CPMI-IOSCO Disclosure for Japanese Banks’ Payment Clearing Network 2015
Responding institution : Japanese Banks’ Payment Clearing Network
Jurisdiction in which the FMI operates : Japan
Authorities regulating, supervising or overseeing the FMI : Japan Financial Services Agency,
Bank of JapanThe date of this disclosure : July 31, 2015
This disclosure can also be found at www.zengin-net.jp/en/
For further information, please contact :kikaku@zengin-net.jp

I. Executive summary
Overview of FMI
The Japanese Banks’ Payment Clearing Network (hereinafter, “Zengin-Net”) is currently
Japan’s only Funds Clearing Agency under the Payment Services Act (Act No. 59 of 2009).
Zengin-Net commenced operations in October 2010 when the operations of the Organization
for Management of Domestic Fund Transfers (established in 1973) were succeeded from theTokyo Bankers Association (currently, the Japanese Bankers Association) in the form of the
National Domestic Funds Transfer System (hereinafter, “Domestic Funds Transfer System”).
The purpose of Zengin-Net is to facilitate smooth, safe and efficient fund settlements between
financial institutions, which are a foundation of society, and establish a reliable financial
infrastructure to raise the standard of living for people living in Japan. To fulfill this purpose,
Zengin-Net operates the Domestic Funds Transfer System.
The Domestic Funds Transfer System connects financial institutions online and is structured
to allow funds transfer transactions, such as wire transfers and remittances, to be carried out
between financial institutions. The greatest feature of the Domestic Funds Transfer System isthe speed of execution it offers, whereby in almost all cases on weekdays between the hoursof 8:30am and 3:30pm funds are deposited into beneficiary accounts in real time almost
simultaneously with the transfer message sent and received between financial institutions.
The core operating system of the Domestic Funds Transfer System is the Zengin Data
Telecommunication System (hereinafter, “Zengin System”), which is operated by Zengin-Net.
The Zengin System links financial institutions in Japan through telecommunication lines forprocessing data in a concentrated manner. Zengin-Net utilizes the Zengin System to carry out
1funds clearing operations and data exchange operations in which data for funds transfer
transactions from transfer messages is sent and received between financial institutions.
The term “funds clearing” refers to clearing funds by assuming the obligation in the
debtor-creditor relationship between financial institutions that accompany funds transfer
transactions. As the operator of the Domestic Funds Transfer System, Zengin Net has
obtained a license for funds clearing operations as its core business.

2

[Figure 1: Work Flow of Data Exchange Operations]Remitter

Sender bankCenterTransfermessage

Telegraphic transfer
MT data file transmission
New file transfers

Funds

Zengin Center

clearing[data exchange]

Bank of Japan

Telegraphic transfer
MT data file transmission
New file transfers

Transfermessage

CenterReceiver Bank

Beneficiary●Center: Sends and receives transfer messages●Telegraphic transfer: Transfer messages are each sent and received in real time
●MT data file transmissions: Batch sending and receiving of multiple transfer messages●New file transfers: Each data sent and received by MT data file transmission is managed and sent as an individual file3

<Participants>
Almost all deposit-taking financial institutions in Japan, including banks, Shinkin banks(credit associations), credit cooperatives, labor banks and agricultural cooperatives and theJapan Post Bank, currently participate in the Domestic Funds Transfer System These financial
institutions are referred to as “Participating Banks.”
Specifically, currently over 1,300 financial institutions, including foreign banks, participate in
the Domestic Funds Transfer System, with exchange transactions taking place between theirmore than 30,000 branches in Japan.
Of these Participating Banks, those that conduct direct funds settlements with Zengin-Net arereferred to as “Clearing Participants” and Participating Banks that outsource funds
settlements to these clearing participants are called “Agency Participants.”<Legal and Regulatory Framework>
The Payment Services Act enacted in April 2010 requires that entities engaging in funds
clearing operations obtain a license from the Prime Minister of Japan. Zengin-Net obtained
this funds clearing business license in September 2010.
The funds clearing business involves assuming obligations for the clearing of debits-credits
for funds transfer transactions and assuming the burden of obligations under funds transfer
transactions occurring between banks from changes or other methods. Zengin-Net executes
final settlements through transfers via the current deposit accounts of Zengin-Net andParticipating Banks held at the Bank of Japan, which is Japan’s central bank, after translating
the interbank debits-credits into debits-credits between banks and Zengin-Net.
The operations of a Funds Clearing Agency are restricted under the Payment Services Act andsubject to the supervision and inspection of the Financial Services Agency.
Zengin-Net is also subject to oversight of financial markets infrastructure carried out by the
Bank of Japan, as the country’s central bank, under the objectives stipulated in the Bank ofJapan Act.

4

<Main Risks>
Zengin-Net is exposed to various risks, which include credit risk and system risk, among
others.
Of each risk, the three main risks for Zengin-Net due to the nature of its operations are: (1)credit risk; (2) liquidity risk; and (3) operational risk. The scope of each of these risks ispresented below.
(1) Credit risk
The risk that Zengin-Net will incur losses from the failure of a Clearing Participant tofulfill their obligation when Zengin-Net assumes the obligation borne by the Clearing
Participant from their counterparty Clearing Participant during the process of funds
clearing(2) Liquidity risk
The risk that Zengin-Net will incur losses because the funds clearing counterparty
cannot complete their obligation as per the limited time available, even in cases where
the funds clearing counterparty will be able to fulfill its obligation at any point in the
future(3) Operational risk
The risk that Zengin-Net will incur losses due to the inoperability or inappropriate
action of an internal process, personnel or system, or due to an exogenous event
Additionally, (3) operational risk is further categorized into the seven risks of administrativerisk, system risk, information security risk, legal risk, event risk, human resources risk, andreputational risk.
◆Table 1: Categories and Definitions of Operational Risk
Category
Administrative risk

Definition
The risk that Zengin-Net will incur losses due to thefailure to carry out correct administrative functions
or due to the cause of an incident or impropriety,
etc.,

by

Zengin-Net’s

executive

officers

or

employees(including

executive

officers

and

employees of administrative outsourcing partners)
5Category
System risk

Definition
The risk that Zengin-Net will incur losses due to thefailure or malfunction of a system and the risk that
Zengin-Net will incur losses from the improper useof a system

Information security risk

The risk that Zengin-Net will incur losses due to theloss of security/integrity of its information assets

Legal risk

The risk that Zengin-Net will incur losses due toinsufficient compliance with laws or ordinances

Event risk

The risk that Zengin-Net will incur losses due toexogenous factors such as a natural disaster,
criminal or terrorism act, failure of social
infrastructure, or epidemic, or the inappropriate use
or management of tangible asset

Human resources risk

The risk that Zengin-Net will incur losses due toproblems arising from human resources or labor
management

Reputational risk

The risk that Zengin-Net will incur losses due to thedegradation of its reputation from rumors<Risk Management>
Zengin-Net carries out risk management based on its Risk Management Policy andmedium-term management plan. In addition, for comprehensive risk management, the Risk
Management Group evaluate and summarize the status of each risk, based on management
carried out on each risk area, and reports its findings to the executive management team.
The three main risks for Zengin-Net due to the nature of its operations are: (1) credit risk; (2)liquidity risk; and (3) operational risk. The scope of each of these risks is presented below.
These risks are managed as follows.
<Credit Risk Management>
Zengin-Net has established the Sender Net Debit Cap Scheme in order to control unsettled
balances and prevent them from becoming too large, as a countermeasure against credit risk.
This scheme uses a system to monitor and make sure the gross payment minus the grossreceipt (net debit amount) of each Clearing Participant occurring from funds transfer
transactions does not exceed the limit declared in advance by each Clearing Participant (net6

debit cap), which controls and prevents credit exposure from becoming too large.
The specific work flow of this scheme entails Clearing Participants establishing, in advance, a
net debit cap by means of pledging Government bonds or other instruments to Zengin-Net in
the form of collateral.
The scheme ensures that the net debit cap cannot exceed the total valuation of the collateralpledged to Zengin-Net. This increases the likelihood that funds can be recovered in the event
funds cannot be settled (default), which in turn mitigates risk.
Next, once a Clearing Participant sends a transfer message, that particular Clearing
Participant’s net debit amount will increase.
The Zengin System monitors this net debit amount in real time, and if the above net debit cap
is almost reached, the Clearing Participant is notified and they are prompted to stop thetransmission of the transfer message (the net debit amount is the gross payment minus thegross receipt of each Clearing Participant, and this amount will decrease if a Clearing
Participant receives a transfer message for an amount larger than the one it sent out) or
temporarily increase the net debit cap.
When a transfer message is sent in which the net debit amount exceeds the net debit cap,
despite the above notification, thetransfer message is treated as an error by the system andreturned to the bank.
<Liquidity Risk Management>
Zengin-Net operates the Sender Net Debit Cap Scheme as outlined above. By establishing aceiling in the form of a net debit cap, liquidity risk is managed within a predetermined level.
In addition, if at the time of funds settlement, liquidity is insufficient and the funds settlement
cannot be executed, Zengin-Net will receive a supply of funds equivalent to the shortfall
through “Liquidity Providing Banks” contracted with Zengin-Net in advance. This ensuresthat the day’s settlements are executed according to schedule, whereby mitigating risk.
Subsequently, at a later date Zengin-Net repays the amount provided by the Liquidity
Providing Banks by disposing of collateral extended by the defaulting bank.

7

<Operational Risk Management>
Zengin-Net manages each category of operational risk based on Zengin-Net’s unique businesscharacteristics per the table below. Management methods are continuously reviewed andreinforced.
◆Table 2: Main Management Methods of Operational Risk by Category
Category
Administrative risk

Main Management Methods
Each department identifies and evaluates risks, andbased on these findings, revisions are made toadministrative

manualsandadministrative

processes, and if an administrative incident occurs,
this information is accumulated, and consideration
is

given

to

changing

systemization

andadministrative processes.
System risk

Based on standards to be complied with and systeminterruption examples of other companies, risk ismonitored and evaluated regularly, and risk
mitigation measures are taken, while project
management is carried out thoroughly for systemdevelopment

from

the

perspective

of

risk

management.
Information security risk

Information assets are regularly identified, while
risk is monitored and evaluated in an integrated
fashion with the above system risk, and risk
mitigation measures are carried out, in addition,
employees

areprovidedwithtraining

on

information security regularly.
Legal risk

Legal issues are mitigated, through monitoring by
the Legal & Compliance Department, for decision
making, contracts and external documents andconsultations

with

legal

compliancetraining

isprofessionals,
alsoplannedwhile
andimplemented.
Event risk

Plans and manuals have been prepared based on
various emergency scenarios, such as earthquakes
and influenza epidemics, and a system is in place toensure the minimum continuity of operations during
8Category

Main Management Methods
an emergency.

Human resources risk

Regularmonitoringiscarriedout

throughcollaboration with human resources, such as
checking for issues in terms of labor management.
Reputational risk

Together with the public relations department of theJapanese

Bankers

Association,measuresareexamined for minimizing loss in the event of media
report is found about Zengin-Net.

