication circuit, while the transaction fees are set according to the type of
message format.

11

18

3-2.

Organizational Structure

The Bank's governance structure is as shown in the next page (Chart 3-4). The
stability of the JGB Book-Entry Transfer System operated by the Bank is secured bythis structure.
The Bank's organizational structure is set forth in the Bank of Japan Act (the Act) as
well as in the Bank's articles of incorporation and Rules on Organization of the Bank.
Its officers consist of the Governor, the Deputy Governors, Members of the Policy
Board, Auditors, Executive Directors, and Counsellors (“Officers”). The Governor,
the Deputy Governors, and Members of the Policy Board make up the Policy Board, theBank's highest decision-making body. Under the Act, in addition to mattersconcerning currency and monetary control, the following shall be decided by the Policy
Board: those matters that are prescribed individually and those matters which the Policy
Board finds particularly necessary, including important issues about the operation of the
FMI.
To execute its day-to-day business as a central bank, the Bank has head office
departments, branches, and local and overseas representative offices. Of these, thePayment and Settlement Systems Department, Operations Department, and Information
System Services Department are primarily responsible for the planning and operation of
the JGB Book-Entry Transfer System and the BOJ-NET JGB Services.

12

(Chart 3-4) Organization Chart of the Bank
Policy Board
Governor
Deputy Governors

Auditors
Members of the
Policy Board

Counsellors
Management Committee

Executive Directors

Compliance Committee

Head OfficeSecretariat of the Policy Board
Internal Auditors’ Office
Monetary Affairs Department
Financial System and Bank Examination Department
Payment and Settlement Systems Department
Financial Markets Department
Research and Statistics Department

International Department
Currency Issue Department
Operations Department
Information System Services Department
Public Relations Department
Personnel and Corporate Affairs Department
Administration Department
Institute for Monetary and Economic Studies
Branches (32), Local Offices in Japan (14) and Overseas Representative Offices (7)The Bank operates the JGB Book-Entry Transfer System and the BOJ-NET JGB
Services as (1) the business pertaining to book-entry transfers of JGBs as a book-entry
transfer institution designated under the Book-Entry Transfer Law, (2) the authorizedbusiness under Article 39, Paragraph1 of the Act, and (3) part of the regular business of
the Bank as stipulated in Article 33, Paragraph1 of the Act. As such, their operations
and risk management are not to violate these articles or the authorization, and they mustalso be consistent with the Bank's purpose as stipulated in Article 1, Paragraph 2 of the
Act (which states, "the Bank of Japan's purpose is to ensure smooth settlement of funds
among banks and other financial institutions, thereby contributing to the maintenance ofstability of the financial system"). In addition, Article 5, Paragraph 1 of the Act
stipulates, "In light of the public nature of its business and property, the Bank of Japan
shall endeavor to conduct its business in a proper and efficient manner." The Policy
Board has set down matters in accordance with each provision of the Act in the Bank's
articles of incorporation, and all these in combination from the Bank's basic policy on
the operations and risk management of the JGB Book-Entry Transfer System and the13

BOJ-NET JGB Services.
Under this policy, the Policy Board decides the eligibility criteria for participation in the
JGB Book-Entry Transfer System and other important issues regarding the operation of
the JGB Book-Entry Transfer System. In the actual operation of the JGB Book-Entry
Transfer System and the BOJ-NET JGB Services, in line with the policy and thedecisions, all functions -- including the relevant functions responsible for business
operations and IT system management -- identify risks that would arise from theexecution of their business and verify how these risks are managed and countermeasures
are implemented. The situation of risk management in each function is periodicallyreported to the Policy Board. Similarly, relevant Officers, including the Governor, andthe functions responsible for business operations and IT system management of the JGB
Book-Entry Transfer System are involved in the development and reviews of businessprocedures and IT system development.
In addition to the above, the Policy Board receives the results of internal audits from theInternal Auditors' Office on a regular basis, while the Auditors appointed by the Cabinet
regularly audit the Bank's business.
management is fully functioning.

These measures ensure that the Bank's risk

Before making significant changes to the JGB Book-Entry Transfer System, the Bank
solicits opinions and proposals from participants and relevant parties in the market, as
necessary. In addition, to identify relevant issues such as the need for improvement of
the JGB Book-Entry Transfer System, the Bank works continually to hold direct
dialogues with and conduct surveys of participants, and exchanges information andviews with the operators of major FMIs on practical issues surrounding FMIs in Japan.
3-3. Legal and Regulatory Frameworks
To operate the JGB Book-Entry Transfer System, the Bank is designated as abook-entry transfer institution by the competent ministers (the Prime Minister, Ministerof Justice, and Minister of Finance) under Article 47, Paragraph 1 of the Book-Entry
Transfer Law. The Bank is authorized by the Prime Minister (whose power isdelegated to the Commissioner of the Financial Services Agency) and the Minister ofFinance to operate (1) the JGB Book-Entry Transfer System under the Book-Entry
Transfer Law and (2) the BOJ-NET JGB Services based on Article 39, Paragraph 1 of
14

the Act, respectively. These services are provided to fulfill the Bank's purpose, which"is to ensure smooth settlement of funds among banks and other financial institutions,
thereby contributing to the maintenance of stability of the financial system" (asstipulated in Article 1, Paragraph 2 of the Act).
The Book-Entry Transfer Law stipulates the attribution of rights and the validity oftransfers pertaining to book-entry JGBs. It also states that the attribution of rights
regarding book-entry JGBs is determined based on an entry or record in the transfer
account ledgers, and that transfer of JGBs becomes valid when it is entered or recordedin the receiver's account. Under the JGB Book-Entry Transfer System, in addition to
the Book-Entry Transfer Law, the Regulations set by the Bank pursuant to theBook-Entry Transfer Law, and the Rules that provide specifics of the Regulations, andother procedures and contracts set forth by the Bank form the legal basis. For online
processing of JGB book-entry transfers via the BOJ-NET, in addition to theabove-mentioned acts, regulations, and rules, the contract between the Bank and users
for the use of the BOJ-NET JGB Services provides the legal basis.
(Chart 3-5) JGB Book-Entry Transfer under the JGB Book-Entry Transfer System

With regard to the JGB Book-Entry Transfer System and the BOJ-NET JGB Services,
the Bank conducts self-assessments against the PFMI. The Bank's operation of the15

JGB Book-Entry Transfer System is subject to the supervision of book-entry transfer
institutions (primarily on the appropriateness and certainty of the operation as abook-entry transfer institution)8 based on the Book-Entry Transfer Law. At the sametime, the Act requires the Bank to report to the Diet and the competent ministers on its
overall business.
3-4. The JGB Book-Entry Transfer System and Operational Process for the JGB
Book-Entry Transfer under the JGB Book-Entry Transfer System
Under the JGB Book-Entry Transfer System, settlements are executed based on transfer
instructions made by participants (see Chart 3-5). For example, when DP X's customer
A wants to deliver JGBs to DP Y's customer B, deliverer A makes a transfer request of
the JGBs to its account management institution X, after which the X debits A's accounton its book and notifies the book-entry transfer institution (i.e., the Bank) which is anupper-tier institution. The book-entry transfer institution debits X's account in its book,then credits the account of Y, which is the account management institution of receiver B,
and notifies Y. Account management institution Y credits receiver B's account, toconclude the series of transfers.
In the series of transfers, the BOJ-NET is used for the execution of the transfer requestfrom account management institution X to account management institution Y, both ofwhich are DPs. Most of the JGB transactions among institutions are settled using DVP
settlement of JGBs, which was introduced in 1994.
After the introduction of RTGS in 2001, in order to reduce the institutions' burden ofcarrying intraday liquidity in the RTGS environment, and to ensure smooth settlementof JGBs, the Bank introduced the in-transit collateral facility, which combines thefunctionality of the Bank's intraday overdraft facility and the DVP settlement of JGBs.
By using the in-transit collateral facility, a BOJ-NET user that is also eligible for the useof overdraft facility, (1) when receiving JGBs on a DVP basis, can (2) simultaneously
pledge the received JGBs as collateral to the Bank for the Bank's overdraft facility, then(3) receive intraday overdraft from the Bank (against the collateral), and (4) pay for the8

Unlike other book-entry transfer institutions, the Bank, under a special provision in theBook-Entry Transfer Law (Article 48), is exempt from provisions concerning control and oversight,
such as (1) the ban on engaging in other businesses, (2) reasons for disqualification of executive
directors, (3) orders for the termination of executive directors, (4) on-site examinations, and (5)reporting and orders on assets (property) and income and expenditure.
16

purchased JGBs (see Chart 3-6, steps (1) through (4) are executed simultaneously).
This facility is also available to the deliverer of JGBs as well as the receivers (see Chart
3-6, steps (1) and (4) through (6) are executed simultaneously).
(Chart 3-6) In-Transit Collateral Facility

Note: Since the new BOJ-NET JGB Services was fully launched in October 2015, the dedicatedcurrent account used for this facility called the "current account (in-transit collateral settlement
account)" and the dedicated collateral type called "in-transit collateral" have been abolished andintegrated with the existing "current account" and "pooled collateral," respectively.

17

4. Explanations of Each Principle
Principle 1: Legal basis
An FMI should have a well-founded, clear, transparent, and enforceable legal
basis for each material aspect of its activities in all relevant jurisdictions.
Key Consideration 1: The legal basis should provide a high degree of certainty foreach material aspect of an FMI's activities in all relevant
jurisdictions.
The Bank operates the JGB Book-Entry Transfer System as a book-entry transfer
institution for JGBs based on the Book-Entry Transfer Law. The important aspects inthe operation of the JGB Book-Entry Transfer System that require a high degree of legal
certainty are (1) the dematerialization of securities (acquisition, transfer, andextinguishment of rights resulting from an entry or record in the transfer account ledger),(2) the tiered structure, and (3) settlement finality.
In order to execute JGB transfers online, the Bank operates the BOJ-NET JGB Services
upon the authorization based on the Act.
In addition to (1) through (3) mentioned above, another important aspect that requires ahigh degree of legal certainty in the operation of the BOJ-NET JGB Services is (4) the
DVP settlements with the BOJ-NET (FTS) that enables the online funds settlements
through transfers of current account deposits the Bank holds from financial institutions
and others.
The important aspects mentioned above from (1) to (4), as well as the rights andobligations between the Bank and the participants regarding the JGB Book-Entry
Transfer System, are set out by the Book-Entry Transfer Law, the Regulations, theRules, and the rules on the BOJ-NET JGB Services, etc. The Regulations stipulatethat the rights and obligations regarding the JGB Book-Entry Transfer System aregoverned by Japanese laws, and that any litigation due to a dispute involving theserights and obligations is to be settled exclusively by the Tokyo District Court. The
rights and obligations regarding the BOJ-NET JGB Services are to be treated in thesame manner.
18

The legal basis of the Regulations and Rules is the Book-Entry Transfer Law and its
related Cabinet Orders and Ordinance of the relevant Ministry, and the legal basis of therules on the use of the BOJ-NET JGB Services is the Japanese Civil and Commercial
Codes, and contracts between the Bank and the users. The fact that these kinds ofrules and the procedures based on them have a high degree of legal certainty underrelevant laws and regulations is secured by assessments by the competent minister, orby both internal and external legal reviews (with the intensity of the review dependingon the degree of significance) at the time of their introduction or revision, or at the timeof the introduction of new relevant laws and regulations.
Key Consideration 2: An FMI should have rules, procedures, and contracts thatare clear, understandable, and consistent with relevant laws
and regulations.
Not only the laws related to JGB settlement (such as the Book-Entry Transfer Law andCivil and Commercial Codes) but also the Regulations, Rules, and eligibility criteria forthe approval of participants are made public.
JGB Services are also publicly available9.