II. Summary of major changes since the last update of the disclosureThis is the first such disclosure made by Zengin-Net.
III. General background on the FMI<History>
Zengin-Net commenced operations in October 2010 when the operations of the Organization forManagement of Domestic Fund Transfers (established in 1973) were succeeded from the Tokyo
Bankers Association in the form of the Domestic Funds Transfer System.
The historical highlights of the Domestic Funds Transfer System are presented in Table 3 below.
◆Table 3: History of the Domestic Funds Transfer System

Year
1943

Summary
Start of centralized settlement of domestic fundtransfers at the Bank of Japan
Revision of the Fund Transfers Settlement System1958

and 27 Fund Transfer Offices were established in theregionally based bankers associations to facilitate
exchange of transfer notification slips

1968

Launch of the Chigin (regional banks) Data
Telecommunications System
Establishment of the National Domestic Funds
Transfer System

1973

Launch of the Zengin System[Participating Banks: domestic banks and the Shoko
Chukin Bank comprising 88 banks and about 7,400
9

Year

Summary
branches]
Launch of the 2nd Generation Zengin System
Sogo

1979

(mutual)banks,

shinkinbanks,

theNorinchukin Bank and other financial institutions
join[Participating Banks: 708 financial institutions with
about 18,000 branches]

1982

Foreign banks operating in Japan joined the Zengin
System for the first time
Credit cooperatives, labour banks, agricultural

1984

cooperatives and other financial institutions joined[Participating Banks: 5,479 financial institutions
with about 40,000 branches]
Launch of the 3rd Generation Zengin System

1987[Participating Banks: 5,304 financial institutions
with about 42,000 branches]

1993
1994

Start of same-day settlements
Revision of the Sender Net Debit Cap Scheme,
which was first implemented in July 1990
Launch of the 4th Generation Zengin System

1995[Participating Banks: 3,552 financial institutions
with about 44,800 branches]

2001

Launch of the New National Domestic FundTransfer System
Launch of the 5th Generation Zengin System

2003[Participating Banks: 1,679 financial institutions
with about 37,250 branches]

2009

Japan Post Bank joined the system
Payment Services Act was enacted

2010

Operations transferred to Japanese Banks’ Payment
Clearing Network, which was established in thesame year
Launch of the 6th Generation Zengin System

2011[Participating Banks: 1,371 financial institutions
with about 32,500 branches]10

<Zengin-Net>
Zengin-Net, or the Japanese Banks’ Payment Clearing Network, is a General Incorporated
Association under the Act on General Incorporated Associations and General Incorporated
Foundations (Act No. 48 of 2006) and a Funds Clearing Agency under the Payment Services
Act (Act No. 59 of 2009).
As of March 2015, Zengin-Net was comprised of 143 financial institutions as Clearing
Participants, 1,182 financial institutions as Agency Participants, and 2 corporations as Associate
Members.
<Participating Banks>
Entities with the qualification of Participating Bank or that can succeed such qualification mustbe financial institutions that engage in domestic funds transfers as part of their banking
operations and procedures to obtain approval of the Zengin-Net Board of Directors must becompleted.
<Associate Members>
The Bank of Japan and the Japanese Bankers Association do not use the Domestic Funds
Transfer System, but they participate as associate members with the approval of the Zengin-Net
Board of Directors, and using the Zengin System, the Bank of Japan carries out data related tostatements for pension transfers and statements for national tax refund transfers, while theTokyo Clearing House communicates data related to the clearing balance.
<System Operator>
The system operator of the Zengin System is Zengin-Net.
<Customers>
Customers (remitters) of a Participating Bank (sender bank), regardless if they are individuals or
corporations, carry out credit transfers through Zengin-Net under their agreement with theParticipating Bank and customers (beneficiaries) receive these funds under their agreement with
the Participating Bank (receiver bank).
For this reason, while there is no direct contractual relationship between Zengin-Net and thecustomers of Participating Banks, Zengin-Net organizes a meeting of experts at least once every
year in order to identify customer needs and improve the convenience of the overall system.

11

<Domestic Funds Transfer Transactions>
Domestic funds transfer transactions consist of credit transfers, where funds are credited to thedeposit account of the beneficiary, remittances, where the beneficiary is paid directly using abank draft or other means, and collections, where bills or cheques are collected and the proceeds
credited. These transactions are carried out through the sending and receipt of transfer messages
between financial institutions.
Transfer messages can be sent or received using the Zengin System or by using postal mail or aclearing house.
The Zengin System’s methods for sending transfer messages can be divided into two major
categories: telegraphic transfers and MT data file transfers.
<Telegraphic Transfers>
A telegraphic transfer includes a number of transfer messages (see Table 4 below), such as
credit transfer, remittance, collection, and other forms of funds transfers between financial
institutions, because individual transfer messages are sent and received through the Zengin
System online in real time.
In the case of a credit transfer or remittance, a financial institution (sender bank) acting on the
instruction of its customer (payer) sends a transfer message to the financial institution (receiverbank) designated by the customer. In the case of a collection, the financial institution that hascollected a bill/cheque sends a transfer message to the financial institution that has requested thecollection.
A transfer message prepared by the sender bank’s branch is sent to a Zengin Center via thebank’s center (in the case of agency participation, the joint center; hereinafter the same shallapply) and relaying computer set up in the bank’s center by Zengin-Net. The Zengin Centerchecks the content of the message and the amount of the transaction, and then sends the transfer
message to the receiver bank, which credits the amount to the payee’s account in accordancewith the content of the transfer message.
■Table 4: Types of Telegraphic Transfer Messages
Type
Credit transfer

Transfer Message

Description

Credit transfer

Same-day credit transfer(including government

Post-dated credit transfer

credit transfers)
12

Type

Transfer Message

Payroll transfer

Payroll or bonus transfer

Credit transfer of payroll or bonus

Ordinary remittanceRemittance in general

Remittance of government

Remittance of government payment

RemittanceDescription

payment
Collection

Payment advice of individual collections

Collection

Miscellaneousand dishonored collections
Same-day credit

Credit advice

Post-dated credit

inter-banktransfer

Same-day claim
Claim advice

Post-dated claim
Claim of dishonored collection

Ordinary communication

Communication between banks related todomestic fund transfers

Government transfer

Credit transfer for government payments<MT Data File Transmission and the New file Transfer Facility>
An MT (mag-tape) data file transmission data contained in multiple transfer messages is sent
and received collectively.
Credit transfers by MT data file transmission is mainly used for payments that need to beprocessed in bulk on a specific date, such as the credit transfer for payrolls, pensions, benefits
and stock dividends, otherwise known as credit transfer agency operations. This system is also
used for document-based transfers and post-dated transfers (see Table 5 below).
MT data files sent from financial institutions are edited and processed according to transaction
type and receiver bank by a Zengin Center before being sent to each receiver bank. The receiverbank then credits the funds to the payee’s account on the designated day.
A new file transfer facility was introduced for the 6th Generation Zengin System to replace MTdata file transmission and significantly enhance processing capacity.
Under this new file transfer facility system, various data, including that sent and received by
MT data file, is managed as single files that are forwarded in bulk from financial institution tofinancial institution, which makes it possible to increase the efficiency of sending and receiving
transfer messages compared to MT data file transmissions.

13

■Table 5: Types of Data for MT Data File Transmissions and the New File Transfer
FacilityType

Description

Document-based transfer

Document-based credit transfers

Postdated transfer

Post-dated credit transfers

Payroll transfer

Payroll or bonus credit transfers

Bonus transfer
Stock dividend transfer

Transfers of dividends to shareholders

Loan-trust dividend transfer

Transfers of loan-trust dividends tobeneficiaries

Benefit transfer from pension trust fundTransfers of benefits to beneficiaries

Benefit transfer from public pension fund
Benefit transfer from health insurance fundStatement for pension transfer

Statement for transfers of public pension

Statement for national tax refund transfer

Statement for transfers of national tax refunds

Note: MT data file transmissions also handle data files that do not accompany fund settlements,
such as a list of payments using a bulk payment system and a payee’s account verification.

<Basic Information and Statistical Results for Administrative Processing>
The Zengin System started in April 1973 and today it covers virtually all of the deposit-taking
financial institutions in Japan. Each day the Zengin System processes on average some 5.6
million transfer messages for transactions valued at around 12 trillion yen, fulfilling a criticalrole as a core infrastructure of Japan’s economy. Transaction volume of credit transfers by typefor December 2014 is presented in Table 6 below.
Table 6: Transaction Volume of Credit Transfers by Type (Unit: 10,000 transfers, %, 100
million yen)Type
Telegraphic transfer

Volume

Share

Value

10,51698.0

2,581,008

MT data file transmission

168

1.5

10,510Mail transfer

18

0.2

2,326

Exchange transfer

32

0.3

2,761

10,734100.0

2,596,605

Total

Notes:
1. Figures are for December 2014.
2. Figures for MT data file transmissions include files handled by the new file transfer facility.

14

<Overview of Zengin-Net’s Organizational Structure>
Zengin-Net carries out operations under the following organizational structure in order to
execute administrative work.
[Figure 2 – Zengin-Net Organizational Structure]

Internal
Audit Dept.

General Affairs & PlanningGroup
Personnel and participating bankrelatedadmin,

management,

businessandPlanning &external

announcements,

Coordination

researchstudies,Dept.

budgetplanning,

HR,

PR,

training,

benefits, etc.

Risk Management Group
Planning and implementation of internal
controls, risk management and related

SeniorManaging

Directoradmin, business continuity planning

Secretary
General

Director

Business Development& Planning Group
Planning and admin for funds clearing

Business
Inspectors

Development
Dept.

business,planning

and

admin

Domestic

Funds

Transfer

for

System,planning and admin for the Zengin
SystemZengin Center
Domestic

Legal &
Compliance
Dept.

Funds

Transfer

Systemoperations, Zengin System operations

Clearing Group
Liquidity Supply Scheme operations,funds clearing business operations(As of April 2015)
15

[Figure 3 – Zengin-Net Committees and Working Groups]
In order to reflect the opinions and views of Participating Banks in operational management,
committees comprised of representatives of Participating Banks and working groups based onthemes have been set up under the board of directors, where reviews are carried out.
Corporate Planning Working
Group(Manager/Assistant Manager
Level)
Corporate planning andorganizational management

Corporate Planning
Committee(Directors)

Zengin System Working
Group(Manager/Assistant Manager
Level)
Future approaches to the
Zengin System
Risk Management Working
Group(Manager/Assistant Manager
Level)
Risk management

Domestic Funds Transfer
System Working Group(Manager/Assistant Manager
Level)
Zengin System changes,
training, management of theDomestic Fund Transfer
SystemZengin-System Expanded
Hours Working Group(Manager/Assistant Manager
Level)
System development project
management and expanded
operating hours

Board ofDirectors

Operations and Systems
Committee(Directors)

Next-Generation Zengin
System Working Group(Manager/Assistant Manager
Level)
Functions and specificationsof the next-generation Zengin
SystemCollateral Management
Working Group(Manager/Assistant Manager
Level)
Collateral management for
the Domestic Funds Transfer
SystemLiquidity Supply Working
Group(General Manager Level)
Liquidity Supply Scheme andnumber of participating banks(As of April 2015)16

<Legal and Regulatory Framework><Legal Structure of Zengin-Net>
Zengin-Net is a General Incorporated Association and is a Funds Clearing Agency under the
Payment Services Act as licensed by the Prime Minister of Japan.
<Ownership Rights Structure>
The ownership rights of Zengin-Net belong only to the Japanese Bankers Association.
<Legal Basis for Important Aspects of Zengin-Net Activities>
Zengin-Net is a General Incorporated Association under the Act on General Incorporated
Associations and General Incorporated Foundations and in legal terms it is considered as acorporation.
Unlike an incorporated for-profit company, the founders cannot be granted the right to receive
distributions of surplus funds or residual assets.
Additionally, Zengin-Net is a Funds Clearing Agency under the Payment Services Act andlicensed by the Prime Minister of Japan.
<Regulatory Supervision and Oversight Framework of Zengin-Net>
Zengin-Net is a Funds Clearing Agency licensed by the Prime Minister of Japan and its
operations are regulated and overseen under the provisions of the Payment Services Act.
Zengin-Net is also subject to oversight of financial markets infrastructure carried out by the
Bank of Japan, as the country’s central bank, under the objectives stipulated in the Bank ofJapan Act.
<System Design and Operations><Management of the Zengin System>
The Zengin System operator is Zengin-Net.
Procedures governing credit transfers and other transactions processed through the Zengin
System and the clearing of inter-bank funds that results from these transactions are outlined in
the rules of the Domestic Fund Transfer System established by the Zengin-Net.

17

<Operating Hours of the Zengin System>
The Zengin System processes transfer messages from 8:30 am to 3:30pm. Operating hours may
be extended on days when a high volume of data traffic is expected. In addition, operating hours
are extended by one hour on the last business day of each month (except December).
<Funds Clearing for Transactions under 100 Million Yen>
Following a funds transfer transaction, the sender bank must pay the funds to the receiver bank.
In the case of transfer messages for transactions under 100 million yen, the debit-credit
relationship is translated from debit-credit between the sender and receiver banks to one
between the Zengin Center and each bank.
This limits the settlements of accounts to individual financial institutions and Zengin-Net,
preventing impacts on other financial institutions in the event of settlement risk.
This method corresponds with “funds clearing” as stipulated by the Payment Services Act, andZengin-Net is licensed by the Prime Minister to engage in the funds clearing business.
The net balance of transfers between Participating Banks is calculated and reported toParticipating Banks using the Zengin System as well as the Bank of Japan.
Based on this notification, the Bank of Japan debits or credits the net balance from/to the current
accounts of Zengin-Net and the Participating Banks at 4:15 pm of the same day.
Settlements for financial institutions such as shinkin banks, which are indirectly connected to
Zengin Centers through respective joint centers, are made by the group’s parent financial
institution, for instance, the Shinkin Central Bank for shinkin banks, which aggregates debits
and credits of all its member financial institutions (Agency Participants).
In other words, in the case of shinkin banks, transactions between individual shinkin banks andother financial institutions are settled using the current account of the Shinkin Central Bank andthe current account of the Zengin-Net as credits or debits of the Shinkin Central Bank.
Settlements between the affiliated financial institutions of the parent financial institution areprocessed in the group by each intra-group system.

18

<Real Time Gross Settlement for Funds Transfer of 100 Million Yen and above>
A different process from that previously described applies to the clearing of domestic fundtransfers of 100 million yen and above (with the exception of credit transfers for payroll andbonus payments). Each time such a payment is made, a transfer message is sent to the receiverbank from Zengin-Net after the transaction has been settled between the current account of thesender bank and the current account of the receiver bank held at the Bank of Japan.
The transfer message is kept at a Zengin Center until each transaction is settled. Funds arecleared for each transfer message by the BOJ-NET through real-time gross settlement (RTGS)
with liquidity saving features.
RTGS does not entail any settlement risk since funds are cleared before the transfer message issent to the receiver bank.
<Configuration of the Zengin System>
The Zengin System consists of host computers at Zengin Centers that form the hub of thesystem, the Zengin relaying computers (RCs) installed in the computer centers of theParticipating Banks (in the case of agency participation, the Zengin RCs are installed in the joint
center), and the communication lines that connect these computers.
Zengin-Net is responsible for all infrastructures up to the RCs.
To assure the security and reliability of the Zengin System, redundancies are in place to back up
every aspect of the system.
Zengin Centers are located in Tokyo and Osaka and both house the host computers for the
Zengin System.
Each Zengin Center has adopted a multiple host computer structure, while Participating Banks
have at least two sets of Zengin RCs installed.
The IP-VPN network is used as the main network and an ISDN network system is used for
backupCommunication between the Zengin Centers and Zengin RCs is encrypted.

19

<Zengin Centers>
The Zengin Centers in Tokyo and Osaka are both equipped with three sets of host computersthat operate simultaneously.
The separately installed host computers in Tokyo and Osaka enable member banks to continuetransactions through the Osaka Center even in the event the Tokyo Center fails due to a natural
disaster or other reasons.
Two sets of host computers are used by both centers for online processing and another set isused for offline processing and backup. Zengin-Net has adopted a hot-standby method to ensurethat when online processing fails due to a damaged computer, this computer can be immediately
replaced by the backup.
In addition, power supplies, data storage and other control peripherals have redundancies,
securing security. The Zengin Centers in Tokyo and Osaka also mutually synchronize data at all
times.
<Relaying Computers>
Participating Banks send and receive telegraphic messages with the details of transfer messages
with the Zengin Centers through the Zengin relaying computers (RCs) installed in their
computer centers.
Participating Banks have their own proprietary systems, which requires transmission protocols
and data formats to be converted so that the Zengin Centers can accept them.
Zengin RCs convert the various transmission protocols and then transmit the data to the Zengin
Centers. These RCs also serve as a backup system when a Participating Bank’s computer
system fails, by sending and receiving transfer messages directly to/from the Zengin Centers onbehalf of the bank’s host computers.
<Communication Lines>
In regard to adopting international standards, the telecommunication line between Zengin
Centers and Zengin RCs is a logically independent IP-VPN (closed domain) that serves as the
backbone network. Even if the backbone network is disconnected, the ISDN backup network
can continue communications.

20

There are also several communications options, including the entry VPN for the new filetransfer facility and the IP-VPN or other options for the information servers.
<Information Server System>
The information servers form a separate system from the fund transfer system. This system isused by the Zengin Centers to transmit statistical information and other data to Participating
Banks and by Participating Banks to send online requests and registration to a Zengin Centerusing the informant server system.

21

[Figure 4 – Configuration of the Zengin System]
Bank of Japan
Host (funds transfer)

Zengin Center (Osaka)

Zengin Center (Tokyo)
Standby hostStandby host

System 1
host

System 1
host

System 2
host

System 2
host

Backbone network andBackup networkRC

Solid line: backbone network

file transmission network

RC

Dotted line: backup network

RC

RC

Host

Host

Bank hosting center

Bank hosting center(Individual connection method)(Individual connection method)

RC

RC

Host (RTGS)

RC

RC

Host
Joint center(Agency participation)

Financial institutions
Branch offices

Branch offices●Backbone network: IP-VPN

Branch offices●File transmission network: Entry VPN●Backup network: ISDN
●RC: relaying computers22

IV. Principle-by-principle summary narrative disclosure
Within the Principles for Financial Market Infrastructures (PFMI), Zengin-Net corresponds to apayment and settlement system to which Principle 1, Principle 2, Principle 3, Principle 4,
Principle 5, Principle 7, Principle 8, Principle 9, Principle 13, Principle 15, Principle 16,
Principle 17, Principle 18, Principle 19, Principle 21, Principle 22 and Principle 23 apply.
However, since Zengin-Net is not a central counterparty (CCP) as defined by the PFMI,
Principle 6 and Principle 14 do not apply, and since Zengin-Net is not a central securities
depository (CSD), securities settlement system (SSS), or trade repository (TR), Principle 10,
Principle 11, Principle 20 and Principle 24 do not apply as well.
Additionally, Zengin-Net is not an exchange-for-value settlement system, so Principle 12 does
not apply.
Zengin-Net’s disclosure of responses for each applicable principle is provided below.
Principle-by-principle summary narrative disclosure
Principle１：Legal basis
An FMI should have a well-founded, clear, transparent, and enforceable legal basis foreach material aspect of its activities in all relevant jurisdictions.
Summary

Zengin-Net engages in the funds clearing business only within Japan based on its

narrative

license from the Prime Minister of Japan in accordance with the Payment Services
Act.
Zengin-Net has established Articles of Incorporation and a Statement of
Operational Procedures as important rules governing specific material aspects of
its activities. These rules have been verified by the legal opinion of an attorney as
having a highly enforceable legal basis and consistency with laws and regulations.
In addition, to obtain the aforementioned license, Zengin-Net submitted important
rules to the regulatory authority that carried out a screening of these rules.
Fundamental rules and procedures have been carried over from Zengin-Net’s
predecessor organization, the Organization for Management of Domestic FundTransfers (established in 1973), while transparency and clearness is ensured
through the continual management of Zengin-Net using meeting bodies(committees) comprised of representatives from Participating Banks.
23

Zengin-Net’s response to each individual key consideration is as follows.

＜Key consideration 1: The legal basis should provide a high degree ofcertainty for each material aspect of an FMI’s activities in all relevant
jurisdictions.＞
The legal jurisdiction for Zengin-Net’s activities is Japan (laws of Japan).
Zengin-Net is a General Incorporated Association under the Act on General
Incorporated Associations and General Incorporated Foundations and a Funds
Clearing Agency as licensed by the Prime Minister of Japan under the Payment
Services Act. Zengin-Net is supervised and audited by the Financial Services
Agency (of Japan).
Zengin-Net has established Articles of Incorporation and Statement of Operational
Procedures as important rules governing its activities. These rules and guidelines
have been verified by the legal opinion of an attorney as having a highly
enforceable legal basis.
＜Key consideration 2: An FMI should have rules, procedures, and contracts
that are clear, understandable, and consistent with relevant laws andregulations.＞
Zengin-Net has published its Articles of Incorporation and Statement of
Operational Procedures, and other important procedures and contracts aredisclosed to financial institutions participating in Zengin-Net, while questions are
accepted as necessary.
Additionally, Zengin-Net has obtained the legal opinion of an attorney with regard
to important rules, procedures and contracts, which has confirmed that these areconsistent with relevant laws and regulations of Japan.
Furthermore, Zengin-Net carries out funds clearing operations based on a license
obtained under the Payment Services Act, which makes it subject to supervision
and audits of the Financial Services Agency. Zengin-Net’s Articles ofIncorporation and Statement of Operational Procedures have been approved by
the regulatory authority (Financial Services Agency) in advance.

24

Article 85 of Zengin-Net’s Statement of Operational Procedures requires that the
Bank of Japan be contacted in advance in situations where necessary handlingprocedures are stipulated for the administration of the Statement of Operational
Procedures or where revisions are made to these handling procedures. Article 86
requires consultation with the Bank of Japan for revisions made to material
matters concerning the settlement of funds transfers.
＜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 and understandable way.＞
The legal basis for Zengin-Net’s activities is laid out in Article 51 of the Articles
of Incorporation, while all matters not stipulated here in the Articles ofIncorporation must be in compliance with the Act on General Incorporated
Associations and General Incorporated Foundations and the Payment Services
Act.
The Articles of Incorporation are submitted to the Financial Services Agency
when applying for licensing, and they are published on the Zengin-Net website
and explicitly shared with Participating Banks and other stakeholders.
＜Key consideration 4: An FMI should have rules, procedures, and contracts
that are enforceable in all relevant jurisdictions. There should be a highdegree of certainty that actions taken by the FMI under such rules andprocedures will not be voided, reversed, or subject to stays.＞
Zengin-Net, through its compliance with the Payment Services Act, has verified
the high degree of legal certainty with regard to its Articles of Incorporation andStatement of Operational Procedures.
Moreover, a legal opinion has been received from an attorney stating that Zengin
Net’s rules and procedures concerning material activities of its operations—its
Articles of Incorporation and Statement of Operational Procedures—are legal
because they are in full compliance with the Payment Services Act and there is nofact indicating that they are in violation of any other applicable laws. This verifies
that within Japan, the only legal jurisdiction where Zengin-Net operates,
Zengin-Net maintains a high degree of reliability with regard to enforceability.
Additionally, a legal opinion has been obtained that interprets the rules and25

procedures concerning material activities of Zengin Net’s operations to be legal.
Accordingly, this verifies that a high degree of certainty is present, indicating
actions taken under Zengin-Net’s rules and procedures will not be voided,
reversed, or subject to stays.
＜Key consideration 5: An FMI conducting business in multiple jurisdictions
should identify and mitigate the risks arising from any potential conflict oflaws across jurisdictions.＞
Zengin-Net operates only in Japan and since it does not carry out operations in
multiple legal jurisdictions, Key Consideration 5 does not apply.