The rules on the use of the BOJ-NET

As described under Key Consideration 1, consistency of these rules, procedures, andcontracts pertaining to the JGB Book-Entry Transfer System and the BOJ-NET JGB
Services with the relevant laws and regulations is secured by internal and external
review procedures at the time of their introduction or revision. Specifically, theBook-Entry Transfer Law requires the competent minister's approval when amending
the Regulations, or notification of the competent regulatory authorities when amending
the Rules. Among important issues regarding the JGB Book-Entry Transfer Systemand the BOJ-NET JGB Services, the following shall be decided by the Policy Board inaccordance with the Act (Article 15, Paragraph 2): those matters that are prescribedindividually and those matters which the Policy Board finds particularly necessary.
Key Consideration 3: An FMI should be able to articulate the legal basis for its
activities to relevant authorities, participants, and, where
relevant, participants' customers, in a clear andunderstandable way.
9

The rules are available only in Japanese.
19When a participant opens a DPs' Account or commences use of the BOJ-NET, the Bank
notifies the participant in writing or through its website of the Regulations, the Rules,
and rules on the use of the BOJ-NET JGB Services. The Regulations, the Rules andthe rules on the use of the BOJ-NET JGB Services are also published on the Bank's
website. In addition, when amending the rules and procedures due to IT system
improvements or changes in the surrounding environment, the Bank notifies participantsof the amendment in writing or through its website, and thus participants are in aposition to easily access the latest information.
Key Consideration 4: An FMI should have rules, procedures, and contracts thatare enforceable in all relevant jurisdictions. There should be ahigh degree of certainty that actions taken by the FMI undersuch rules and procedures will not be voided, reversed, or
subject to stays.
Transfer and pledging of JGBs settled in the JGB Book-Entry Transfer System become
legally effective and can be duly asserted against a third party when the pledgee has had
the increase in the amount pertaining to the pledge entered or recorded in the pledgee's
DPs' Account through application for the book-entry transfer (Articles 98 and 99 ofBook-Entry Transfer Law). If a deliverer of JGBs who does not have legal title to
JGBs delivers them to a receiver, the receiver will acquire legal title to them, provided
that the receiver acted in good faith without gross negligence (Article 102 of the above
law). Since there is no rules in the Japanese bankruptcy laws that are equivalent to theso-called "zero-hour rule," transactions effected before the default will not be voided
under the insolvency proceedings.
Key Consideration 5: An FMI conducting business in multiple jurisdictions should
identify and mitigate the risks arising from any potential
conflict of laws across jurisdictions.
FIPs (such as nonresident financial institutions) can manage accounts based on the JGB
Book-Entry Transfer System through the branches or offices located outside Japan. If
any action is filed with a court outside Japan, under rules on conflict of laws, foreignlaws including the laws of jurisdiction where an FIP is located may be applied, and thismay affect the legal framework of the JGB Book-Entry Transfer System. Taking into20

account such a situation, the Regulations stipulate that the rights and obligations
regarding the JGB Book-Entry Transfer System are governed by Japanese laws.
Moreover, the Bank requires the FIP to submit the letter of representations which statesthat the FIP verifies that the agreement regarding the governing laws is legally
enforceable under the laws of jurisdiction where the FIP is located.

21

Principle 2: Governance
An FMI should have governance arrangements that are clear and transparent,
promote the safety and efficiency of the FMI, and support the stability of thebroader financial system, other relevant public interest considerations, and theobjectives of relevant stakeholders.
Key Consideration 1: An FMI should have objectives that place a high priority on
the safety and efficiency of the FMI and explicitly support
financial stability and other relevant public interest
considerations.
The Bank operates the JGB Book-Entry Transfer System, placing high priority both on
its safety and efficiency in accordance with the relevant laws and regulations. With
respect to safety, the Bank's purpose to smoothly and stably operate the FMI derives
from Article 1, Paragraph 2 of the Act, where it stipulates that the Bank's "purpose is toensure smooth settlement of funds among banks and other financial institutions, thereby
contributing to the maintenance of stability of the financial system." Taking into
account that the funds transactions and settlements are closely related to the purchases
and sales of JGBs among banks and other financial institutions, the purpose to operate
the JGB Book-Entry Transfer System is to ensure smooth settlement of funds amongbanks and other financial institutions. As for efficiency, the Bank, in light of the
public nature of its business and property, is required to conduct its business in a properand efficient manner, as called for in Article 5, Paragraph 1 of the Act, giving due
consideration to its financial soundness. In conducting the Bank's business, as
provided by the Act, the Policy Board decides its basic policy, and the Governor,
relevant Officers, and employees execute them under the basic policy. The Act also
stipulates that the Auditors appointed by the Cabinet shall audit the Bank's business.
The Bank publishes on a regular basis its Payment and Settlement Systems Report,
describing the efforts made by the Bank and relevant institutions to improve the safety
and efficiency of the FMIs. The report also assesses the extent to which the Bank has
attained its objectives. The Bank also releases the Annual Review, which is acomprehensive description of the Bank's policy and business, including the operationsof the JGB Book-Entry Transfer System, as required by the Act.

22

Key Consideration 2: An FMI should have documented governance arrangementsthat provide clear and direct lines of responsibility andaccountability. These arrangements should be disclosed toowners, relevant authorities, participants, and, at a moregeneral level, the public.
The operational stability of the JGB Book-Entry Transfer System is ensured through thegovernance arrangements of the Bank.
The Bank's organization is managed in accordance with the Act, articles ofincorporation, and Rules on Organization of the Bank, all of which are made public.
Specifically, at the Bank, the Policy Board, as the highest decision-making-body,decides the basic policies on policy, business, and organizational matters; based onthese policies, the Governor and other relevant Officers, as well as head office
departments, branches, and local and overseas representative offices, conduct businessaccording to their jurisdiction. The operation of the JGB Book-Entry Transfer Systemand the BOJ-NET JGB Services that are (1) JGB book-entry transfers as the designatedbook-entry transfer institution under the Book-Entry Transfer Law, (2) authorizedbusiness under Article 39, Paragraph 1 of the Act, and (3) the Bank's regular businessunder Article 33, Paragraph 1 of the Act, are also conducted under the above regime.
The Bank is the operator of the JGB Book-Entry Transfer System and the overseer ofprivate FMIs. Mindful of this dual role that could cause a conflict of interest, the Bank
strives to avoid the misunderstanding that it conducts the oversight of private FMIs totake the advantage of the operation of the JGB Book-Entry Transfer System. For
example, the oversight of private FMIs is conducted by a function that is separate fromthe one that operates the JGB Book-Entry Transfer System. With regard to the JGB
Book-Entry Transfer System, the Bank conducts self-assessments against the PFMI.
Key Consideration 3: The roles and responsibilities of an FMI's board of directors(or equivalent) should be clearly specified, and there should
be documented procedures for its functioning, including
procedures to identify, address, and manage member
conflicts of interest. The board should review both its overall
performance and the performance of its individual board
members regularly.
23

The Act and articles of incorporation set forth the matters that should be decided by the
Policy Board, the Bank's highest decision-making body. On the management of the
Policy Board, the Act and articles of incorporation call for a quorum of at least
two-thirds of the total number of incumbent Policy Board members, including its
chairperson, to hold a meeting and to take a vote. In addition, proceedings are
determined by a majority vote of the attending members; when yes and no votes stand atparity, it is stipulated that the chair is to decide. The Act and articles of incorporation
also stipulate that the Governor and the Deputy Governors shall not have the authorityof representation with regard to matters for which their interests and the interest of the
Bank conflict. Regarding the management of proceedings at Policy Board meetings,
the procedures are set forth by the Policy Board.
Key Consideration 4: The board should contain suitable members with theappropriate skills and incentives to fulfil its multiple roles.
This typically requires the inclusion of non-executive board
member(s).
The Policy Board consists of nine members. They are the Governor, two Deputy
Governors, and the six Members of the Policy Board that are all appointed by the
Cabinet, subject to the consent of the House of Representatives and the House ofCouncilors in accordance with the Act. Members of the Policy Board shall be
appointed from among persons with relevant knowledge and experience including
experts on the economy or finance.
Key Consideration 5: The roles and responsibilities of management should beclearly specified. An FMI's management should have theappropriate experience, a mix of skills, and the integrity
necessary to discharge their responsibilities for the operation
and risk management of the FMI.
The business of the Bank is executed by the Governor, the Deputy Governors, andExecutive Directors under the basic policy set by the Policy Board.
The
responsibilities and powers of these officers are set forth by the Act and articles ofincorporation, as well as Rules on Organization of the Bank. Specifically, theGovernor represents the Bank and exercises general control over its business in24accordance with decisions made by the Policy Board, while the Deputy Governors, inaccordance with the decisions made by the Governor, represent the Bank, andadminister the business of the Bank assisting the Governor. The Executive Directors,in accordance with the decisions made by the Governor, administer the business of theBank, assisting the Governor and the Deputy Governors. The specific responsibilitiesof the Deputy Governors and Executive Directors are decided by the Governor and aremade public.
The Officers of the Bank are appointed in accordance with the provisions of the Act.
Among the Officers administering the business of the Bank, the Governor and the
Deputy Governors are appointed by the Cabinet, subject to the consent of the House ofRepresentatives and the House of Councilors, while Executive Directors are appointed
by the Minister of Finance based on the Policy Board's recommendation.
Key Consideration 6: The board should establish a clear, documented
risk-management framework that includes the FMI's
risk-tolerance policy, assigns responsibilities andaccountability for risk decisions, and addresses decision
making in crises and emergencies. Governancearrangements should ensure that the risk-management
and internal control functions have sufficient authority,
independence, resources, and access to the board.
The JGB Book-Entry Transfer System and the BOJ-NET JGB Services are operated by
the Bank as (1) JGB book-entry transfers as the designated book-entry transfer
institution under the Book-Entry Transfer Law, (2) authorized business under Article 39,
Paragraph1 of the Act, and (3) the Bank's regular business under Article 33, Paragraph 1of the Act. As such, their operation and risk management are not to violate thesearticles or the authorization, and they must also be consistent with the Bank's purpose
stipulated in Article 1, Paragraph 2 of the Act (which states, "the Bank of Japan's
purpose is to ensure smooth settlement of funds among banks and other financial
institutions, thereby contributing to the maintenance of stability of the financial
system"). In addition, Article 5 of the Act stipulates, "In light of the public nature ofits business and property, the Bank of Japan shall endeavor to conduct its business in aproper and efficient manner." The Policy Board has set down matters in accordancewith each provision of the Act in the Bank's articles of incorporation, and all of these in25

combination form the Bank's basic policy on the operation and risk management of the
JGB Book-Entry Transfer System and the BOJ-NET JGB Services.
Under this policy, the Policy Board decides the eligibility criteria for participation in the
JGB Book-Entry Transfer System and other important issues regarding the operation of
the JGB Book-Entry Transfer System. In the actual operation of the JGB Book-Entry
Transfer System and the BOJ-NET JGB Services, in line with the policy and thedecisions, all functions -- including the relevant functions responsible for business
operations and IT system management -- identify risks that would arise from theexecution of their business and verify how these risks are managed and countermeasures
are implemented. The situation of risk management in each function is periodicallyreported to the Policy Board. Similarly, relevant Officers, including the Governor, andthe functions responsible for business operations and IT system management of the JGB
Book-Entry Transfer System are involved in development and review of the businessprocedures and in IT system development.
In addition to the above, the Policy Board receives the result of internal audits by theInternal Auditors' Office on a regular basis, while the Auditors appointed by the Cabinet
regularly audit the Bank's business. These measures ensure that the Bank's risk
management is fully functioning.
As to decision making at the time of crisis or in emergencies, the Bank establishes
procedures that allow flexibility in the management of the Policy Board, and set forth inadvance internal procedures that are to be referred to by each function in case of
extraordinary situations. Especially for measures against disasters, in accordance with
the Basic Act on Disaster Control Measures and other relevant laws and regulations, theBank has developed and made public its business continuity plans stating the selectionof businesses to be covered in case of emergencies, securing of personnel and supplies,
information gathering, and arrangements for communication with relevant institutions.
Key Consideration 7: The board should ensure that the FMI's design, rules,
overall strategy, and major decisions reflect appropriately
the legitimate interests of its direct and indirect participants
and other relevant stakeholders. Major decisions should beclearly disclosed to relevant stakeholders and, where there isa broad market impact, the public.
26

Before making significant changes to the JGB Book-Entry Transfer System, the Bank
publishes its basic policy in advance or discloses it to relevant stakeholders and solicits
opinions and proposals from DPs and relevant parties in the market, as necessary,
thereby ensuring that there is sufficient time for preparation before the changes are
implemented. In addition, to identify the needs for improvements in the business itself
and the operation of the business, the Bank works continually to hold direct dialogues
with and conduct surveys of participants, and to exchange information and views withthe operators of major FMIs on practical issues surrounding FMIs in Japan.

27

Principle 3: Framework for the comprehensive management of risks
An FMI should have a sound risk-management framework for comprehensively
managing legal, credit, liquidity, operational, and other risks.
Key Consideration 1: An FMI should have risk-management policies, procedures,and systems that enable it to identify, measure, monitor, andmanage the range of risks that arise in or are borne by the
FMI. Risk-management frameworks should be subject toperiodic review.
The Bank's framework on the operation and risk management pertaining to the JGB
Book-Entry Transfer System and the BOJ-NET JGB Services are as stated underPrinciple 2, Key Consideration 6. In the actual operation of the JGB Book-Entry
Transfer System and the BOJ-NET JGB Services, in accordance with the basic policy
and decisions by the Policy Board on risk management, all functions -- including
business operations and IT system management, either individually according to theirjurisdiction or in collaboration with other functions -- analyze and consider risks (suchas credit, liquidity, and operational risks) that could affect smooth operation of the JGB
Book-Entry Transfer System to identify and manage them. In addition, the Bank
establishes and implements necessary control procedures.
The management of individual risks is as described under the Principles corresponding
to the individual risks (Principle 4 and after).
The Policy Board receives reports on the situation of risk management in each function
on a regular basis, and also receives regular reports of internal audits by the Internal
Auditors' Office. Separately, the Auditors audit the Bank's business, and the outline of
the results is published in the Annual Review.
The risk management framework for the operation of the JGB Book-Entry Transfer
System is subject to reviews in consideration of changes in the situation of risk
management, economic and market trends, relevant laws and regulations, market
practices, and so on.
Key Consideration 2: An FMI should provide incentives to participants and, where28relevant, their customers to manage and contain the risks
they pose to the FMI.
To manage and contain risks (e.g., credit, liquidity and operational risks) pertaining toparticipants, the Bank publishes its eligibility criteria for participants. In addition, theBank manages and contain risks associated with participants and provides informationon countermeasures against these risks through screening when approving participants,
on-site examinations and monitoring of participants that have contracts regarding
on-site examinations with the Bank, oversight of FMIs that are also participants, andpublication of the Payment and Settlement Systems Report.
As stated in Principle 4, Key Consideration 1, from the viewpoint of ensuring smoothsettlements of JGBs under the JGB Book-Entry Transfer System and the associatedfunds settlements, the Bank sets, in advance, lending terms for the provision of intraday
overdraft (e.g., the due date of repayment, types of eligible collateral, and lending cap)and discloses them to participants.
After providing information in this manner, to manage and contain risks that a
participant may impose on the JGB Book-Entry Transfer System, the Bank, based on
the Regulations, the Rules, and the contracts for the use of the BOJ-NET JGB Services,
holds the right to remove the participation qualification by terminating the DP Account,to terminate the contract to use the BOJ-NET JGB Services, and to limit the use of the
BOJ-NET JGB Services, when a participant violates the rules of the JGB Book-Entry
Transfer System or when a situation might arise to impede the smooth operation of the
BOJ-NET JGB Services.
As for the appropriate incentives per risk type, see the descriptions under each Principle
corresponding to the risks.
Key Consideration 3: An FMI should regularly review the material risks it bears
from and poses to other entities (such as other FMIs,
settlement banks, liquidity providers, and service providers)
as a result of interdependencies and develop appropriate
risk-management tools to address these risks.
The operation of the JGB Book-Entry Transfer System is not predicated on the29

provision of certain services by other entities.10 Therefore, even if other entities face
problems, the probability is low that this would cause the JGB Book-Entry Transfer
System to face difficulty in its operations due to knock-on effects.
On the other hand, as book-entry JGBs are critical for market participants for funds
management and procurement and involve other FMIs (matching and clearing houses)
in its settlement process, disruptions arising from business processing or IT system of
the JGB Book-Entry Transfer System could spread to other entities.
As to the risk of such disruptions arising in the JGB Book-Entry Transfer System andspreading to other entities, as stated in Principle 2, Key Consideration 6, in accordancewith its basic policy and decisions by the Policy Board on risk management, eachfunction -- including the relevant function responsible for business operations and IT
system management -- identifies risks that would arise from the execution of its
business and verifies how these risks are managed and countermeasures are
implemented. Each function's risk management status is reported periodically to the
Policy Board. In addition, the Bank has spelled out procedures designed to ensurebusiness continuity in the face of potential disruptions and notifies participants andother entities in advance. Moreover, through drills that deal with system disruption
scenarios and through the oversight of other FMIs, the Bank regularly verifies thespillover effects of such disruptions and the effectiveness of FMIs' responses to theseeffects.
Key Consideration 4: An FMI should identify scenarios that may potentiallyprevent it from being able to provide its critical operations
and services as a going concern and assess the effectivenessof a full range of options for recovery or orderly
wind-down. An FMI should prepare appropriate plans for
its recovery or orderly wind-down based on the results ofthat assessment. Where applicable, an FMI should also
provide relevant authorities with the information needed
for purposes of resolution planning.
This Key Consideration does not apply to the FMI operated by central banks.
10

DVP settlements for JGBs are realized by linking the BOJ-NET JGB Services and the BOJ-NET(FTS), both of which are operated by the Bank.
30

Principle 4: Credit risk
An FMI should effectively measure, monitor, and manage its credit exposures toparticipants and those arising from its payment, clearing, and settlement processes.
An FMI should maintain sufficient financial resources to cover its credit exposure
to each participant fully with a high degree of confidence. In addition, a Central
counterparty (CCP) that is involved in activities with a more-complex risk profileor that is systemically important in multiple jurisdictions should maintainadditional financial resources sufficient to cover a wide range of potential stressscenarios that should include, but not be limited to, the default of the twoparticipants and their affiliates that would potentially cause the largest aggregate
credit exposure to the CCP in extreme but plausible market conditions. All other
CCPs should maintain additional financial resources sufficient to cover a wide
range of potential stress scenarios that should include, but not be limited to, thedefault of the participant and its affiliates that would potentially cause the largest
aggregate credit exposure to the CCP in extreme but plausible market conditions.
Key Consideration 1: An FMI should establish a robust framework to manage its
credit exposures to its participants and the credit risks
arising from its payment, clearing, and settlement processes.
Credit exposure may arise from current exposures, potential
future exposures, or both.
Credit risk for the Bank
The Bank, as the book-entry transfer institution of JGBs, does not become acounterparty to individual JGB settlements between participants.
Nevertheless, with the aim of ensuring smooth settlements of JGBs and the associatedfunds settlements, the Bank extends credit in the form of intraday overdrafts to theparticipants it has authorized to use such a facility when requested. Specifically, whena BOJ-NET user receives JGBs through DVP settlements (see Principle 12 for thedetailed function of the DVP settlement mechanism), the user can simultaneously
pledge the delivered JGBs to the Bank as a collateral for the Bank's overdraft facility,
receive intraday overdrafts from the Bank (against the pledged collateral), and use thefunds to pay for the purchased JGBs. The management of such credit risk arising from31

intraday overdrafts provided is described under Chapter 4, Principle 4 of "Information
Disclosure (BOJ-NET [FTS])".
Credit risks for participants
Although credit risks for participants are not risks arising from the use of the JGB
Book-Entry Transfer System, generally, between the trade and final settlement,
participants are exposed to the credit risk that results from an unrecoverable loss fromthe counterparty's default. Fully mindful of such credit risk, the Bank has introduced
RTGS to the BOJ-NET JGB Services that executes JGB settlements under the JGB
Book-Entry Transfer System. As transfer instructions sent by DPs are settled
immediately after the BOJ-NET JGB Services accept them, even if a DP defaults, thedirect impact of a loss realized stemming from the credit risk would be limited to thecounterparty of the defaulter, and the possibility that the turmoil would spread throughthe JGB Book-Entry Transfer System to other participants and the entire financial
system would remain limited. Furthermore, the Bank strives to identify credit risks
arising from funds and JGB settlements faced by participants through on-siteexaminations and monitoring of the participants that have BOJ current account.
The BOJ-NET JGB Services provide the DVP settlement facility so that the DPs are notexposed to the principal risk (the risk that a counterparty that delivered JGBs is unable
to receive payment against the delivery) arising from a counterparty's default (seePrinciple 12 for details).
Key Consideration 2: An FMI should identify sources of credit risk, routinely
measure and monitor credit exposures, and use
appropriate risk-management tools to control these risks.
See Key Consideration 1.
Key Consideration 3: A payment system or Securities settlement system (SSS)should cover its current and, where they exist, potential
future exposures to each participant fully with a high degreeof confidence using
collateral and other equivalentfinancial resources (see Principle 5 on collateral). In the caseof a Deferred net settlement (DNS) payment system or DNS
32

SSS in which there is no settlement guarantee but where its
participants face credit exposures arising from its payment,
clearing, and settlement processes, such an FMI should
maintain, at a minimum, sufficient resources to cover the
exposures of the two participants and their affiliates thatwould create the largest aggregate credit exposure in thesystem.
See Chapter 4, Principle 4, Key Consideration 1 of "Information Disclosure (BOJ-NET[FTS])." JGB settlements between the participants under the JGB Book-Entry
Transfer System do not use a deferred net settlement.
Key Consideration 4: A CCP should cover its current and potential future
exposures to each participant fully with a high degree ofconfidence using margin and other prefunded financial
resources (see Principle 5 on collateral and Principle 6 on
margin). In addition, a CCP that is involved in activities
with a more-complex risk profile or that is systemicallyimportant in multiple jurisdictions should maintainadditional financial resources to cover a wide range ofpotential stress scenarios that should include, but not belimited to, the default of the two participants and theiraffiliates that would potentially cause the largest aggregate
credit exposure for the CCP in extreme but plausible
market conditions. All other CCPs should maintainadditional financial resources sufficient to cover a wide
range of potential stress scenarios that should include, but
not be limited to, the default of the participant and its
affiliates that would potentially cause the largest aggregate
credit exposure for the CCP in extreme but plausible
market conditions. In all cases, a CCP should document its
supporting rationale for, and should have appropriate
governance arrangements relating to, the amount of total
financial resources it maintains.
This Key Consideration does not apply to central securities depositories (CSDs) or
33

SSSs.
Key Consideration 5: A CCP should determine the amount and regularly test thesufficiency of its total financial resources available in theevent of a default or multiple defaults in extreme but
plausible market conditions through rigorous stress testing.
A CCP should have clear procedures to report the results of
its stress tests to appropriate decision makers at the CCP
and to use these results to evaluate the adequacy of andadjust its total financial resources. Stress tests should be
performed daily using standard and predeterminedparameters and assumptions. On at least a monthly basis, a
CCP should perform a comprehensive and thoroughanalysis of stress testing scenarios, models, and underlying
parameters and assumptions used to ensure they areappropriate for determining the CCP's required level ofdefault protection in light of current and evolving market
conditions. A CCP should perform this analysis of stresstesting more frequently when the products cleared or
markets served display high volatility, become less liquid, orwhen the size or concentration of positions held by a CCP'sparticipants increases significantly. A full validation of a
CCP's risk-management model should be performed at least
annually.
This Key Consideration does not apply to CSDs or SSSs.
Key Consideration 6: In conducting stress testing, a CCP should consider the effectof a wide range of relevant stress scenarios in terms of bothdefaulters' positions and possible price changes inliquidation periods. Scenarios should include relevant peakhistoric price volatilities, shifts in other market factors suchas price determinants and yield curves, multiple defaults
over various time horizons, simultaneous pressures infunding and asset markets, and a spectrum of
forward-looking stress scenarios in a variety of extreme but
34

plausible market conditions.
This Key Consideration does not apply to CSDs or SSSs.
Key Consideration 7: An FMI should establish explicit rules and procedures that
address fully any credit losses it may face as a result of any
individual or combined default among its participants withrespect to any of their obligations to the FMI. These rules
and procedures should address how potentially uncovered
credit losses would be allocated, including the repayment of
any funds an FMI may borrow from liquidity providers.
These rules and procedures should also indicate the FMI's
process to replenish any financial resources that the FMI
may employ during a stress event, so that the FMI cancontinue to operate in a safe and sound manner.
The Bank does not become a counterparty to individual JGB settlements between
participants. As such, it does not adopt rules for the allocation of uncovered credit
losses stemming from a participant's default among the participants under the JGB
Book-Entry Transfer System.