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 the broader financial
system, other relevant public interest considerations, and the objectives of relevant
stakeholders.
Summary

The purpose of Zengin-Net is “to implement smooth, safe and efficient fundnarrative

settlements between financial institutions, which are a foundation of society, andbusiness operations related thereto, and establish a reliable financial infrastructure
to enhance user protection and convenience, and thereby contribute to raise thestability and standard of living of Japanese citizens” (Articles of Incorporation
Article 3).
To achieve this purpose, Zengin-Net has established a clear and transparent
governance system.
Specifically, the Articles of Incorporation, which are disclosed to the public,
stipulate the composition of the board of directors and its authority, for which 11
directors are selected and two inspectors.
Inspectors are responsible for auditing the performance of duties by directors inaccordance with the Act on General Incorporated Associations and General
Incorporated Foundations.
Directors that are appointed include individuals in responsible positions as
representatives of the banking industry and board members of the Japanese
26Bankers Association, which includes the presidents of prominent Japanese banks.
Inspectors that are appointed include a legal expert as well as the Secretary
General of the Japanese Bankers Association, who has a wealth of experience inexamining banking system and operations and operating a General Incorporation
Association. In each case, directors and inspectors maintain suitable skills,
experience and knowledge concerning the operations of Zengin-Net.
Of the 11 directors, nine, which excludes the senior managing director andexecutive director, are independent directors and a legal opinion has beenobtained from an attorney regarding the requirements of director’s independence.
From the perspective of ensuring transparency, Zengin-Net reports on the result ofits business and financial statements every fiscal year at the general meeting ofmembers, and these documents are sent to Participating Banks after thesemeetings in order to make business conditions known to all stakeholders.
A report on the funds clearing business is also submitted every fiscal year to the
Financial Services Agency, which is the regulatory authority, in order to report on
business conditions.
Additionally, Zengin-Net submits regular reporting documents, including on thesettlement of accounts, etc., along with its policy on risk management, to the Bankof Japan.
Zengin-Net considers public opinions and regularly solicits opinions when
making important decisions, including those concerning system design, rules, andoverall business strategy. This is achieved through reviews conducted by working
groups and committees comprising representatives from Participating Banks aswell as a meeting of experts convened at least once annually.
Important decisions are conveyed to Participating Banks and in case bankcustomers are affected, such as through system changes, etc., announcements are
made through Participating Banks or publicly disclosed on Zengin-net websites.
Zengin-Net’s response to each individual key consideration is as follows.

27

＜Key consideration 1: An FMI should have objectives that place a highpriority on the safety and efficiency of the FMI and explicitly support
financial stability and other relevant public interest considerations.＞
The purpose of Zengin-Net is that which is stated in Article 3 of the Articles ofIncorporation: “to implement smooth, safe and efficient fund settlements between
financial institutions, which are a foundation of society, and business operations
related thereto, and establish a reliable financial infrastructure to enhance userprotection and convenience, and thereby contribute to raise the stability andstandard of living of Japanese citizens.”
As for safety and efficiency, Zengin-Net assigns priority rankings to objectives,
which explicitly support the key consideration of financial stability and otherrelevant public interests, such as stability in the way of life of people living inJapan.
＜ Key consideration 2: An FMI should have documented governancearrangements that provide clear and direct lines of responsibility andaccountability. These arrangements should be disclosed to owners, relevant
authorities, participants, and, at a more general level, the public.＞
Zengin-Net stipulates the composition and authority of its board of directors, aswell as the duties of the board of directors and executive director, which serve as
executive management, within its Articles of Incorporation, which also stipulate
the senior managing director, chosen from directors, must execute his/her duties
in compliance with laws and the provisions of the Articles of Incorporations.
The executive director is appointed based on a resolution of the board of directors
and under the supervision of the senior managing director, assists the senior
managing director and is assigned tasks for the operations of Zengin-Net. The
executive director also carries out the duties of the senior managing director withregard to these business operations at times when the senior managing director
cannot tend to his/her duties or is involved in an accident.
In accordance with Article 45 of the Articles of Incorporation, Zengin-Net hasestablished a secretariat to carry out administrative work. The secretariat is
managed by the senior managing director based on rules stipulated throughresolutions passed by the board of directors.

28

The Articles of Incorporation are published on Zengin-Net’s website and every
year the business plan and income and expenditures budget are approved by thegeneral meeting of members, comprising the members who are equivalent toowners.
＜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.＞
Zengin-Net, regarding the roles (authority) and responsibilities of its board of
directors, which is equivalent to company’s board of directors, explicitly statesthat the board of directors is to make decisions on the business execution of
Zengin-Net and audit directors’ duties in Article 30 of the Articles ofIncorporation, and the board of directors is responsible for the performance of
these duties.
Article 33 of the Articles of Incorporation stipulates the method of board of
directors’ resolutions. Resolutions require a majority of directors in attendance,
excluding those directors with special interests, and must be approved by amajority of those in attendance.
Furthermore, issues examined by the board of directors every fiscal year areorganized and included in the business report, which is submitted to the general
meeting of members. This process ensures verification from all members, such asthat the function of the board of directors

has been

in line with the interestof

Zengin-Net.
The status concerning the performance of the senior managing director(representative director), who executes operations, and the executive director isreported to the board of directors once every three months pursuant to the Act onGeneral Incorporated Associations and General Incorporated Foundations.
＜Key consideration 4: The board should contain suitable members with theappropriate skills and incentives to fulfil its multiple roles. This typicallyrequires the inclusion of non-executive board member(s).＞29The board of directors, which is equivalent to a company’s board of directors,
comprises directors who are in responsible positions as representatives of thebanking industry and board members of the Japanese Bankers Association, which
includes the presidents of prominent Japanese banks. Inspectors include a legal
expert as well as the Secretary General of the Japanese Bankers Association, who
has a wealth of experience in examining banking system operations and operating
a General Incorporation Association. In each case, directors and inspectors
maintain suitable skills, experience and knowledge concerning the operations of
Zengin-Net.
Of the 11 directors, nine, which excludes the senior managing director andexecutive director, are independent directors and a legal opinion has beenobtained from an attorney regarding the requirements of director’s independence.
＜Key consideration 5: The roles and responsibilities of management should
be clearly specified. An FMI’s management should have the appropriate
experience, a mix of skills, and the integrity necessary to discharge their
responsibilities for the operation and risk management of the FMI.＞
The board of directors comprises directors who are in responsible positions as
representatives of the banking industry and board members of the Japanese
Bankers Association, which includes the presidents of prominent Japanese banks.
Inspectors include a legal expert as well as the Secretary General of the Japanese
Bankers Association, who has a wealth of experience in examining banking
system and operations and operating a General Incorporation Association. In eachcase, directors and inspectors maintain suitable skills, experience and knowledge
concerning the operations of Zengin-Net.
Additionally, the senior managing director prepares the business report andobtains the approval of the board of directors. The performance of their duties isalso reported to the board of directors on a quarterly basis in accordance with
Article 91 of the Act on General Incorporated Associations and General
Incorporated Foundations. Other evaluations are performed by directors andinspectors, while audits are also carried out by the accounting auditor, to ensure
the senior managing director is carrying out their work appropriately.
＜Key consideration 6: The board should establish a clear, documented
risk-management framework that includes the FMI’s risk-tolerance policy,
30

assigns responsibilities and accountability for risk decisions, and addresses
decision making in crises and emergencies. Governance arrangements should
ensure that the risk-management and internal control functions havesufficient authority, independence, resources, and access to the board.＞
Zengin-Net has stipulated a management approach based on various definitions
and classifications of risk stipulated in the risk management policy found in theInternal Control Basic Policy prepared by the Board of Directors.
With regards to risk management, Zengin-Net has established a comprehensive
risk management system that effectively controls various risks. Specifically, thePlanning & Coordination Department, stipulated as the department in charge ofoverall risk management for Zengin-Net, carries out risk management.
The board of directors maintains ultimate accountability with regard to risk
management.
In addition, the board of directors has established a Corporate Planning
Committee in order to appropriately reflect the views of Participating Banks inoperations. This committee is also in charge of risk management matters for
Zengin-Net. Under this committee, Zengin-Net has established the Risk
Management Working Group, which is charged with reviewing mattersconcerning risk management for Zengin-Net.
Zengin-Net has established a Risk Management Council, comprising full-time
directors, Director-General of the Secretariat, and the heads of each department,so that the senior managing director (representative director) can execute
operations based on comprehensive recognition of Zengin-Net’s risks. This
council provides instructions for the execution of operations based on reports
received from the departments it covers.
In addition to this, audits are conducted by the Internal Audit Department andexternal professionals (accounting auditor) in the form of audits on the risk
management system in order for the board of directors to maintain sufficient
governance concerning the adoption and use of risk management models. The
results of these audits are reported to the board of directors. Plans are thenprepared for matters requiring improvement to ensure systemic improvementtakes place.
31Through this internal audit function, the board of directors verifies the status ofinternal audits and reviews concerning the details of these internal audits are
examined using outside experts. Inspectors also cover the status of internal audit
activities within their inspector audits, with these models and methods examined.
＜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 be clearly disclosed to relevant
stakeholders and, where there is a broad market impact, the public.＞
Zengin-Net considers public opinions and regularly solicits opinions when
making important decisions, including those concerning system design, rules, andoverall business strategy. This is achieved through reviews conducted by working
groups and committees comprising representatives from Participating Banks aswell as a meeting of experts convened at least once annually.
Furthermore, important decisions are conveyed to Participating Banks using
circulars and in case bank customers are affected, such as through systemchanges, etc., announcements are made through Participating Banks or publicly
disclosed on Zengin-net websites.

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.
Summary

Zengin-Net manages risk, based on various risk scenarios, with the goal ofnarrative

minimizing these affects in order to carry out stable and continuous operations of
the Zengin System with certainty in accordance with Zengin-Net’s risk
management policy.
Zengin-Net is exposed to various risks, including credit risk and operational risk,
among others. With regards to operational risk, Zengin-Net further categorizes
this into the seven risks of administrative risk, system risk, information security
risk, legal risk, event risk, human resources risk, and reputational risk. Risk
management is carried out based on the unique characteristics of these risks.

32

Moreover, in addition to management of these risk areas, the Planning &Coordination Department, which serves as the department in charge of risk,
examines and assesses the status of each risk and reports its findings to executive
management, which ensures that comprehensive risk management is being carriedout, including on other risks not categorized at the current moment in time.
Zengin-Net’s response to each individual key consideration is as follows.
＜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 to periodic review.＞
Risks that arise or are borne by Zengin-Net are managed in accordance with
Zengin-Net’s risk management policy.
With regards to risk management, Zengin-Net has established a comprehensive
risk management system that effectively controls various risks. Specifically, thePlanning & Coordination Department, stipulated as the department in charge ofoverall risk management for Zengin-Net, carries out risk management.
Risk management is also carried out in consideration of the relationship between
each type of risk, including interdependence.
For example, Zengin-Net’s credit risk and liquidity risk in either case areinterdependent because credit risk arising from the settlement default of aClearing Participant in turn will lead to liquidity risk caused by the failure to clear
funds as a result.
Based on this, pursuant to Article 52 of the Statement of Operational Procedures,
Zengin-Net requires that Clearing Participants pledge collateral to cover theSender Net Debit Cap applied for the Clearing Participant. This comprehensively
mitigates impacts at the time both risks emerge.
Additionally, Zengin-Net has prepared an emergency response manual, whichcontains necessary action to be taken in responding to the emergence of not only
event risks, such as natural disasters, but also system risk, such as a major system
failure, and information security risks, including information leakages.
33

Furthermore, the validity of the risk management policy is examined by the boardof directors at least once per year based on changes in external environment andchanges made to the medium-term management plan. Changes are then made to
the policy as necessary. This ensures regular consideration is given toward majorchanges in risk.
＜Key consideration 2: An FMI should provide incentives to participants
and, where relevant, their customers to manage and contain the risks theypose to the FMI.＞
Zengin-Net’s Internal Control Basic Policy enables it to carry out monitoring ofParticipating Banks, when necessary, in order to encourage Participating Banks tomitigate risks caused to Zengin-Net.
Additionally, pursuant to Article 52 and 53 of the Statement of Operational
Procedures, Zengin-Net requires Clearing Participants to pledge collateral in theamount of the Sender Net Debit Cap, which corresponds to the exposure of credit
risk. In the case of default, this collateral can be disposed of. This serves as anincentive for Clearing Participants to manage and control risk in order to reduce
their burden.
＜Key consideration 3: An FMI should regularly review the material risks itbears 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.＞
Other entities with interdependencies include the Bank of Japan, Participating
Banks, Liquidity Providing Banks, and system vendors.
Material risks borne from these entities include credit risk, liquidity risk as well as
system risk within operational risk. This risk is managed based on Zengin-Net’s
risk management policy.
Credit risk and liquidity risk borne from Participating Banks and Liquidity
Providing Banks is managed using the Sender Net Debit Cap Scheme, CollateralManagement Scheme, and Liquidity Supply Scheme. System risk is managed andmonitored by instructing system vendors to carry out inspections.

34

Risks borne from the interruption of services provided by related external
institutions or providers is evaluated and necessary additional measures, such as
Business Continuity Plan (BCP), are examined.
The methods used to manage these risks are reviewed regularly once per year andthey will be reinforced as necessary in the future.
＜ Key consideration 4: An FMI should identify scenarios that may
potentially prevent it from being able to provide its critical operations andservices as a going concern and assess the effectiveness of a full range ofoptions for recovery or orderly wind-down. An FMI should prepare
appropriate plans for its recovery or orderly wind-down based on the resultsof that assessment. Where applicable, an FMI should also provide relevant
authorities with the information needed for purposes of resolution planning.
＞Zengin-Net, even when it bears a large obligation from assuming a debit for asettlement transaction, has a system in place to ensure that its obligation does notexceed the underlying Sender Net Debit Cap amount pledged as collateral. This
ensures settlement risk is managed appropriately.
Even if losses occur despite this, Article 60 of the Statement of Operational
Procedures provides that Zengin-Net can collect funds equivalent to losses fromall Clearing Participants. Ultimately, a framework is in place that ensures funds
necessary for repayment and losses can be collected from virtually all banks inJapan, including foreign banks operating in Japan.

Principle 4: Credit risk
An FMI should effectively measure, monitor, and manage its credit exposure toparticipants and those arising from its payment, clearing, and settlement processes. An
FMI should maintain sufficient financial resources to cover its credit exposure to eachparticipant fully with a high degree of confidence. In addition, a CCP that is involved in
activities with a more-complex risk profile or that is systemically important in multiple
jurisdictions should maintain additional financial resources sufficient to cover a wide
range of potential stress scenarios that should include, but not be limited to, the default of
the two largest participants and their affiliates that would potentially cause the largest
aggregate credit exposures to the CCP in extreme but plausible market conditions. All35

other CCPs should maintain, at a minimum, total financial resources sufficient to cover
the default of the one participant and its affiliates that would potentially cause the largest
aggregate credit exposures to the CCP in extreme but plausible market conditions.
Summary

Zengin-Net has a credit risk management policy in place and, pursuant tonarrative

Article 49 of the Statement of Operational Procedures, defines credit risk
as the risk that Zengin-Net will incur losses from the failure of a Clearing
Participant to fulfill their payment obligation during the funds clearing
process. To manage credit risk, Zengin-Net has established the CollateralManagement Scheme and the Sender Net Debit Cap Scheme.
Under these schemes, Clearing Participants are required to provide
collateral appraised at an amount that exceeds the Sender Net Debit Cap.
The sender net debit amount is managed to ensure that it does not exceed
the appraised amount of the collateral. Thus, current exposure is coveredin the appraisal, management, mitigation, and monitoring of credit risk.
The 6th Generation Zengin System launched in November 2011
processes all credit transfers of 100 million yen and above, excluding
payroll credit transfers, using real time gross settlement (RTGS) throughcurrent accounts held at the Bank of Japan, in order to reduce risk.
Transfer requests processed using RTGS average about 10,000
transactions every business day which are valued at around 8 trillion yen.
The Zengin System’s average transaction volume per business day isapproximately 5.6 million transactions valued at around 12 trillion yen.
Comparing the two, the ratio of RTGS transaction is smaller, but the ratioof value is almost equivalent. This indicates that credit risk has been
reduced significantly.
Assets with little liquidity or assets considered to be subject to large pricefluctuations are excluded from eligible collateral in order to minimize
losses borne from settlement defaults and fluctuations in collateral price.
This covers potential future exposure.
In the event that credit risk does emerge, Zengin-Net will dispose ofcollateral or recover fund from the settlement default bank, but in cases
where credit obligations cannot be fully recovered, ultimately at the36

approval of the board of directors, all Clearing Participants will be
required to provide the funds.
Zengin-Net’s response to each individual key consideration is as follows.
＜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.＞Zengin-Net, pursuant to Article 49 of the Statement of Operational
Procedures, defines credit risk as the risk that Zengin-Net will incur
losses from the failure of a Clearing Participant to fulfill their payment
obligation when Zengin-Net assumes the liability and obligation borne by
the Clearing Participant from their counterparty Clearing Participant
during the process of funds clearing.
In addition, Zengin-Net has established the collateral management
scheme under which each Clearing Participant provides collateral with anappraisal amount that exceeds the Sender Net Debit Cap. Under thisscheme, credit risk is evaluated, managed, mitigated and monitored.
Zengin-Net examines the validity of this risk management policy at least
once per year based on changes in external environment and changes
made to the medium-term management plan, and makes changes whennecessary.
＜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.＞
The source of credit risk for Zengin-Net is, pursuant to Article 49 of theStatement of Operational Procedures, the failure of a Clearing Participant
to fulfill their payment obligation when Zengin-Net assumes the liability
and obligation borne by said Clearing Participant from their counterparty
Clearing Participant during the process of funds clearing.
Zengin-Net has introduced the Sender Net Debit Cap Scheme to ensure
37

that the ender amount never exceeds the appraised value of the pledged
collateral.
Specifically, the net debit amount of each Clearing Participant iscalculated as needed using the system and whenever the net debit amountbreaches 70%, 80%, 90% and 100% of the Sender Net Debit Cap, theClearing Participant is notified and they are prompted to stop thetransmission of the transfer message (the net debit amount is the gross
payment minus the gross receipt of each Clearing Participant, and thisamount will decrease if a Clearing Participant receives a transfer message
for an amount larger than the one it sent out) or temporarily increase thenet debit cap.
When a transfer message is sent in which the net debit amount exceeds
the Sender Net Debit Cap, despite the above notification, the transfer
message is treated as an error by the system and returned to the bank.
To ensure that the Sender Net Debit Cap Scheme maintains it
effectiveness, the market value of the actual collateral must not fall below
the appraised value of the collateral. Back-tests are performed to check
whether in past market environments the price of collateral fell below the
Zengin-Net’s appraised value in order to verify sufficiency.
In the future, Zengin-Net plans on reducing inherent risk by marking tomarket the value of collateral every day.
＜Key consideration 3: A payment system or SSS should cover its
current and, where they exist, potential future exposures to eachparticipant fully with a high degree of confidence using collateral andother equivalent financial resources (see Principle 5 on collateral). In
the case of a DNS payment system or DNS SSS in which there is nosettlement guarantee but where its participants face credit exposuresarising 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 that would
create the largest aggregate credit exposure in the system.＞
Zengin-Net, pursuant to Article 52 of the Statement of Operational
38

Procedures, requires that Clearing Participants apply for the Sender Net
Debit Cap Scheme and simultaneously pledge collateral to cover the net
debit amount. This covers current exposure.
Losses incurred from non-payment and fluctuations in collateral price areconsidered potential future exposure. To minimize price fluctuation risk,
bonds with low liquidity are excluded from eligible collateral and bonds
considered to have large price fluctuations are also omitted.
Specifically, a proportional limit has been set for stocks to ensure thatstocks do not account for an excessive ratio of pledged collateral.
The scope of this eligible collateral is reviewed regularly every year.
In addition, Zengin-Net has established a collateral weight for eachcollateral type per Principle 5 in order to reduce the impact fromfluctuations in collateral price.
The liquidity supply system is used by Zengin-Net to guarantee
settlement obligations are carried out.
＜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 (seePrinciple 5 on collateral and Principle 6 on margin). In addition, a
CCP that is involved in activities with a more-complex risk profile orthat is systemically important in multiple jurisdictions should
maintain additional financial resources to cover a wide range ofpotential stress scenarios that should include, but not be limited to,the default of the two participants and their affiliates that would
potentially cause the largest aggregate credit exposure for 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 belimited 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 should39

document its supporting rationale for, and should have appropriate
governance arrangements relating to, the amount of total financial
resources it maintains.＞
Zengin-Net is a payment and settlement system. Therefore, this key
consideration does not apply.
＜Key consideration 5: A CCP should determine the amount andregularly test the sufficiency of its total financial resources available
in the event of a default or multiple defaults in extreme but plausible
market conditions through rigorous stress testing. A CCP should haveclear procedures to report the results of its stress tests to appropriate
decision makers at the CCP and to use these results to evaluate theadequacy of and adjust 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 thorough analysis of stresstesting

scenarios,

models,andunderlying

parametersandassumptions used to ensure they are appropriate for determining the
CCP’s required level of default protection in light of current andevolving market conditions. A CCP should perform this analysis ofstress testing more frequently when the products cleared or markets
served display high volatility, become less liquid, or when the size orconcentration of positions held by a CCP’s participants increases
significantly. A full validation of a CCP’s risk-management model
should be performed at least annually.＞
Zengin-Net is a payment and settlement system. Therefore, this key
consideration does not apply.
＜Key consideration 6: In conducting stress testing, a CCP should
consider the effect of a wide range of relevant stress scenarios interms of both defaulters’ positions and possible price changes inliquidation periods. Scenarios should include relevant peak historic
price volatilities, shifts in other market factors such as pricedeterminants and yield curves, multiple defaults over various time
horizons, simultaneous pressures in funding and asset markets, and aspectrum of forward-looking stress scenarios in a variety of extreme
but plausible market conditions.＞
40

Zengin-Net is a payment and settlement system. Therefore, this key
consideration does not apply.
＜Key consideration 7: An FMI should establish explicit rules andprocedures that address fully any credit losses it may face as a resultof any individual or combined default among its participants withrespect to any of their obligations to the FMI. These rules andprocedures 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 proceduresshould also indicate the FMI’s process to replenish any financial
resources that the FMI may employ during a stress event, so that the
FMI can continue to operate in a safe and sound manner.＞
Zengin-Net, pursuant to Article 52 of the Statement of Operational
Procedures, requires that Clearing Participants pledged collateral thatexceeds their self-declared Sender Net Debit Cap.
If a latent credit risk event occurs, such as a settlement default,
Zengin-Net either disposes of the collateral or collects funds from thesettlement default bank.
In cases where sufficient obligations cannot be collected, despite this,
Zengin-Net can ultimately collect funds from all participants after
obtaining approval of the board of directors pursuant to Article 60 of theStatement of Operational Procedures.
If Zengin-Net determines that it cannot complete repayment of funds
received from a Liquidity Providing Bank by the deadline due to ashortage of funds based on the disposal value of the collateral or otherreasons, Zengin-Net can collect funds required to make the repayment
from all participants pursuant to Article 61 of the Statement of
Operational Procedures.