35

Principle 5: Collateral
An FMI that requires collateral to manage its or its participants' credit exposure
should accept collateral with low credit, liquidity, and market risks. An FMI
should also set and enforce appropriately conservative haircuts and concentration
limits.
Key Consideration 1: An FMI should generally limit the assets it (routinely)
accepts as collateral to those with low credit, liquidity, andmarket risks.
As described under Principle 4, Key Consideration 1, the Bank, with the aim of
ensuring smooth settlements of JGBs and the associated funds settlements, provides
intraday overdrafts secured by collateral to the participants it has authorized to use such
facility when requested. As for the collateral the Bank accepts as eligible collateral for
intraday overdrafts, see Chapter 4, Principle 5 of "Information Disclosure (BOJ-NET[FTS])."Key Consideration 2: An FMI should establish prudent valuation practices anddevelop haircuts that are regularly tested and take into
account stressed market conditions.
As described under Chapter 4, Principle 5, Key Consideration 2 of "Information
Disclosure (BOJ-NET [FTS])."
Key Consideration 3: In order to reduce the need for procyclical adjustments, an
FMI should establish stable and conservative haircuts thatare calibrated to include periods of stressed market
conditions, to the extent practicable and prudent.
As described under Chapter 4, Principle 5, Key Consideration 3 of "Information
Disclosure (BOJ-NET [FTS])."
Key Consideration 4: An FMI should avoid concentrated holdings of certain assets
where this would significantly impair the ability to liquidate
such assets quickly without significant adverse price effects.
36

As described under Chapter 4, Principle 5, Key Consideration 4 of "Information
Disclosure (BOJ-NET [FTS])."
Key Consideration 5: An FMI that accepts cross-border collateral should mitigate
the risks associated with its use and ensure that thecollateral can be used in a timely manner.
As described under Chapter 4, Principle 5, Key Consideration 5 of "Information
Disclosure (BOJ-NET [FTS])." The Bank currently does not provide the in-transit
collateral facility against foreign government bonds as the eligible collateral.
Key Consideration 6: An FMI should use a collateral management system that iswell-designed and operationally flexible.
As described under Chapter 4, Principle 5, Key Consideration 6 of "Information
Disclosure (BOJ-NET [FTS])."37

Principle 6: Margin
A CCP should cover its credit exposures to its participants for all products
through an effective margin system that is risk-based and regularly reviewed.
This Principle does not apply to CSDs or SSSs.

38

Principle 7: Liquidity risk
An FMI should effectively measure, monitor, and manage its liquidity risk. An
FMI should maintain sufficient liquid resources in all relevant currencies to effectsame-day and, where appropriate, intraday and multiday settlement of payment
obligations with a high degree of confidence under a wide range of potential stressscenarios that should include, but not be limited to, the default of the participant
and its affiliates that would generate the largest aggregate liquidity obligation for
the FMI in extreme but plausible market conditions.
Key Consideration 1: An FMI should have a robust framework to manage its
liquidity risks from its participants, settlement banks,
nostro agents, custodian banks, liquidity providers, andother entities.
Liquidity risk for the Bank
The Bank does not become a counterparty to individual JGB settlements between
participants.
As described under Principle 4, Key Consideration 1, to ensure the smooth settlementsof JGBs and the associated funds settlements, the Bank extends credit in the form of
intraday overdrafts to the participants it has authorized to use such a facility whenrequested. There is no liquidity constraint for the Bank in providing this facility.
Hence, Key Considerations 3 to 10 do not apply to the Bank.
Liquidity risks for the participants
Although liquidity risks for the participants are not risks arising from the use of the JGB
Book-Entry Transfer System, generally, between the trade and final settlement,
participants face a liquidity risk that the participants will not be able to acquire a
sufficient amount of liquidity at the point of time necessary to settle. Fully mindful ofsuch a liquidity risk, the Bank operated the JGB Book-Entry Transfer System from theviewpoint of ensuring smooth settlements of JGBs under the JGB Book-Entry Transfer
System and the associated funds settlements. See Chapter 3, Outline, 3-1, in-transit
collateral facility, and Chapter 4, Principle 7 of "Information Disclosure (BOJ-NET
39

[FTS])" for details (note that participants cannot use Liquidity-Saving Features of
BOJ-NET [FTS] for funds settlements in the DVP settlements for JGBs.)
Key Consideration 2: An FMI should have effective operational and analytical
tools to identify, measure, and monitor its settlement andfunding flows on an ongoing and timely basis, including its
use of intraday liquidity.
See Key Consideration 1.
Key Consideration 3: A payment system or SSS, including one employing a DNS
mechanism, should maintain sufficient liquid resources in all
relevant currencies to effect same-day settlement, and whereappropriate intraday or multiday settlement, of payment
obligations with a high degree of confidence under a wide
range of potential stress scenarios that should include, but
not be limited to, the default of the participant and its
affiliates that would generate the largest aggregate payment
obligation in extreme but plausible market conditions.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 4: A CCP should maintain sufficient liquid resources in all
relevant currencies to settle securities-related payments,
make required variation margin payments, and meet otherpayment obligations on time with a high degree ofconfidence under a wide range of potential stress scenariosthat should include, but not be limited to, the default of theparticipant and its affiliates that would generate the largest
aggregate payment obligation to the CCP in extreme but
plausible market conditions. In addition, a CCP that is
involved in activities with a more-complex risk profile orthat is systemically important in multiple jurisdictions
should consider maintaining additional liquidity resources
sufficient to cover a wider range of potential stress scenarios
40that should include, but not be limited to, the default of thetwo participants and their affiliates that would generate thelargest aggregate payment obligation to the CCP in extreme
but plausible market conditions.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 5: For the purpose of meeting its minimum liquid resource
requirement, an FMI's qualifying liquid resources in eachcurrency include cash at the central bank of issue and at
creditworthy commercial banks, committed lines of credit,
committed foreign exchange swaps, and committed repos, aswell as highly marketable collateral held in custody andinvestments that are readily available and convertible into
cash with prearranged and highly reliable funding
arrangements, even in extreme but plausible market
conditions. If an FMI has access to routine credit at thecentral bank of issue, the FMI may count such access as partof the minimum requirement to the extent it has collateralthat is eligible for pledging to (or for conducting otherappropriate forms of transactions with) the relevant central
bank. All such resources should be available when needed.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 6: An FMI may supplement its qualifying liquid resources withother forms of liquid resources. If the FMI does so, thenthese liquid resources should be in the form of assets that arelikely to be saleable or acceptable as collateral for lines ofcredit, swaps, or repos on an ad hoc basis following a default,
even if this cannot be reliably prearranged or guaranteed in
extreme market conditions. Even if an FMI does not haveaccess to routine central bank credit, it should still takeaccount of what collateral is typically accepted by the41

relevant central bank, as such assets may be more likely tobe liquid in stressed circumstances. An FMI should notassume the availability of emergency central bank credit as apart of its liquidity plan.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 7: An FMI should obtain a high degree of confidence, throughrigorous due diligence, that each provider of its minimum
required qualifying liquid resources, whether a participantof the FMI or an external party, has sufficient information
to understand and to manage its associated liquidity risks,
and that it has the capacity to perform as required under its
commitment. Where relevant to assessing a liquidity
provider's performance reliability with respect to aparticular currency, a liquidity provider's potential access tocredit from the central bank of issue may be taken into
account. An FMI should regularly test its procedures foraccessing its liquid resources at a liquidity provider.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 8: An FMI with access to central bank accounts, payment
services, or securities services should use these services,where practical, to enhance its management of liquidity risk.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 9: An FMI should determine the amount and regularly test thesufficiency of its liquid resources through rigorous stresstesting. An FMI should have clear procedures to report theresults of its stress tests to appropriate decision makers at
the FMI and to use these results to evaluate the adequacy of42and adjust its liquidity risk-management framework. In
conducting stress testing, an FMI should consider a wide
range of relevant scenarios. Scenarios should include
relevant peak historic price volatilities, shifts in othermarket factors such as price determinants and yield curves,multiple defaults over various time horizons, simultaneouspressures in funding and asset markets, and a spectrum of
forward-looking stress scenarios in a variety of extreme but
plausible market conditions. Scenarios should also take into
account the design and operation of the FMI, include allentities that might pose material liquidity risks to the FMI(such as settlement banks, nostro agents, custodian banks,
liquidity providers, and linked FMIs), and whereappropriate, cover a multiday period. In all cases, an FMI
should document its supporting rationale for, and shouldhave appropriate governance arrangements relating to, theamount and form of total liquid resources it maintains.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
Key Consideration 10: An FMI should establish explicit rules and procedures thatenable the FMI to effect same-day and, where appropriate,intraday and multiday settlement of payment obligations
on time following any individual or combined default
among its participants. These rules and procedures should
address unforeseen and potentially uncovered liquidity
shortfalls and should aim to avoid unwinding, revoking, ordelaying the same-day settlement of payment obligations.
These rules and procedures should also indicate the FMI's
process to replenish any liquidity resources it may employ
during a stress event, so that it can continue to operate in asafe and sound manner.
As described in Key Consideration 1, this Key Consideration does not apply to the
Bank.
43

Principle 8: Settlement finality
An FMI should provide clear and certain final settlement, at a minimum by theend of the value date. Where necessary or preferable, an FMI should provide final
settlement intraday or in real time.
Key Consideration 1: An FMI's rules and procedures should clearly define thepoint at which settlement is final.
The point of time when the settlements of JGBs under the JGB Book-Entry Transfer
System are final is stipulated in laws and regulations. Specifically, Article 88 ofBook-Entry Transfer Law stipulates that the attribution of rights to the JGBs is final
when it is entered or recorded in the transfer account ledgers. With respect to transfer
and pledging of JGBs, the Book-Entry Transfer Law (Articles 98 and 99) stipulates thatthey become legally valid by the entry or record in the receiver's transfer accountledgers. Moreover, if a deliverer of JGBs who does not have legal title to JGBs
delivers them to a receiver, the receiver will acquire legal title to them, provided that thereceiver acted in good faith without gross negligence (Article 102).
With respect to the transfer of JGBs that has already been entered or recorded in thereceiver's account, such transfer will not be canceled under Japanese laws, including thebankruptcy laws. Since there are no rules under the Japanese bankruptcy laws that areequivalent to the so-called "zero-hour rule," transactions entered or recorded in thereceiver's transfer account ledger before the default will not be voided under theinsolvency proceedings.
Under the JGB Book-Entry Transfer System, FIPs can manage accounts through theirbranches or offices located outside Japan. Thus, if any action is filed with a court
outside Japan, and foreign laws including laws of the jurisdiction where an FIP is
located are applied under rules on conflict of laws, this may affect the legal frameworkof the JGB Book-Entry Transfer System. To address this issue, as described underPrinciple 1, the governing laws on the rights and obligations between the Bank and FIPs
as set out by the Book-Entry Transfer Law, the Regulations and Rules are, by mutual
agreement, Japanese laws. Moreover, the Bank ascertains that the agreement
regarding the governing laws is legally enforceable under the laws of jurisdiction where
the FIP is located, by requiring the FIP to submit to the Bank the letter of44

representations which states that the FIP verifies that the agreement is legally
enforceable under the laws of jurisdiction where the FIP is located.
Key Consideration 2: An FMI should complete final settlement no later than theend of the value date, and preferably intraday or in real time,
to reduce settlement risk. An LVPS or SSS should consider
adopting RTGS or multiple-batch processing during thesettlement day.
Under the JGB Book-Entry Transfer System, the JGB settlement via the BOJ-NET JGB
Services is designed to ensure final settlement on the settlement day. This is stipulated
in the contracts on the use of the BOJ-NET JGB Services.
Specifically, JGB transfer via the BOJ-NET JGB Services is continuously settled in
RTGS so that final settlements are promptly completed on the settlement date. Users
are notified of the result of processing using the BOJ-NET JGB Services promptly after
completion of the settlement.
Key Consideration 3: An FMI should clearly define the point after which unsettled
payments, transfer instructions, or other obligations may not
be revoked by a participant.
The contracts between the Bank and the participants stipulate when the JGB transfer
instructions sent to the BOJ-NET JGB Services can be canceled and, where cancelable,
the time limit. All JGB transfer instructions that do not designate DVP settlements aretreated as instructions without conditions, and are processed immediately upon the
Bank's acceptance of valid transfer instructions; these transfer instructions may not becanceled. JGB transfer requests designating DVP settlements may be canceled evenafter they have been accepted by the Bank, if the counterparty of the transaction gives
its consent. However, even in such cases, they may not be canceled after the Bank has
accepted the corresponding funds transfer requests.
These procedures are stipulated in the Regulations, Rules, and the contract on the use of
the BOJ-NET JGB Services.