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 and41

enforce appropriately conservative haircuts and concentration limits.
Summary

Zengin-Net, pursuant to Article 52 of the Statement of Operational

narrative

Procedures, requires Clearing Participants to pledge collateral it deems
eligible. In consideration of price fluctuations and safety, Zengin-Net hasestablished restrictions on the percentage of stock provided as pledged
collateral and requires that the percentage of government bonds andgovernment-guaranteed bonds exceed a certain level, which reduces risk.
Even after collateral is pledged, Zengin-Net, at the time of marking tomarket, checks for compliance with the restriction on percentages ofindividual stock, restriction on the value of individual stock, restriction onvalue of all stock, and restriction on the value of bank bonds, corporate
bonds and local government bonds, and adjusts the appraisal amount toensure that collateral is not over weighted toward collateral with highprice fluctuation risk.
Additionally, Zengin-Net excludes bonds issued by Clearing Participants
and bonds and stocks issued by specified affiliates from eligible collateral
to reduce risk in a similar manner.
Furthermore, Zengin-Net marks to market stock every business day andmarks to market bonds twice monthly. As of 2015, Zengin-Net iscurrently examining changing the frequency of marking to market bonds
to daily.
Collateral weighting is specified for each type of collateral. Back-tests are
performed to check whether in past market environments the price ofcollateral fell below the Zengin-Net’s appraised value in order to verify
sufficiency.
In fiscal 2015, Zengin-Net carried out a stress test to check whether instressed market environments the price of collateral could fall below the
Zengin-Net’s appraised value in order to verify sufficiency of weightings.
In the future, Zengin-Net will regularly perform stress tests at least once
per year.
Zengin-Net’s collateral management system enables weightings to be42

changed as needed, and changes to the tolerable ratio of each collateral
type, too, can be implemented by making a request to the system vendor.
Rules stipulate that security interest be assigned to Zengin-Net forgovernment bonds when they are transferred to Zengin-Net’s Bank ofJapan account and for ordinary bonds and stocks when they aretransferred to Zengin-Net’s account with the Japan Securities Depository
Center. The transfer status for Zengin-Net’s accounts can be checked
instantaneously.
Zengin-Net maintains a processing capacity to handle around double thepast peak administrative volume of collateral cases.
Zengin-Net’s response to each individual key consideration is as follows.
＜Key consideration 1: An FMI should generally limit the assets it(routinely) accepts as collateral to those with low credit, liquidity, andmarket risks.＞
Zengin-Net determines the type of collateral that can be pledged from
Clearing Participants to Zengin-Net by majority approval of the board of
directors and rules are in place with regard to eligible collateral.
Zengin-Net reduces risk by not allowing the pledge, as collateral, of bankbonds and corporate bonds issued by Clearing Participants and bankbonds and corporate bonds issued by specified affiliates (specified
affiliates stipulated in Article 4-2-1 of the Banking Act Enforcement
Ordinance) as well as the stock of specified affiliates.
In addition to this, Zengin-net is planning to implement a system toconduct reviews of accepted collateral based on quantitative evaluations
including the result of stress tests.
＜Key consideration 2: An FMI should establish prudent valuation
practices and develop haircuts that are regularly tested and take into
account stressed market conditions.＞
Zengin-Net has established a collateral weight for each collateral type andensures the sufficiency of the weightings by conducting back-tests to43

check whether the appraised value has fallen below the market value ofthe collateral during past market environments.
Collateral is marked to mark every business day for stocks and twice
monthly for bonds, during which time the appraisal value of the collateralis calculated based on the market price and weighting.
Zengin-Net is currently examining whether to switch the timing of markto market operations for bonds to daily and it is considering setting
weightings based on the market environment during times of stress.
＜Key consideration 3: In order to reduce the need for procyclicaladjustments, an FMI should establish stable and conservative
haircuts that are calibrated to include periods of stressed market
conditions, to the extent practicable and prudent.＞
In order to identify and evaluate the inherent procyclicality of weighting
calculations, in fiscal 2015 Zengin-Net hired an outside expert to conduct
a stress test, which checked to see whether the appraised value has fallen
below the market value of the collateral during the time with the highest
recorded price fluctuation, which verified the sufficiency of theweightings. Zengin-Net will carry out such stress tests on a regular basis
going forward at least once per year.
＜Key consideration 4: An FMI should avoid concentrated holdingsof certain assets where this would significantly impair the ability toliquidate such assets quickly without significant adverse price effects.
＞
Zengin-Net has established a certain percentage of the collateral that the
total appraised value of government bonds and government-guaranteedbonds cannot exceed to ensure pledged collateral is not overweight interms of local government bonds or other bonds.
As for stock, Zengin-Net has established a measure to reduce theappraised value to avoid overconcentration in specified stocks byrequiring the pledging of bonds above a certain level of the total
appraised value of collateral excluding stock.

44

Furthermore, Zengin-Net carries out back-tests to confirm that collateralvalue will not fall below the value appraised by Zengin-Net by preventing
the overconcentration of collateral around specific types that are currently
set.
＜Key consideration 5: An FMI that accepts cross-border collateralshould mitigate the risks associated with its use and ensure that thecollateral can be used in a timely manner.＞
Zengin-Net does not accept cross-border collateral.
＜Key consideration 6: An FMI should use a collateral management
system that is well-designed and operationally flexible.＞
Zengin-Net’s collateral management system allows for changes in the
Sender Net Debit Cap, marks to market collateral, and allows for thepledging/return of collateral, while changes in collateral weightings canbe made as needed.
The system can also be modified to change the tolerance ratio for eachtype of collateral (e.g., the total appraised value of government bonds andgovernment-guaranteed bonds must exceed 30% of the collateral, etc.).

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 effect same-day and,
where appropriate, intraday and multiday settlement of payment obligations with a highdegree 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 liquidity obligation for the FMI in extreme but plausible market
conditions.
Summary

Zengin-Net defines liquidity risk and carries out risk evaluations,narrative

management, reduction, and monitoring in accordance with its liquidity
risk management policy defined in its Internal Control Basic Policy.
Zengin-Net defines liquidity risk as the risk that Zengin-Net will incur
losses because the funds clearing counterparty cannot complete thepayment obligation as per the limited time available (funds are cleared45

normally by 4:15pm), even in cases where the said funds clearing
counterparty will be able to fulfill its obligation at any point in the future,
within its current account held at the Bank of Japan due to the failure of
the other Clearing Participant to carry out the funds settlement.
Zengin-Net

carriesoutliquidityriskevaluations,management,

mitigation, and monitoring along with credit risk.
With regards to monitoring, Zengin-Net, pursuant to Article 51 of its
Statement of Operational Procedures, always calculates the net debit
amount of Clearing Participants in the system for each funds transfer
transaction, which enables the monitoring of liquidity risk and ensuresthat the net debit amount of each Clearing Participant does not exceed theSender Net Debit Cap.
As for reducing risk, Zengin-Net sets forth procedures to respond to asettlement default, assuming the scenario of a bankruptcy involving a
Clearing Participant and its affiliates, in Article 58 of its Statement of
Operational Procedures, which also establishes the Liquidity Supply
Scheme to secure a source of liquidity for the settlement of funds
transfers.
Specifically, Zengin-Net selects Liquidity Providing Banks from Clearing
Participants, and in case there is nonpayment of funds by a Clearing
Participant, Zengin-Net receives a supply of funds from thepre-determined Liquidity Providing Bank, which makes it possible toclear the funds transfer settlement.
Additionally, even if there is a settlement default by the top two Liquidity
Providing Banks, a liquidity supply cap has been determined for eachbank to ensure that the shortfall in liquidity from these two banks can bereceived from other Liquidity Providing Banks.
This arrangement has been confirmed as providing access to sufficientliquidity even if there is a settlement default by the largest Liquidity
Providing Bank and its affiliates once every three months.
Furthermore, pursuant to Article 57 of the Statement of Operational
46

Procedures, the top 25 Clearing Participants in terms of domestic funds
transfer transaction volume from the previous year are selected as
Liquidity Providing Banks. The liquidity supply cap for each of thesebanks is explicitly stated in the liquidity supply agreement concluded
with each bank.
Moreover, the feasibility of the Liquidity Supply Scheme is verified once
every three months during which time the ability of Liquidity Providing
Banks to supply funds is assessed.
In fiscal 2015, stress tests were carried out on latent stress scenarios,
which verified the sufficiency of liquidity and the effectiveness of current
risk management methods with regard to liquidity risk. In the future,similar stress tests will be carried out at least once every year.
In the event that the amount of funds provided by the Liquidity Providing
Bank is not enough for the required funds to complete the day’s
settlements, pursuant to Article 60 of the Statement of Operational
Procedures, Zengin-Net can request all Clearing Participants to supply theshortfall of funds.
Additionally, once every year Zengin-Net holds a training exercise for asettlement default with Liquidity Providing Banks participating. This has
confirmed that the procedures of the Liquidity Supply Scheme can be
carried out quickly and with certainty.
Even if there is a settlement default bank, as demonstrated above, asystem is in place to complete the day’s settlements, albeit with a slightdelay from the initially scheduled time.
Zengin-Net only handles Japanese yen and it is able to conduct
settlements within its current account held at the Bank of Japan.
Zengin-Net’s response to each individual key consideration is as follows.

＜Key consideration 1: An FMI should have a robust framework to
47manage its liquidity risks from its participants, settlement banks,
nostro agents, custodian banks, liquidity providers, and otherentities.＞
Zengin-Net has defined liquidity risk and carries out liquidity risk
assessments, management, mitigation, and monitoring.
Article 57 of the Statement of Operational Procedures sets forth Liquidity
Providing Banks and Article 58 stipulates the processing of settlements
during the occurrence of a settlement default. Based on these provisions,
Zengin-Net has established Handling Guidelines for Procedures when aSettlement Default Occurs, which sets forth the procedures to follow inthe event of nonpayment.
Zengin-Net selects Liquidity Providing Banks from Clearing Participantsand even if there is a settlement default by the top two Liquidity
Providing Banks resulting in a liquidity shortfall, a liquidity supply cap
has been determined for each bank to ensure that the shortfall in liquidityfrom these two banks can be received from other Liquidity Providing
Banks (confirmation is made once every three months that this amount islarger than if there was a nonpayment by the largest Liquidity Providing
Bank and its affiliates).
＜Key consideration 2: An FMI should have effective operational andanalytical tools to identify, measure, and monitor its settlement andfunding flows on an ongoing and timely basis, including its use of
intraday liquidity.＞
With regards to liquidity risk, Zengin-Net, pursuant to Article 51 of its
Statement of Operational Procedures, always calculates the net debit
amount of Clearing Participants in the system for each funds transfer
transaction, which enables the monitoring of liquidity risk and ensuresthat the net debit amount of each Clearing Participant does not exceed theSender Net Debit Cap.
Moreover, the ability of Liquidity Providing Banks to supply funds is
assessed once every three months.
＜Key consideration 3: A payment system or SSS, including one
48