45

Principle 9: Money settlements
An FMI should conduct its money settlements in central bank money wherepractical and available. If central bank money is not used, an FMI should minimiseand strictly control the credit and liquidity risk arising from the use of commercialbank money.
Key Consideration 1: An FMI should conduct its money settlements in central
bank money, where practical and available, to avoid credit
and liquidity risks.
Under the JGB Book-Entry Transfer System, it is up to each market participant tochoose a cash settlement agent for JGB settlement. In the case of JGB settlement on a
DVP basis via the BOJ-NET, the funds settlement associated with the JGB settlement issettled via BOJ current accounts.
With regard to the funds settlements of JGB transactions that are not settled on a DVP
basis, both the Bank and commercial banks act as a settlement agent. However, theguidelines formulated by the self-regulatory organization in the Japanese securities
market (by the Japan Securities Dealers Association in "The Japanese Government
Securities Guidelines for Real Time Gross Settlement") states that "market participants
capable of DVP settlement are required to process settlements via DVP settlement asmuch as possible." Hence, most of the JGB settlements, except for those that are freeof payment such as collateral trading, between the participants in the JGB Book-Entry
Transfer System are settled on a DVP basis.
Key Consideration 2: If central bank money is not used, an FMI should conduct its
money settlements using a settlement asset with little or no
credit or liquidity risk.
As described under Key Consideration 1, under the JGB Book-Entry Transfer System, it
is up to each market participant to choose a cash settlement agent for JGB settlement.
A part of JGB settlement under the JGB Book-Entry Transfer System uses commercialbank money instead of central bank money to settle funds associated with the JGB
settlement. Such commercial banks are subject to the prudential regulation ofcompetent regulatory authorities based on relevant laws and regulations (e.g., the46

Banking Law).

Key Consideration 3: If an FMI settles in commercial bank money, it should
monitor, manage, and limit its credit and liquidity risks
arising from the commercial settlement banks. In particular,
an FMI should establish and monitor adherence to strict
criteria for its settlement banks that take account of, among
other
things,theirregulation
andsupervision,creditworthiness, capitalisation, access to liquidity, andoperational reliability. An FMI should also monitor andmanage the concentration of credit and liquidity exposures
to its commercial settlement banks.
In the JGB settlement under the JGB Book-Entry Transfer System, the cash leg of the
DVP settlement using the BOJ-NET is settled via BOJ current accounts. Otherwise,
each participant makes a choice on which cash settlement agent to use for the funds
settlement in JGB settlement. However, non-DVP settlement remains marginal under
the JGB Book-Entry Transfer System, and thus the credit and liquidity risks arisingfrom the use of commercial banks as a cash settlement agent are limited.
Key Consideration 4: If an FMI conducts money settlements on its own books, it
should minimise and strictly control its credit and liquidity
risks.
Together with the JGB Book-Entry Transfer System, the Bank operates a funds transfer
system using BOJ current accounts. In the JGB settlement under the JGB Book-Entry
Transfer System, the Bank settles funds in its own book for the DVP settlement using
the BOJ-NET. See Chapter 4, Principle 4 and 7 of "Information Disclosure (BOJ-NET[FTS])" for the management of credit and liquidity risks that arise from funds transfer
using BOJ current account.
Key Consideration 5: An FMI's legal agreements with any settlement banks should
state clearly when transfers on the books of individual
settlement banks are expected to occur, that transfers are to
be final when effected, and that funds received should betransferable as soon as possible, at a minimum by the end of47

the day and ideally intraday, in order to enable the FMI and
its participants to manage credit and liquidity risks.
In the JGB settlement under the JGB Book-Entry Transfer System, the cash leg of the
DVP settlement using the BOJ-NET is settled via BOJ current accounts. The funds
transferred to the receiver are immediately available to the receiver.
For other JGB settlements, participants can choose to use commercial banks to settle
funds associated with the JGB settlements.

48

Principle 10: Physical deliveries
An FMI should clearly state its obligations with respect to the delivery of physicalinstruments or commodities and should identify, monitor, and manage the risks
associated with such physical deliveries.
This Principle does not apply to the Bank, since the JGB Book-Entry Transfer System
only handles dematerialized JGBs (i.e., book-entry JGBs) based on the Book-Entry
Transfer Law.

49

Principle 11: Central securities depositories
A CSD should have appropriate rules and procedures to help ensure the integrityof securities issues and minimise and manage the risks associated with thesafekeeping and transfer of securities. A CSD should maintain securities in an
immobilised or dematerialised form for their transfer by book entry.
Key Consideration 1: A CSD should have appropriate rules, procedures, andcontrols, including robust accounting practices, tosafeguard the rights of securities issuers and holders,prevent the unauthorised creation or deletion of securities,
and conduct periodic and at least daily reconciliation of
securities issues it maintains.
Under the JGB Book-Entry Transfer System, in accordance with the Book-Entry
Transfer Law and rules such as the Regulations, JGBs held by participants that are
account management institutions and JGBs held by their customers are entered orrecorded separately in the transfer account ledgers of book-entry transfer institutions or
account management institutions. This ensures that the rights of the JGB holders areprotected even from the attachment order or insolvency proceedings of the participant
under the Civil Execution Law and the bankruptcy laws.
The Book-Entry Transfer Law stipulates that when a participant that is an accountmanagement institution makes errors such as recording an excess amount of JGBs in thetransfer account books ("overbooking"), the participant is obliged to retire theoverbooking to protect its customers from losses. It also stipulates that accountmanagement institutions in the tiers below the account management institution
responsible for the overbooking are jointly and severally liable for retiring theoverbooking of the upper-tier institution for their own customers. Further, an investor
protection trust is set up as a safety net to cover the losses incurred by retail investors if
the book-entry transfer institution or account management institutions (excluding FIPs)
become insolvent before they fulfill the obligation to retire the overbooking. The
investor protection trust will compensate the losses incurred by retail investors up to 10
million yen per investor.

50

In order to ensure the rights of the issuer of JGBs, with regard to a new entry or recordin the transfer account ledgers based on the issuance of JGBs and deletion from thetransfer account ledger based on the redemption of JGBs, the Bank, as a book-entry
transfer institution, makes it a rule to have at least two of its authorized staff members to
execute such operations based on the instructions from the issuer of JGBs, thegovernment. Moreover, when making transfers in the BOJ-NET JGB Services, thetotal balance of the entire transfer account ledger remains the same, and the amountdebited from the sender's account and the amount credited to the receiver's account arealways identical for each transfer, thus preventing the unauthorized creation or deletionof securities.
Furthermore, with regard to the appropriateness of operations of the JGB Book-Entry
Transfer System and the BOJ-NET JGB Services (including accounting and verificationof the total balance of the JGBs), the Bank's Auditors, and the Internal Auditors' Office
which reports directly to the Governor, periodically verify and audit the operational
status as a part of the Bank's business.
Key Consideration 2: A CSD should prohibit overdrafts and debit balances insecurities accounts.
The Regulations of the JGB Book-Entry Transfer System prohibit participants frommaking transfer requests unless there are sufficient securities outstanding, thus
preventing negative balances in the securities accounts. Moreover, the BOJ-NET JGB
Services does not accept entries that cause negative balances.
Under the JGB Book-Entry Transfer System, the Bank does not provide overdrafts inthe securities account to resolve negative balances in such an account.
Key Consideration 3: A CSD should maintain securities in an immobilised or
dematerialised form for their transfer by book entry. Where
appropriate, a CSD should provide incentives to immobilise
or dematerialise securities.
JGBs processed under the JGB Book-Entry Transfer System are fully dematerialized,
and no JGB certificates may be issued.

51

Key Consideration 4: A CSD should protect assets against custody risk throughappropriate rules and procedures consistent with its legal
framework.
As stated above, under the JGB Book-Entry Transfer System, the attribution of rights
regarding JGBs is settled by the entries or records to the transfer account ledgers, inaccordance with the Book-Entry Transfer Law. Under such circumstances, entries orrecords to the transfer account ledger kept at the Bank are made by at least two of its
authorized staff members based on the instructions from the government or participants.
In addition, when there are credits or debits to the DPs' accounts, the Bank notifies theparticipants of the amount of credits or debits as well as the amount outstanding. The
BOJ-NET JGB Services verify the validity of the sender of the message throughauthentication using a password distributed to each operator and integrated-circuit (IC)cards. The BOJ-NET JGB Services also send notifications to participants whenever atransfer of JGBs is executed.
Based on the Regulations, the Bank takes the utmost care in maintaining the transfer
account ledger in its custody so that it is not defaced, mutilated, lost, or destroyed.
The JGBs deposited with the Bank by participants under the JGB Book-Entry Transfer
System are appropriately maintained in safekeeping through these operating
arrangements and are fully protected from custody risk.
The segregation of customer assets is as described under Key Consideration 5.
Key Consideration 5: A CSD should employ a robust system that ensuressegregation between the CSD's own assets and the
securities of its participants and segregation among thesecurities of participants. Where supported by the legal
framework, the CSD should also support operationally the
segregation of securities belonging to a participant's
customers on the participant's books and facilitate thetransfer of customer holdings.
In accordance with the Book-Entry Transfer Law and rules such as the Regulations, theBank segregates its own JGBs and JGBs owned by participants on the transfer account52

ledger it keeps. It also ensures segregation among its participants, by keeping separate
accounts for individual participants on its transfer account ledger.
In addition, under the JGB Book-Entry Transfer System, in accordance with theBook-Entry Transfer Law and rules such as the Regulations, JGBs held by participantsthat are account management institutions and those held by their customers are
separately entered or recorded on the transfer account ledgers kept at the book-entry
transfer institutions or the account management institutions in the tier above.
In order to implement the above, in the transfer account ledger of participants that are
account management institutions, accounts for the entry or record of its own JGBs must
be segregated from those for the entry or record of their customers' JGBs.
This ensures the protection of customers' assets against the attachment order or
insolvency proceedings of the participants under the Civil Execution Act and thebankruptcy laws.
Key Consideration 6: A CSD should identify, measure, monitor, and manage its
risks from other activities that it may perform; additional
tools may be necessary in order to address these risks.
The Bank, as the central bank, is engaged in businesses other than the book-entry
transfer institution for JGBs, as stipulated by the Act or authorized by the competent
ministers. Being designated as the book-entry transfer institution for JGBs pursuant to
the Book-Entry Transfer Law, the Bank was exempted from its provisions on theprohibition of engaging in other businesses.
The Bank identifies risks posed by each business it offers and verifies their impact on
the business as a book-entry transfer institution under the JGB Book-Entry Transfer
System.

53

Principle 12: Exchange-of-value settlement systems
If an FMI settles transactions that involve the settlement of two linked obligations(for example, securities or foreign exchange transactions), it should eliminate
principal risk by conditioning the final settlement of one obligation upon the final
settlement of the other.
Key Consideration 1: An FMI that is an exchange-of-value settlement systemshould eliminate principal risk by ensuring that the final
settlement of one obligation occurs if and only if the final
settlement of the linked obligation also occurs, regardless ofwhether the FMI settles on a gross or net basis and when
finality occurs.
Under the JGB Book-Entry Transfer System, when participants transfer JGBs using the
BOJ-NET, the Bank, as a book-entry transfer institution, provides them with a DVP
settlement function that enables them to simultaneously execute the JGB transfer andthe associated funds transfer between BOJ current account. This enables participants
to eliminate the principal risk arising from the transfer of JGBs. The DVP settlements
are processed as follows: (1) a participant delivering the JGBs sends a transfer
instruction for JGBs; (2) information on funds transfer that corresponds to the JGBs
transfer is notified to the payer of funds (i.e., the receiver of the JGBs or the cash
settlement agent designated by the receiver of the JGBs); (3) the payer of funds
confirms the information and makes an entry of the funds transfer instruction; and (4)settlement of JGBs and funds are executed.
The transfer of JGBs under the JGB Book-Entry Transfer System and the transfer offunds using BOJ current account are executed simultaneously on an RTGS basis underthe "gross-gross model" (i.e., in each transaction, a specific funds transfer corresponds
to a specific JGB transfer). Under this model, transfers of each JGBs and funds thatare settled on DVP basis become final at the same time.