employing a DNS mechanism, should maintain sufficient liquid
resources in all relevant currencies to effect same-day settlement, andwhere appropriate intraday or multiday settlement, of payment
obligations with a high degree of confidence under a wide range ofpotential stress scenarios that should include, but not be limited to,the default of the participant and its affiliates that would generate thelargest aggregate payment obligation in extreme but plausible market
conditions.＞
Zengin-Net, under its defined Liquidity Supply Scheme, establishes theceiling of the Sender Net Debit Cap every fiscal year at its board of
directors meeting based on the status of net debit amounts of Clearing
Participants. Based on this, the total liquidity supply cap of Liquidity
Providing Banks is calculated.
Specifically, the total liquidity supply cap is set to cover any failure by
the top two banks in terms of Sender Net Debit Cap to fulfill an
obligation (confirmation is made once every three months that thisamount is larger than if there was a settlement default by the largest
Liquidity Providing Bank and its affiliates).
Moreover, the feasibility of the Liquidity Supply Scheme is verified once
every three months during which time the ability of Liquidity Providing
Banks to supply funds is assessed.
In fiscal 2015, Zengin-Net carried out stress tests which verified thesufficiency of liquidity and the effectiveness of current liquidity risk
management methods for extreme but plausible market conditions. In the
future, similar stress tests will be carried out at least once every year.
＜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 of confidence under awide range of potential stress scenarios that should include, but not
be limited to, the default of the participant and its affiliates thatwould generate the largest aggregate payment obligation to the CCP
in extreme but plausible market conditions. In addition, a CCP that is49

involved in activities with a more-complex risk profile or that issystemically important in multiple jurisdictions should consider
maintaining additional liquidity resources sufficient to cover a wider
range of potential stress scenarios that should include, but not belimited to, the default of the two participants and their affiliates thatwould generate the largest aggregate payment obligation to the CCP
in extreme but plausible market conditions.＞
Zengin-Net is a payment and settlement system. Therefore, this key
consideration does not apply.
＜Key consideration 5: For the purpose of meeting its minimum
liquid resource requirement, an FMI’s qualifying liquid resources ineach currency include cash at the central bank of issue and at
creditworthy commercial banks, committed lines of credit, committed
foreign exchange swaps, and committed repos, as well as highlymarketable collateral held in custody and investments that arereadily available and convertible into cash with prearranged andhighly 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 part of theminimum requirement to the extent it has collateral that is eligible
for pledging to (or for conducting other appropriate forms oftransactions with) the relevant central bank. All such resources
should be available when needed.＞
Zengin-Net, pursuant to Article 57 of the Statement of Operational
Procedures, selects Liquidity Providing Banks in advance and has secured
sources of liquidity so that the day’s settlements can be completed, even if
the top two banks in terms of Sender Net Debit Cap go bankrupt.
Additionally, Zengin-Net, under Article 53 of the Statement of
Operational Procedures, is able to dispose of collateral pledged by a
Clearing Participant according to a method, timing and price generally
deemed acceptable without advanced notification or reminding of the
Clearing Participant in cases where the Clearing Participant fails to fulfill
an obligation to Zengin-Net. As a result, there is no particular barrier
present to converting collateral to cash.

50

Depending on the market environment, it may take time to sell collateral,but Zengin-Net will receive funds from Liquidity Providing Banks on thesame day as the settlement, making it possible to complete the settlement,
posing no problem in terms of funds clearing.
During fiscal 2016, Zengin-Net plans on verifying whether a system is inplace to quickly dispose of secured collateral.
＜Key consideration 6: An FMI may supplement its qualifying liquid
resources with other forms of liquid resources. If the FMI does so,then these liquid resources should be in the form of assets that arelikely to be saleable or acceptable as collateral for lines of credit,
swaps, or repos on an ad hoc basis following a default, even if thiscannot be reliably prearranged or guaranteed in extreme market
conditions. Even if an FMI does not have access to routine central
bank credit, it should still take account of what collateral is typically
accepted by the relevant central bank, as such assets may be more
likely to be liquid in stressed circumstances. An FMI should notassume the availability of emergency central bank credit as a part ofits liquidity plan.＞
Zengin-Net, in case of settlement default by a bank, will receive funds
from predetermined Liquidity Providing Banks based on Article 57 of theStatement of Operational Procedures.
Moreover, in the event that the amount of funds provided by the Liquidity
Providing Bank is not enough for the required funds to complete the day’s
settlements, Zengin-Net can request all Clearing Participants to supply
the shortfall of funds.
In fiscal 2015, Zengin-Net carried out a stress test which verified thesufficiency of liquidity and the effectiveness of current liquidity risk
management methods for extreme but plausible market conditions,although extreme. In the future, similar stress tests will be carried out atleast once every year.

＜Key consideration 7: An FMI should obtain a high degree of51

confidence, through rigorous due diligence, that each provider of its
minimum required qualifying liquid resources, whether a participantof the FMI or an external party, has sufficient information tounderstand 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 performancereliability with respect to a particular currency, a liquidity provider’spotential access to credit 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.＞Zengin-Net, once every three months, requests each Liquidity Providing
Bank to provide information on the balance of its current account with the
Bank of Japan and conducts a feasibility analysis, which has confirmedthat each Liquidity Providing Bank maintains the liquidity capacity tocontinually provide more funds than the liquidity supply cap.
During this time, Zengin-Net also requests each Liquidity Providing Bank
to provide information on the balance of its shared collateral pledged to
the Bank of Japan and takes into account Liquidity Providing Banks’potential access to credit from the Bank of Japan supported by thisbalance.
Additionally, once every year Zengin-Net holds a training exercise forsettlement default with Liquidity Providing Banks participating. This has
confirmed that the procedures of the Liquidity Supply Scheme can be
carried out quickly and with certainty.
＜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.＞
Zengin-Net has been selected by the Bank of Japan, Japan’s central bank,as a counterparty of current deposit transactions within the Bank of Japan,
making it possible for Zengin-Net to settle transactions in its Bank ofJapan current account.
＜Key consideration 9: An FMI should determine the amount andregularly test the sufficiency of its liquid resources through rigorous52

stress testing. 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 of 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, simultaneous pressures infunding and asset markets, and a spectrum of forward-looking stressscenarios in a variety of extreme but plausible market conditions.
Scenarios should also take into account the design and operation of
the FMI, include all entities that might pose material liquidity risks
to the FMI (such as settlement banks, nostro agents, custodian banks,
liquidity providers, and linked FMIs), and where appropriate, covera multiday period. In all cases, an FMI should document its
supporting rationale for, and should have appropriate governancearrangements relating to, the amount and form of total liquid
resources it maintains.＞
Zengin-Net carried out a stress test in fiscal 2015 with the assistance ofoutside experts. This test verified the robustness of the Liquidity Supply
Scheme for extreme but plausible market conditions by examining theeffectiveness of current liquidity risk management methods. In the future,similar stress tests will be carried out at least once every year.
＜Key consideration 10: An FMI should establish explicit rules andprocedures that enable the FMI to effect same-day and, whereappropriate,intradayandmultidaysettlementofpayment

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, or delaying 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 a safe and sound manner.＞
Zengin-Net, pursuant to Article 58 of the Statement of Operational
Procedures, settlement rules have been established for the handling of a53

settlement default bank, and a system is in place to ensure that settlements
are completed on the same day, even when there is a settlement defaultbank.
In the case of a settlement default bank, Article 57 of the Statement of
Operational Procedures stipulates that funds are to be supplied by
Liquidity Providing Banks, and in the event that the amount of funds
provided by the Liquidity Providing Bank is not enough for the required
funds to complete the day’s settlements, Zengin-Net can request all
Clearing Participants to supply the shortfall of funds.
These procedures are defined in Zengin-Net’s Handling Guidelines for
Procedures when a Settlement Default Occurs and Handling Guidelines
for Collection and Recovery of Obligation from Settlement Default
Banks. These guidelines are disclosed to Participating Banks.

Principle 8: Settlement finality
An FMI should provide clear and certain final settlement, at a minimum by the end of thevalue date. Where necessary or preferable, an FMI should provide final settlement
intraday or in real time.
Summary

Domestic funds transfer transactions normally begin from 8:30am andnarrativeend at 3:30pm. Afterwards, settlement between Clearing Participants
takes place at the Bank of Japan at 4:15pm. This is the final settlement fordomestic funds transfer transactions.
This information is clearly stipulated in Article 48 of the Statement of
Operational Procedures, which is published on the Zengin-Net website.
Irrespective of the above, credit transfers of 100 million yen and above,
excluding payroll and bonus payments, are settled at the Bank of Japan
using real time gross settlement (RTGS), with final settlement being
immediate.
This information is published on Zengin-Net’s website and details are
explicitly stipulated in the Domestic Funds Transfer Handling
Regulations which is disclosed to Participating Banks.
54For clearing transactions, Zengin-Net, pursuant to Articles 49 and 50 of
the Statement of Operational Procedures, shall assume the debits that a
Clearing Participant owes to another Clearing Participant whereby the
Clearing Participant is discharged from such debits and simultaneously
acquire the credits corresponding to such debits from the Clearing
Participant that is discharged from such debits.
Additionally, all of the credits Zengin-Net has acquired from a Clearing
Participant and all the debits Zengin-Net assumes from the Clearing
Participant are offset by the opposing amount at the time settlements
begin.
Zengin-Net’s relevant legal jurisdiction for the settlements of domestic
funds transfer transactions is only Japan, and Clearing Participants, who
are the counterparty in settlements of domestic funds transfer
transactions, submit a written pledge that they will comply with the Stateof

Operational

Procedures,

Domestic

Funds

Transfer

Handling

Regulations, and the Zengin System Rules.
Following these rules and regulations, the Bank of Japan, which is thecentral bank that received the transfer request for settlement amount offunds transfer transaction calculated by Zengin-Net, carries out the final
settlement by transfer between current accounts at the Bank of Japan.
Additionally, a legal opinion has been obtained that the Articles ofIncorporation and Statement of Operational Procedures, which regulate
the clearing of funds, are not in violation of the Payment Services Act orother applicable laws.
Zengin-Net’s response to each individual key consideration is as follows.
＜Key consideration 1: An FMI’s rules and procedures should clearly
define the point at which settlement is final.＞
Domestic funds transfer transactions normally begin from 8:30am andend at 3:30pm. Afterwards, settlement between Clearing Participants
takes place at the Bank of Japan at 4:15pm. This is the final settlement for55

domestic funds transfer transactions. This information is stipulated in
Article 48 of the Statement of Operational Procedures and is published on
the Zengin-Net website.
Irrespective of the above, credit transfers of 100 million yen and above,
excluding payroll and bonus payments, are settled at the Bank of Japan
using real time gross settlement (RTGS), with final settlement being
immediate. This information is published on the Zengin-Net website anddetails are explicitly stated in the Domestic Funds Transfer Handling
Regulations, which is disclosed to Participating Banks, as “The credit anddebit of large-value domestic funds transfer transactions are settled within
settlement accounts at the Bank of Japan (simultaneous settlement
account) for each individual large-value domestic funds transfer
transaction.”＜Key consideration 2: An FMI should complete final settlement nolater than the end of the value date, and preferably intraday or inreal time, to reduce settlement risk. An LVPS or SSS should consider
adopting RTGS or multiple-batch processing during the settlementday.＞
The settlement date is stipulated for every credit transfer request. Funds
are transferred between current accounts at the Bank of Japan and funds
movement takes place, with the final settlement taking place on the same
day for same-day settlements or the designated date for forward dated
settlements.
For credit transfers of 100 million yen and above, excluding payroll andbonus payments, the real time gross settlement is carried out at the Bankof Japan, with the final settlement immediate, in the case of same day
settlements immediately and in the case of forward dated settlements atthe start of operations on the designated date.
＜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.＞
Zengin-Net completes the calculation of funds transfer amounts for the
day immediately after communication time for the Zengin System ends at56

the typical 3:30pm, after which time it is impossible to send acancellation request telegraphic message and cancellation acceptance andfunds return telegraphic message based on this request.
This cancellation request is not finalized simply by the Zengin Systemsending the telegraphic message to the sender bank, as the sender bankhas to notify the receiver bank of the telegraphic message. If thisnotification does not take place the funds transfer settlement amount will
not be revised.
Details regarding this handling are found in the Domestic Funds Transfer
Handling Procedures and Zengin System Rules, which are disclosed toParticipating Banks and the Bank of Japan.