54

Principle 13: Participant-default rules and procedures
An FMI should have effective and clearly defined rules and procedures to managea participant default. These rules and procedures should be designed to ensurethat the FMI can take timely action to contain losses and liquidity pressures andcontinue to meet its obligations.
Key Consideration 1: An FMI should have default rules and procedures thatenable the FMI to continue to meet its obligations in theevent of a participant default and that address thereplenishment of resources following a default.
The Bank does not become a counterparty to individual JGB transfers between
participants.
On the other hand, as the operator of the JGB Book-Entry Transfer System, the Bank
defines actions to be taken in the event of a participant default in the Regulations, etc.
Specifically, the Regulations stipulate the criteria to terminate the account of DPs, thecriteria to withdraw the approval of IPs and FIPs, and the procedure to port the JGB
balance of the participant's customers to other participants when the participant
discontinues its book-entry transfer business due to its bankruptcy or other reasons. In
addition, the Regulations stipulate that when a participant is prohibited fromtransferring JGBs by laws and regulations because of an attachment order, for example,
the participant may not request the transfer of such JGBs. Furthermore, theRegulations provide, after noting explicitly that the purpose must be to ensure the"smooth operation of the JGB Book-Entry Transfer System," that the Bank may
establish necessary provisions or take necessary measures.
With respect to the BOJ-NET JGB Services, the contracts with DPs using this network
stipulate that in the event that the Bank recognizes that there is a possibility that thesmooth use of the BOJ-NET JGB Services could be jeopardized, it may terminate thecontract or restrict the use of the BOJ-NET for a certain period of time. Furthermore,
the contracts between the Bank and DPs provide, after noting explicitly that the purposemust be "to ensure the appropriate use of the BOJ-NET for JGB related businesses,"that the Bank may establish necessary provisions or take necessary measures other thanthose stated in the contracts.
55

Key Consideration 2: An FMI should be well prepared to implement its default
rules and procedures, including any appropriate
discretionary procedures provided for in its rules.
As described under Key Consideration 1, the Regulations, etc., stipulate the criteria toterminate the account of the participant, the criteria to withdraw the approval of IPs andFIPs, and the procedure to port the JGB balance of the defaulting participant to otherparticipants. In addition, to the extent of achieving the purpose to ensure the "smooth
operation of the JGB Book-Entry Transfer System," the Bank may establish necessary
provisions or take necessary measures. In addition to the above, the Bank has put inplace a necessary business processing framework.
With respect to the BOJ-NET JGB Services, the contract on the use of the BOJ-NET
stipulates that in the event the Bank recognizes that there is a possibility that the smoothuse of the BOJ-NET JGB Services would be jeopardized, it may terminate the contract
or restrict the use of the BOJ-NET JGB Services for a certain period of time. In
addition, the contract stipulates that only to the extent of achieving the objective "toensure the appropriate use of the BOJ-NET for JGB related businesses," the Bank may
establish necessary provisions or take necessary measures. In addition to the above,
the Bank has put in place a necessary business processing framework.
When the Bank terminates DPs' accounts or withdraws the approval of IPs or FIPs, theBank has an operational framework in place to appropriately notify all participants.
Key Consideration 3: An FMI should publicly disclose key aspects of its default
rules and procedures.
The Bank stipulates in the Regulations, etc., the criteria to terminate the account of DPs,the criteria to withdraw the approval of IPs and FIPs, and the procedure to port the JGB
balance of the defaulting participant to other participants, and publishes them.
Key Consideration 4: An FMI should involve its participants and otherstakeholders in the testing and review of the FMI's
default procedures, including any close-out procedures.
Such testing and review should be conducted at least
annually or following material changes to the rules and56

procedures to ensure that they are practical and effective.
The Bank verifies and reviews on a continuous basis the effectiveness of the procedures
to terminate DPs' accounts and to restrict the use of the BOJ-NET JGB services.

57

Principle 14: Segregation and portability
A CCP should have rules and procedures that enable the segregation andportability of positions of a participant's customers and the collateral provided to
the CCP with respect to those positions.
This Principle does not apply to CSDs or SSSs.

58

Principle 15: General business risk
An FMI should identify, monitor, and manage its general business risk and holdsufficient liquid net assets funded by equity to cover potential general businesslosses so that it can continue operations and services as a going concern if thoselosses materialise. Further, liquid net assets should at all times be sufficient toensure a recovery or orderly wind-down of critical operations and services.
As the Bank is not an entity that would be exposed to business continuity risks arisingfrom deterioration of financial conditions (i.e., general business risk), this Principle does
not apply.

59

Principle 16: Custody and investment risks
An FMI should safeguard its own and its participants' assets and minimise the riskof loss on and delay in access to these assets. An FMI's investments should be in
instruments with minimal credit, market, and liquidity risks.
Key Consideration 1: An FMI should hold its own and its participants' assets at
supervised and regulated entities that have robust
accounting practices, safekeeping procedures, and internal
controls that fully protect these assets.
As a book-entry transfer institution under the JGB Book-Entry Transfer System, theBank manages its own JGBs and the JGBs deposited by participants on its own ledger.
The management of securities by the Bank under the JGB Book-Entry Transfer System
is as described under Principle 11.
Key Consideration 2: An FMI should have prompt access to its assets and theassets provided by participants, when required.
The Bank manages its own JGBs and the JGBs deposited by participants on its own
ledger.
Key Consideration 3: An FMI should evaluate and understand its exposures to its
custodian banks, taking into account the full scope of its
relationships with each.
The Bank manages its own JGBs and the JGBs deposited by participants on its own
ledger.
Key Consideration 4: An FMI's investment strategy should be consistent with its overallrisk-management strategy and fully disclosed to its participants,
and investments should be secured by, or be claims on,
high-quality obligors. These investments should allow for quick
liquidation with little, if any, adverse price effect.
The Bank does not invest its own assets or the JGBs deposited by participants.
60

Principle 17: Operational risk
An FMI should identify the plausible sources of operational risk, both internal andexternal, and mitigate their impact through the use of appropriate systems, policies,
procedures, and controls. Systems should be designed to ensure a high degree of
security and operational reliability and should have adequate, scalable capacity.
Business continuity management should aim for timely recovery of operations andfulfilment of the FMI's obligations, including in the event of a wide-scale or major
disruption.
Key Consideration

1: An FMI should establish a robust operationalrisk-management framework with appropriate systems,
policies, procedures, and controls to identify, monitor,and manage operational risks.

The Bank's basic policy for the operation and risk management of the JGB Book-Entry
Transfer System is as described as under Principle 2, Key Consideration 6.
Operational risks in the JGB Book-Entry Transfer System are also managed under thispolicy.
Specifically, the JGB Book-Entry Transfer System and the BOJ-NET JGB Services areoperated by the Bank as (1) JGB book-entry transfers as the designated book-entry
transfer institution under the Book-Entry Transfer Law, (2) business authorized under
Article 39, Paragraph 1 of the Act, and (3) the regular business of the Bank as stipulated
in Article 33, Paragraph 1 of the Act. As such, their operation and risk management
are not to violate these articles or the authorization, and they must also be consistent
with the Bank's purpose stipulated in Article 1, Paragraph 2 of the Act (which states,"the Bank of Japan's purpose is to ensure smooth settlement of funds among banks andother financial institutions, thereby contributing to the maintenance of stability of thefinancial system"). In addition, Article 5, Paragraph 1 of the Act stipulates, "In light ofthe public nature of its business and property, the Bank of Japan shall endeavor to
conduct its business in a proper and efficient manner." The Policy Board has set down
matters in accordance with each provision of the Act in the Bank's articles ofincorporation, and all of these in combination form the Bank's basic policy on theoperation and risk management of the JGB Book-Entry Transfer System and the
BOJ-NET JGB Services.
61

Under this policy, the Policy Board decides the eligibility criteria for participation in the
JGB Book-Entry Transfer System and other important issues regarding the operation of
the JGB Book-Entry Transfer System. In the actual operation of the JGB Book-Entry
Transfer System and the BOJ-NET JGB Services, in line with the policy and thedecisions, all functions -- including the relevant functions responsible for business
operations and IT system management -- identify risks that would arise from theexecution of their business and verify how these risks are managed and countermeasures
are implemented. The situation of risk management in each function is periodicallyreported to the Policy Board.
Similarly, in the development phase of the JGB Book-Entry Transfer System, theGovernor, other relevant Officers, and the relevant functions responsible for business
operations and IT system management identify operational risks in accordance with thesystem development policy decided by the senior management, and build a system that
contains such risks. In addition, in deliberating the content of new services, thefunction responsible for business operations ensures the implementation of appropriate
business processing by carefully examining the content of the business, identifying andestablishing business processes that control operational risks, and establishing detailed
business processing rules and procedures for both participants and the Bank.
Furthermore, with respect to system disruptions, basic measures stating how to react tothe Bank's system disruptions have been developed among all relevant functions at the
Bank, including the relevant functions responsible for business operations and IT
system management. The Bank ensures the continuity of appropriate businessprocessing through continuous review of operational risks.
Key Consideration 2: An FMI's board of directors should clearly define the roles
and responsibilities for addressing operational risk andshould endorse the FMI's operational risk-management
framework. Systems, operational policies, procedures, andcontrols should be reviewed, audited, and tested periodicallyand after significant changes.
As described under Key Consideration 1 and Principle 2, Key Consideration 6, in
accordance with the basic policy and decisions by the Policy Board on risk management,
and within the scope of organization and jurisdiction set forth by the Act, articles of62

incorporation and Rules on Organization of the Bank, all functions -- including relevant
functions responsible for business operations and IT system management -- identify andcontrol risks that may arise in the performance of their duties, and take necessary
measures. The situation of risk management in each function is periodically reported
to the Policy Board.
In addition, the Internal Auditors' Office conducts audits, and these results are verified
by the Policy Board. Moreover, Auditors audit the Bank's business, and the outline of
the results is published every fiscal year in the Annual Review.
Key Consideration 3: An FMI should have clearly defined operational reliability
objectives and should have policies in place that are designed
to achieve those objectives.
The Bank operates the JGB Book-Entry Transfer System and the BOJ-NET JGB
Services with the purpose to contribute to the smooth settlement of funds among
financial institutions by achieving safer and more efficient JGB settlements, as
book-entry of JGBs is strongly linked with funds transactions and settlements among
financial institutions. In according with this purpose, the BOJ-NET JGB Services has
gained credibility in its business processing because (1) it has sufficiently highoperational availability, (2) there have been very few breakdowns, and (3) the JGB
Book-Entry Transfer System has operated stably for a considerable period of time. In
accordance with the basic policy and the decisions by the Policy Board on risk
management described under Principle 2, Key Consideration 6, the Bank aims tocontinue to maintain the sufficiently high operational availability of the BOJ-NET JGB
Services and the stable operation of the JGB Book-Entry Transfer System.
To ensure the information security of its computer systems, including the BOJ-NETJGB Services, and the information processed by these systems, the Bank has
documented its security policy (its principles on organizational structure and security
measures to ensure information security). Under this policy, the Bank works to ensure
information security. Moreover, the Bank monitors the system operations at its
computer center at all times for early detection and correction of disruptions. It also
has in place business continuity plans for potential disasters or disruptions. Throughthese measures, the Bank will seek to maintain its high operational reliability in the
future.
63

The operational status of the BOJ-NET JGB Services and other computer systems isperiodically reported to the Policy Board. In addition, as part of their verification andaudit of the business of the Bank, Auditors and the Internal Auditors' Office verify andaudit the status of the development and operation of the BOJ-NET JGB Services.
Key Consideration 4: An FMI should ensure that it has scalable capacity adequate
to handle increasing stress volumes and to achieve its
service-level objectives.
The Bank ensures that it has adequate capacity in business processing by conducting
surveys to project future transaction volume, as necessary, taking into account theoffering of new services, developments in other FMIs, and trends in financial markets.
Key Consideration 5: An FMI should have comprehensive physical andinformation security policies that address all potential
vulnerabilities and threats.
The Bank's security measures for the physical safety of its data centers, offices, as wellas sites where its devices are located that are used for business processing, are stated in
its information security policy (its basic principles on the organizational structure andsafety measures) and rules on the security of its business offices. Specifically, there
are rigorous controls on entering and leaving the Bank's data centers, the sites wheredevices are located. These locations are also guarded by locks and fire prevention
measures.
As stated under Key Consideration 3, information security policy concerning theoperation of the JGB Book-Entry Transfer System is set in the Bank's information
security policy.
Key Consideration 6: An FMI should have a business continuity plan that
addresses events posing a significant risk of disrupting
operations, including events that could cause a wide-scaleor major disruption. The plan should incorporate the useof a secondary site and should be designed to ensure thatcritical information technology (IT) systems can resume
operations within two hours following disruptive events.
64

The plan should be designed to enable the FMI to complete
settlement by the end of the day of the disruption, even incase of extreme circumstances. The FMI should regularly
test these arrangements.
To ensure the operational reliability of the BOJ-NET JGB Services, the Bank has
duplicated not only the host computers at its main center but also important devices,such as central devices including telecommunication control units, circuits linking theBank's head office with branches, and circuit exchange offices of telecommunicationcompanies used by the head office and branches.
In case disruptions should occur at its main center, the Bank has established a backup
center at a location sufficiently distant from the main center (i.e., approximately 500
kilometers away in Osaka), so that even if a disruption hits the main center, the Bank
should be able to continue the provision of services under the JGB Book-Entry Transfer
System through processing at the backup center. Thus, the Bank has in place anoperational framework to ensure smooth settlements.
At the Bank's computer center, the Bank monitors the situation of the system operations
at all times for early detection and correction of disruptions. Under this regime, whenan event that would suspend the business processing at the main center is detected, theprocessing can be switched over to the backup center. The backup center can provide
the same service as the main center, and the data at the main center are mirrored nearly
on a real-time basis to the backup center. The operational procedures following theswitchover to the backup center are documented, and there is an arrangement underwhich the business at the backup center will be carried out primarily by the Bank's
branch staff in Osaka, which is the city where the backup center is located. It is
expected that the business at the backup center will resume within two hours following
a disruptive event.
If the Bank's branch cannot continue its business related to the BOJ-NET due todisasters or disruptions, the head office will take over the relevant business of the
branch. Moreover, in order for a participant to be prepared for a situation where it isunable to execute business related to the BOJ-NET due to a disaster or disruption, theBank requires participants to prepare their business continuity planning to switch topaper-based transactions or to use the BOJ-NET terminals at its other offices dedicated65for the use at such times. Through these measures, the Bank aims to ensure thattime-critical transactions are executed even in case of extreme circumstances.
The Bank conducts drills with users of the BOJ-NET JGB Services about once a year,
in which the scenario calls for switching over to the backup center. The effectivenessof the switchover to the backup center is verified through these drills. In addition tothem, the Bank has established business continuity arrangements in emergencies arisingfrom disasters and other events, and verifies their effectiveness periodically throughdrills.
Key Consideration 7: An FMI should identify, monitor, and manage the risks thatkey participants, other FMIs, and service and utility
providers might pose to its operations. In addition, an FMI
should identify, monitor, and manage the risks its operations
might pose to other FMIs.
The Bank's basic policy for the operation and risk management of the JGB Book-Entry
Transfer System and the BOJ-NET JGB Services is as described under Key
Consideration 1 and Principle 2, Key Consideration 6. In the actual operation of the
JGB Book-Entry Transfer System and the BOJ-NET JGB Services, in accordance withthe basic policy and decisions by the Policy Board on risk management, all functions -including business operations and IT system management, either individually according
to their jurisdiction or in collaboration with other functions -- analyze and consider risks(such as credit, liquidity, and operational risks) that could affect smooth operation of the
JGB Book-Entry Transfer System and the BOJ-NET JGB Services to identify andmanage them. In addition, the Bank sets procedures and implements them whennecessary.
Specifically, through timely and appropriate monitoring of the status of participants'
system operations, the Bank manages the risks posed by their disruptions that may
affect the operation of the JGB Book-Entry Transfer System.
In addition, the BOJ-NET JGB Services encrypts messages sent via thetelecommunication networks to protect secrets and prevent data tampering. Moreover,the Bank verifies the validity of the sender of the message through authentication usinga password distributed to each operator and IC cards. The BOJ-NET JGB Services are66controlled in such a way that a user of the BOJ-NET JGB Services can only execute thebusiness that is designated to that user in advance.
On the other hand, the identification, monitoring, and management of the risks where
disruptions in the business processing in the JGB Book-Entry Transfer System and the
BOJ-NET JGB Services spreading to other entities are as described under Principle 3,
Key Consideration 3.
The Bank maintains close contact with other FMIs using the JGB Book-Entry Transfer
System for the JGB settlements through, among others, exchanges of communication
trees in case of disruption and business processing procedures for business continuity.
In establishing or amending such a regime, the Bank and the FMI duly discuss andcoordinate to ensure their effectiveness.

67Principle 18: Access and participation requirements
An FMI should have objective, risk-based, and publicly disclosed criteria forparticipation, which permit fair and open access.
Key Consideration 1: An FMI should allow for fair and open access to its services,
including by direct and, where relevant, indirect
participants and other FMIs, based on reasonablerisk-related participation requirements.
The eligibility criteria for the participation of the JGB Book-Entry Transfer System are
stipulated in "Requirements for Establishing Direct Participants' Accounts andCustomers' Accounts and Requirements for Approval as Indirect Participants andForeign Indirect Participants in the JGB Book-Entry System," and published by the
Bank. Such criteria enable open and fair access to the JGB Book-Entry Transfer
System.
The requirements state that the Bank provides access to the JGB Book-Entry Transfer
System to (1) institutions provided in Article 44, Paragraph 1, Items 1 through 13 of theBook-Entry Transfer Law (banks, foreign bank branches, financial instruments business
operators, insurance companies); (2) other book-entry transfer institutions and clearingorganizations under the Book-Entry Transfer Law; and (3) foreign book-entry transfer
institutions and clearing organizations which the Bank considers to be equivalent tothose under the Book-Entry Transfer Law. In order to ensure the safety of settlement
under the JGB Book-Entry Transfer System, the Bank verifies the following to preventthe credibility of the JGB Book-Entry Transfer System being jeopardized or smooth
operation of the JGB Book-Entry Transfer System being disrupted: the fact that theparticipants' financial condition is sound and their operational capabilities are adequate;
for a securities clearing and settlement system , in addition to the above, the fact that
there are no concerns about the risk management of clearing and settlement as part oftheir business, procedures on loss disposition caused by the clearing and settlement, andcredibility of the computer system offered to users. These requirements areappropriate from the viewpoint of ensuring the safety and efficiency of the JGB
Book-Entry Transfer System.
Key Consideration 2: An FMI's participation requirements should be justified in68terms of the safety and efficiency of the FMI and themarkets it serves, be tailored to and commensurate with the
FMI's specific risks, and be publicly disclosed. Subject tomaintaining acceptable risk control standards, an FMI
should endeavour to set requirements that have theleast-restrictive impact on access that circumstances permit.
As described under Key Consideration 1, the eligibility criteria for the participation of
the JGB Book-Entry Transfer System are set appropriately from the viewpoint of
ensuring the safety and efficiency of the JGB Book-Entry Transfer System. These
criteria are reviewed whenever necessary, for example, based on risks surrounding the
JGB Book-Entry Transfer System, changes in the financial market structure, andamendments in laws and regulations.
Key Consideration 3: An FMI should monitor compliance with its participation
requirements on an ongoing basis and have clearly definedand publicly disclosed procedures for facilitating thesuspension and orderly exit of a participant that breaches,or no longer meets, the participation requirements.
The participants' compliance with the Bank's eligibility criteria for the participation of
the JGB Book-Entry Transfer System is monitored through the submission of accident
reports and reporting and submission of materials required by the Bank mainly based on
the Regulations and information disclosure contracts. Participants that have contractedwith the Bank to be subject to on-site examination by the Bank are continuously
monitored through on-site examination and off-site monitoring. FMIs that are
participants in the JGB Book-Entry Transfer System are subject to the Bank's oversight.
Whenever a participant does not meet the Bank's eligibility criteria for participation in
the JGB Book-Entry Transfer System, or is acknowledged to have the risk of impairingsmooth settlements under the JGB Book-Entry Transfer System, the Bank takes
appropriate measures to induce changes and intensify monitoring of the participant.
The Regulations stipulate that the Bank can deny or suspend access of a participant to
the JGB Book-Entry Transfer System (1) when a participant has been issued
administrative dispositions based on laws and regulations, (2) when a participant hasbreached the Rules, the Regulations, or other matters determined by the Bank to ensure
69

the smooth operation of the JGB Book-Entry Transfer System, or (3) when the Bank
considers that it impairs, or threatens to impair, the credibility of the JGB Book-Entry
Transfer System or prevent its smooth operation. The Regulations are publicly
available on the Bank's website.

70Principle 19: Tiered participation arrangements
An FMI should identify, monitor, and manage the material risks to the FMI
arising from tiered participation arrangements.
Key Consideration 1: An FMI should ensure that its rules, procedures, andagreements allow it to gather basic information about
indirect participation in order to identify, monitor, andmanage any material risks to the FMI arising from suchtiered participation arrangements.
The Bank collects information on indirect participation through settlement data under
the JGB Book-Entry Transfer System and surveys of and discussions with theparticipants. Through these activities, the Bank grasps basic information on (1) IPs,
FIPs, and Customers with a large scale of settlement (e.g., the number of IPs, FIPs, andCustomers, their names, the transaction volume and value, and their industry
categories); (2) the settlement-related services that DPs provide to IPs; and (3) risks
arising from these services and how these risks are managed.
Key Consideration 2: An FMI should identify material dependencies between
direct and indirect participants that might affect the FMI.
As described under Key Consideration 1, the Bank conducts surveys of and discussions
with DPs, and through them the Bank identifies material dependencies that may affectthe smooth settlements of funds under the JGB Book-Entry Transfer System among theDPs and the IPs, FIPs, and Customers. Specifically, the Bank has identified
dependencies where DPs provide settlement business, credit extension, and liquidity
provision to IPs, FIPs, and Customers.
Key Consideration 3: An FMI should identify indirect participants responsible fora significant proportion of transactions processed by the
FMI and indirect participants whose transaction volumes orvalues are large relative to the capacity of the direct
participants through which they access the FMI in order tomanage the risks arising from these transactions.

71

As described under Key Consideration 1, the Bank conducts settlement data collection
under the JGB Book-Entry Transfer System, and surveys of and discussions with theDPs. Through these activities, the Bank identifies IPs, FIPs, and Customers with alarge scale of settlement that have a considerable share of the transaction value under
the JGB Book-Entry Transfer System and IPs, FIPs, and Customers that have arelatively higher transaction volume and value compared to DPs.
Key Consideration 4: An FMI should regularly review risks arising from tiered
participation arrangements and should take mitigating
action when appropriate.
As described under Key Consideration 1, mainly through settlement data collection
under the JGB Book-Entry Transfer System and surveys of and discussions with theDPs, the Bank grasps and verifies the risks arising from the tiered participation under
the JGB Book-Entry Transfer System.
Through these activities, the Bank has confirmed that the number of IPs, FIPs, andCustomers that have a considerable share of the transaction value under the JGB
Book-Entry Transfer System, as well as the IPs, FIPs, and Customers that have arelatively higher transaction volume and value compared to DPs, is small. Hence, theBank evaluates that risks arising from tiered participation arrangements under the JGB
Book-Entry Transfer System are limited.

72Principle 20: FMI links
An FMI that establishes a link with one or more FMIs should identify, monitor,and manage link-related risks.
Key Consideration 1: Before entering into a link arrangement and on an ongoingbasis once the link is established, an FMI should identify,
monitor, and manage all potential sources of risk arisingfrom the link arrangement. Link arrangements should bedesigned such that each FMI is able to observe the otherprinciples in this report.
The JGB Book-Entry Transfer System has not established a link with other FMIs (theBank has not used nor has participated in other FMIs in order to operate the JGB
Book-Entry Transfer System), hence it does not have the procedure to identify such arisk that arises from the link arrangement.
On the other hand, when other FMIs apply for participation in the JGB Book-Entry
Transfer System, the Bank verifies whether the applicant satisfies the requirements forsecurities clearing and settlement system set out in the "Requirements for Establishing
Direct Participants' Accounts and Customers' Accounts and Requirements for Approval
as Indirect Participants and Foreign Indirect Participants in the JGB Book-Entry
System." In particular, the Bank verifies that there are no particular concerns about thesafety of the clearing and settlement the FMI from the viewpoint of the risk
management of clearing and settlement as part of business, the procedure of loss
disposition caused by the clearing and the settlement, and credibility of the computer
system offered to users. The Bank also verifies the fact that the participants' financial
condition is sound and its operational capabilities are adequate. Furthermore, the Bank
oversees major FMIs including FMIs that directly participate in the JGB Book-Entry
Transfer System, in accordance with the "The Bank of Japan Policy on Oversight of
Financial Market Infrastructures."
Key Consideration 2: A link should have a well-founded legal basis, in all relevant
jurisdictions, that supports its design and provides adequate
protection to the FMIs involved in the link.

73

As described above, the JGB Book-Entry Transfer System does not use or participate inother FMIs.
As described in Principle 1, Key Consideration 5, and Principle 8, Key Consideration 1,
the legal risk arising from indirect participation in the JGB Book-Entry Transfer System
by FMIs located outside Japan is addressed by mutually agreeing that the governing
laws regarding the rights and obligations between the Bank and the FMI are Japaneselaws, and by requiring the FIP to submit to the Bank the letter of representations whichstates that the FIP verifies that the agreement is legally enforceable under the laws ofjurisdiction where the FIP is located.
Key Consideration 3: Linked CSDs should measure, monitor, and manage thecredit and liquidity risks arising from each other. Any credit
extensions between CSDs should be covered fully withhigh-quality collateral and be subject to limits.
This Key Consideration does not apply to the JGB Book-Entry Transfer System, since
JGB Book-Entry Transfer System does not use or participate in other FMIs.
Key Consideration 4: Provisional transfers of securities between linked CSDs
should be prohibited or, at a minimum, the retransfer ofprovisionally transferred securities should be prohibited
prior to the transfer becoming final.
The JGB Book-Entry Transfer System does not use or participate in other FMIs.
There is no provisional transfer of securities with the CSD that participates in the JGB
Book-Entry Transfer System.
Key Consideration 5: An investor CSD should only establish a link with an issuer
CSD if the arrangement provides a high level of protection
for the rights of the investor CSD's participants.
This Key Consideration does not apply to the JGB Book-Entry Transfer System, since
the JGB Book-Entry Transfer System does not use nor participate in other FMIs.

74

Key Consideration 6: An investor CSD that uses an intermediary to operate a linkwith an issuer CSD should measure, monitor, and manage
the additional risks (including custody, credit, legal, andoperational risks) arising from the use of the intermediary.
This Key Consideration does not apply to the JGB Book-Entry Transfer System, since
the JGB Book-Entry Transfer System does not use or participate in other FMIs.
Key Consideration 7: Before entering into a link with another CCP, a CCP should
identify and manage the potential spill-over effects from thedefault of the linked CCP. If a link has three or more CCPs,
each CCP should identify, assess, and manage the risks ofthe collective link arrangement.
This Key Consideration does not apply to CSDs or SSSs.
Key Consideration 8: Each CCP in a CCP link arrangement should be able tocover, at least on a daily basis, its current and potential
future exposures to the linked CCP and its participants, ifany, fully with a high degree of confidence without reducing
the CCP's ability to fulfil its obligations to its own
participants at any time.
This Key Consideration does not apply to CSDs or SSSs.
Key Consideration 9: A TR should carefully assess the additional operational risks
related to its links to ensure the scalability and reliability ofIT and related resources.
This Key Consideration does not apply to CSDs or SSSs.

75

Principle 21: Efficiency and effectiveness
An FMI should be efficient and effective in meeting the requirements of its
participants and the markets it serves.
Key Consideration 1: An FMI should be designed to meet the needs of its
participants and the markets it serves, in particular, withregard to choice of a clearing and settlement arrangement;
operating structure; scope of products cleared, settled, or
recorded; and use of technology and procedures.
In making decisions or changes on services offered under the JGB Book-Entry Transfer
System and the BOJ-NET JGB Services, the Bank conducts public consultations asnecessary and, to grasp the views and requests of participants, regularly holds direct
dialogues with and conducts surveys of participants. For example, in developing the
new BOJ-NET, which was fully launched in October 2015, the Bank adopted a basic
policy to (1) use the latest IT, (2) employ a more flexible architecture to take account of
future changes, and (3) incorporate enhanced accessibility. In addition, through public
consultation and a forum of participants, the Bank grasped their views and requests.
Based on such dialogues and survey results, the Bank makes its analyses on the
improvements of the safety and efficiency as concrete as possible, and assesses theneeds of its participants and the markets it serves.
With regard to the IT system performance of the BOJ-NET JGB Services, the Bank
verifies the system capacity and performance periodically or when development or
modification of the system is underway. The Bank also monitors daily transaction
volume at all times and has maintained sufficient IT system capacity to meet thetransaction demands on normal days as well as the foreseeable peak transaction volume.
At present, recent records on the use and settlement of the BOJ-NET JGB Services
show no signs of gross excess or shortage in IT system performance.
Key Consideration 2: An FMI should have clearly defined goals and objectives
that are measurable and achievable, such as in the areas ofminimum service levels, risk-management expectations, andbusiness priorities.

76

The Bank operates the JGB Book-Entry Transfer System with the purpose ofcontributing to the smooth settlement of funds among financial institutions by achieving
safer and more efficient JGB settlements.
This purpose has been sufficiently achieved, as (1) the BOJ-NET JGB Services has
maintained high operational availability for a long period of time, (2) there have beenvery few breakdowns (see Principle 17), and (3) the volume and value of settlements
have followed a stable trend as shown in the charts below (Charts 4-1 and 4-2). The
levels of JGB settlements under the JGB Book-Entry Transfer System and operational
status of the BOJ-NET are periodically reported to the Policy Board, while trends in thevalue and volume of settlements under the JGB Book-Entry Transfer System arepublished as monthly statistics.
(Chart 4-1) Trends in JGB Settlements through the JGB Book-Entry Transfer System
Trillion yen

Ten thousand

140

3
Value

Volume (right scale)

120
100

2

80
60
1

40
20
0
CY 06

0
07

08

09

10

11

12

13

14

15

16

17

18

19

(Chart 4-2) Change of JGB Settlements Values through the JGB Book-Entry Transfer
Systemy/y % chg.
50
40
30
20
10
0
▲10
▲20
▲30
CY

06

07

08

09

10

11

12

77

13

14

15

16

17

18

19

Key Consideration 3: An FMI should have established mechanisms for the regularreview of its efficiency and effectiveness.
The Bank ensures that it has adequate capacity in business processing by conducting
surveys to project future transaction volume that takes into account the developments inother FMIs and trends in financial markets. In addition, the levels of settlements of
JGBs under the JGB Book-Entry Transfer System and operational status of the
BOJ-NET are periodically reported to the Policy Board.
Moreover, with regard to the Bank's business, including the operation of the JGB
Book-Entry Transfer System and the BOJ-NET JGB Services, there are audits by theInternal Auditors' Office and periodic verification of the Bank's business operations by
the Auditors, including an assessment of efficiency and effectiveness.

78Principle 22: Communication procedures and standards
An FMI should use, or at a minimum accommodate, relevant internationallyaccepted communication procedures and standards in order to facilitate efficient
payment, clearing, settlement, and recording.
Key Consideration 1: An FMI should use, or at a minimum accommodate,internationally accepted communication procedures andstandards.
The BOJ-NET JGB Services uses Transmission Control Protocol/Internet Protocol(TCP/IP), which is an internationally accepted communication procedure.
The BOJ-NET JGB Services has adopted the internationally prevalent Extensible
Markup Language (XML) message format. ISO 20022 messages are employed when
there is an expectation that the straight-through processing (STP) that enables theconsecutive processing of a transaction from the point of execution to settlement can beenhanced. For other XML message formats, XML tags based on ISO 20022 messages
are applied to the extent possible.

79Principle 23: Disclosure of rules, key procedures, and market data
An FMI should have clear and comprehensive rules and procedures and should
provide sufficient information to enable participants to have an accurate
understanding of the risks, fees, and other material costs they incur byparticipating in the FMI. All relevant rules and key procedures should be publicly
disclosed.
Key Consideration 1: An FMI should adopt clear and comprehensive rules andprocedures that are fully disclosed to participants. Relevant
rules and key procedures should also be publicly disclosed.
The basic rules and procedures for the JGB Book-Entry Transfer System are set forth in(1) the relevant laws and regulations including the Book-Entry Transfer Law; (2)Statement of Operation Procedures set by the Bank based on the Act; (3) the
Regulations that is approved by the competent minister under the Book-Entry Transfer
Law, and the Rules; and (4) the participation requirements for the JGB Book-Entry
Transfer System.
The rules and procedures of the BOJ-NET JGB Services are stipulated as a contract
between the DPs and the Bank, where the rights and obligations of the parties areclearly defined. The operation manuals for the BOJ-NET JGB Services stipulate theoperational procedures to be followed by the users and the procedures on exceptional
occasions such as participant defaults and system disruptions. These are easily
accessible to participants.11
Also published are the rights and obligations between the Bank and participants,
detailed arrangements on the use of the JGB Book-Entry Transfer System, and fees forthe use of the BOJ-NET JGB services.
All the above rules and procedures including the Regulations make up comprehensive
arrangements for the use of the JGB Book-Entry Transfer System, which allow aparticipant to easily recognize the risks and costs it may bear as the participant.
When the Bank makes changes to the rules and procedures in light of IT system
11

The operation manuals are available only in Japanese.
80improvements or changes in the surrounding environment, the Bank notifies participantsof this fact in writing or via its website, and thus the participants can easily access thelatest information.
Key Consideration 2: An FMI should disclose clear descriptions of the system's
design and operations, as well as the FMI's and participants'rights and obligations, so that participants can assess therisks they would incur by participating in the FMI.
As described above, the design and managements of the JGB Book-Entry Transfer
System and the BOJ-NET JGB Services are stipulated in (1) the relevant laws andregulations including the Book-Entry Transfer Law; (2) Statement of Operation
Procedures set by the Bank based on the Act; (3) the Regulations that are approved by
the competent minister under the Book-Entry Transfer Law, and the Rules; (4) the
participation requirements for the JGB Book-Entry Transfer System; and (5) the rules
and operational manuals of the BOJ-NET JGB services. These relevant laws andregulations, rules and procedures are published on the Bank's website.
To facilitate the participants' understanding of the risks they would bear by becoming aparticipant in the JGB Book-Entry Transfer System or a user of the BOJ-NET JGB
Services, the rules, procedures, and contracts provide information on the rights andobligations of a participant, the time when the book-entry transfer of JGB becomes final,
the procedures for participant’s default, and the governing laws and jurisdiction.
The Regulations stipulate that the Bank may establish necessary provisions or takenecessary measures, including the revisions of the rules and procedures. However, it
is noted explicitly that it will be pursued only to the extent to achieve the objective ofensuring appropriate operation of the JGB Book-Entry Transfer System.
Key Consideration 3: An FMI should provide all necessary and appropriate
documentation and training to facilitate participants'
understanding of the FMI's rules and procedures and therisks they face from participating in the FMI.
The Bank promotes the participants' understanding through such steps as providing
explanations when approved to become a participant to the JGB Book-Entry Transfer
81

System, setting up help-desk support, providing explanatory documents andexplanations upon revision in the JGB Book-Entry Transfer System, and offeringrunning tests on the BOJ-NET JGB Services including the one before the full launch of
the New BOJ-NET JGB Services.
As a result of these measures, the Bank has maintained the stability of settlements under
the JGB Book-Entry Transfer System and the BOJ-NET JGB Services.
Key Consideration 4: An FMI should publicly disclose its fees at the level ofindividual services it offers as well as its policies on any
available discounts. The FMI should provide clear
descriptions of priced services for comparability purposes.
With regard to the fees for the use of the BOJ-NET JGB Services, the Bank discloses its
policy and the fees that are set at the level of individual services. Specifically, the fees
are in principle set based on the following policy.
First, the Bank considers that it should basically bear the costs of putting its
infrastructure in place to offer its settlement services (such as the costs of development
and maintenance of the systems). This is because the JGB Book-Entry Transfer
System, which offers JGB settlements among financial institutions, is a public
infrastructure that is fundamental to the functioning of the financial and capital markets.
Moreover, it is considered that investing to further enhance the safety and efficiency of
its FMI in response to changes in the surrounding environment such as technologicalinnovation is an inherent function of central banks.
On the other hand, financial institutions using the JGB Book-Entry Transfer System
online via the BOJ-NET JGB Services can expect to benefit from the lighter operationalburden and shorter processing time compared with those when using these services via
paper-based requests to the Bank. Therefore, when the BOJ-NET JGB Services isaccessed, the Bank collects the costs for connection with the BOJ-NET JGB Services
and the use of communication circuits from participants, which corresponds to thebenefits from online processing. The fees are collected in the form of fixed fees andtransaction fees. The fixed fees are determined by the type of communication circuit,while the transaction fees are set according to the type of message format.

82

Key Consideration 5: An FMI should complete regularly and disclose publicly
responses to the CPSS-IOSCO Disclosure framework forfinancial market infrastructures. An FMI also should, at aminimum, disclose basic data on transaction volumes andvalues.
The Bank intends to disclose publicly the response to "Principles for financial market
infrastructures: disclosure framework and assessment methodology" whenever there is amaterial change in the JGB Book-Entry Transfer System and the BOJ-NET JGB
Services or the surrounding environment, or at least every other year.
The Bank compiles and publishes on its website statistics on Payment and Settlement
Statistics on a monthly basis. These statistics include the volume and value of
settlements executed under the JGB Book-Entry Transfer System, and the cumulative
share of DVP for JGB settlements settled during the day both on a volume and value
basis. The Bank also publishes the number of participants in the JGB Book-Entry
Transfer System.

83Principle 24: Disclosure of market data by trade repositories
A TR should provide timely and accurate data to relevant authorities and the
public in line with their respective needs.
This Principle does not apply to CSDs or SSSs.

84