Principle 9: Money settlements
An FMI should conduct its money settlements in central bank money where practical andavailable. If central bank money is not used, an FMI should minimise and strictly control
the credit and liquidity risk arising from the use of commercial bank money.
Summary

All funds transfer settlements are conducted with central bank money.

narrative
Credit transfers of 100 million yen and above, excluding payroll andbonus payments, are not subject to funds clearing, but these, too, undergo
real time gross settlement at the Bank of Japan and are settled in Japaneseyen.
Zengin-Net’s response to each individual key consideration is as follows.
＜Key consideration 1: An FMI should conduct its money settlements
in central bank money, where practical and available, to avoid credit
and liquidity risks.＞
Zengin-Net calculates the funds transfer amounts for each Clearing
Participant for the day, notifies the Clearing Participant and Bank ofJapan, and the settlement is then carried out by the Bank of Japan.
Credit transfers of 100 million yen and above, excluding payroll andbonus payments, are not subject to funds clearing, but these, too, undergo57

real time gross settlement at the Bank of Japan and are settled in Japaneseyen.
＜Key consideration 2: If central bank money is not used, an FMI
should conduct its money settlements using a settlement asset withlittle or no credit or liquidity risk.＞
Zengin-Net uses central bank money for all settlements (settlements
within current accounts at the Bank of Japan).
＜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 and supervision, creditworthiness, capitalisation, access toliquidity, and operational reliability. An FMI should also monitor andmanage the concentration of credit and liquidity exposures to its
commercial settlement banks.＞
Zengin-Net does not use commercial bank money. It uses central bankmoney for all settlements (settlements within current accounts at the Bankof Japan).
＜Key consideration 4: If an FMI conducts money settlements on its
own books, it should minimise and strictly control its credit andliquidity risks.＞
Zengin-Net does not conduct money settlements on its own books but
uses central bank money for all settlements (settlements within current
accounts at the Bank of Japan)＜ Key consideration 5: An FMI’s legal agreements with any
settlement banks should state clearly when transfers on the books ofindividual settlement banks are expected to occur, that transfers areto be final when effected, and that funds received should betransferable as soon as possible, at a minimum by the end of the day
and ideally intraday, in order to enable the FMI and its participants
to manage credit and liquidity risks.＞
Article 48 of the Statement of Operational Procedures explicitly states
58

that the settlement of funds transfers is to be conducted at 4:15pm
through current accounts at the Bank of Japan, and the final settlement is
to be at this time.

Principle 13: Participant-default rules and procedures
An FMI should have effective and clearly defined rules and procedures to manage aparticipant default. These rules and procedures should be designed to ensure that the FMI
can take timely action to contain losses and liquidity pressures and continue to meet its
obligations.
Summary narrative

Zengin-Net has established a system to address settlement defaults that
may occur from bankruptcy and the handling of a bankruptcy asprocedures to manage a participant default.
The handling at the time of a participant default including procedures forthe handling situations where a settlement default bank that begins
proceedings for civil rehabilitation continues to participate in domestic
funds transfer transactions, the handling of the transfer of operations
stipulated in the Deposit Insurance Act for defaulted banks, the handlingof temporary stoppages of use of the Domestic Funds Transfer System bydefaulted banks, and the handling of the beginning of bankruptcy
proceeds by a defaulted bank and its loss of participant qualifications due
to dissolution.
Zengin-Net, if it receives notice from the Bank of Japan that at the time ofsettlement that there is a Clearing Participant for which the funds transfer
settlement amount cannot be debited, can treat the Clearing Participant as
settlement default bank regardless of the reason.
Additionally, Zengin-Net, if a settlement default occurs at the time ofParticipating Bank bankruptcy or before or after this, has a system inplace to receive funds immediately from a Liquidity Providing Bank tocomplete the day’s settlements.
In particular, with regard to the system to address settlement default,
Zengin-Net’s contract with Liquidity Providing Banks states that theymust supply liquidity by a predetermined time, which makes it possible to59use a liquidity facility immediately.
With regards to the failure of a settlement default bank to fulfill its
payment obligation for the funds transfer settlement, Zengin-Net can
carry out necessary procedures for collateral to be disposed of and othercredits collected, and with the approval of the board of directors,
Zengin-Net can also collect the amount of the losses in funds from all
Clearing Participants without collecting the credit.
Important matters regarding this are stipulated in Articles 55, 57, 58 and
60 of the Statement of Operational Procedures, which is published on
Zengin-Net’s website.
Zengin-Net has prepared a manual on the handling of settlement defaults
within the Domestic Funds Transfer System, as equivalent to an in-houseplan that indicates the role and obligations at the time of a settlement
default. This manual also covers documents to be prepared, information
to be collected, and communication/adjustments to be made with the
Financial Services Agency and Bank of Japan at the time of a settlement
default.
Additionally, once every year Zengin-Net holds a training exercise for asettlement default with Liquidity Providing Banks participating, in orderto foster greater operational experience, and procedures are reviewed
based on the results of the training.
Zengin-Net’s response to each individual key consideration is as follows.
＜ Key consideration 1: An FMI should have default rules andprocedures that enable the FMI to continue to meet its obligations in
the event of a participant default and that address the replenishmentof resources following a default.＞
Article 16 of the Statement of Operational Procedures sets forth the lossof participant qualifications, Article 21 the temporary stoppage of use of
the Domestic Funds Transfer System, and Article 33 the continued
participation in domestic funds transfer transactions after filing to begin
civil rehabilitation proceedings and settlement default.
60

Additionally, Article 57 of the Statement of Operational Procedures
contains provisions on the Liquidity Supply Scheme. Zengin-Net, if
nonpayment occurs at the time of Participating Bank bankruptcy or
before or after this, has a system in place to receive funds immediatelyfrom a Liquidity Providing Bank to complete the day’s settlements.
Article 58-2 of the Statement of Operational Procedures requires that
Liquidity Providing Banks receiving a request to pay the requested
amount from Zengin-Net into Zengin-Net’s Bank of Japan current
account by the stipulated deadline, which ensures immediate access to aliquidity facility.
Additionally, Article 61 of the Statement of Operational Procedures
stipulates that funds supplied from Liquidity Providing Banks are to be
repaid after the settlement is completed.
＜ 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.＞Zengin-Net, as procedures for handling at the time of a participant
default, stipulates the handling of the Domestic Funds Transfer System
for temporary stoppages of use funds transfer system and loss ofparticipant qualifications, handling situations where a settlement default
bank that begins proceedings for civil rehabilitation continues toparticipate in domestic funds transfer transactions, the handling of thetransfer of operations stipulated in the Deposit Insurance Act for
defaulted banks. Administrative procedures are organized for funds
transfer transactions and funds transfer settlements for Zengin-Net as wellas each defaulted bank and Participating Bank.
Zengin-Net has prepared a manual on the handling of settlement defaults
within the Domestic Funds Transfer System, as equivalent to an in-houseplan that indicates the role and obligations at the time of a settlement
default.
This manual also covers documents to be prepared, information to be61

collected, and communication/adjustments to be made with the Financial
Services Agency and Bank of Japan at the time of a settlement default.
＜Key consideration 3: An FMI should publicly disclose key aspectsof its default rules and procedures.＞
Zengin-Net has established rules and procedures for the handling of asettlement default that may occur due to bankruptcy or addressing a
Clearing Participant default. Important matters are cited in the Statementof Operational Procedures, which is published on the Zengin-Net website.
＜Key consideration 4: An FMI should involve its participants andother stakeholders in the testing and review of the FMI’s default
procedures, including any close-out procedures. Such testing andreview should be conducted at least annually or following materialchanges to the rules and procedures to ensure that they are practicaland effective.＞
Zengin-Net, when reviewing and examining its rule and circulars for theStatement of Operational Procedures, carries out deliberations andreviews in committees and working groups comprising representatives ofParticipating Banks.
When amending the State of Operational Procedures, the approval of thePrime Minister of Japan is necessary and discussions must be held with
the Bank of Japan primarily on matters concerning funds settlements,
such as the handling of settlement defaults. Amendments are shared with
relevant regulatory authorities (Article 86 of the Statement of Operational
Procedures).
Zengin-Net recognizes that facilitating the completion of the day’s funds
transfer settlements is of the utmost importance, even when handling abankruptcy. Additionally, once every year Zengin-Net holds a training
exercise for settlement default with Liquidity Providing Banks
participating, in order to foster greater operational experience, andprocedures are reviewed based on the results of the training.

62

Principle 15: General business risk
An FMI should identify, monitor, and manage its general business risk and hold sufficientliquid net assets funded by equity to cover potential general business losses so that it cancontinue operations and services as a going concern if those losses materialise. Further,liquid net assets should at all times be sufficient to ensure a recovery or orderly
wind-down of critical operations and services.
Summary

The operations carried out by Zengin-Net are the funds clearing businessnarrative

and related operations. Zengin-Net does not carry out any otheroperations and does not make investments in securities or real estate.
Therefore, the anticipated business risks of Zengin-Net are the following
four risks: (1) the risk of not receiving payment of expenses from
Participating Banks; (2) the risk of the occurrence of a large unexpected
expense, such as due to lawsuit, that Zengin-Net cannot pay the costs for;(3) the risk that Zengin-Net incurs a large expense due to a natural
disaster or other event that it cannot pay the costs for; and (4) the risk that
Zengin-Net cannot facilitate continued operations due to the bankruptcy
of an outsourcing partner.
Zengin-Net retains funds equivalent to its annual operating expenses inliquid assets (bank deposits), and losses incurred by Zengin-Net from theoperation of the Domestic Funds Transfer System are the joint liability of
all Participating Banks and such losses can be jointly borne from all
Participating Banks based on approval of the board of directors.
Therefore, Zengin-Net can continue its operations even when operational
losses are incurred.
Additionally, the management condition of outsourcing partners isregularly monitored at least once per year and it has been confirmed thatthe risk of bankruptcy is low.
With regards to plans for procuring additional capital (capital plan),
Zengin-Net believes the necessity and significance of such a plan is low
based on the following matters, and thus unnecessary.
(1) Under the Payment Services Act, excluding cases where approvalis received from the Prime Minister of Japan, a Funds Clearing
63

Agency is responsible for the funds clearing business and related
operations and cannot carry out other operations, meaning it has an
obligation to focus on these operations exclusively.
(2) The operating expenses of Zengin-Net are covered by contributions
toexpensescollected

from

Clearing

Participants,

which

fundamentally differs from the management format of ordinary
operating companies which is linked with sales performance.
(3) The Zengin Data Telecommunication System, which is the core
operating system of the Domestic Funds Transfer System, isprovided for the use of Participating Banks based on a service
agreement concluded with the system vendor. This system does notbelong to Zengin-Net.
(4) Zengin-Net does not invest at all in marketable securities orfinancial instruments that carry the risk of a loss of principal.
Zengin-Net’s response to each individual key consideration is as follows.
＜Key consideration 1: An FMI should have robust management andcontrol systems to identify, monitor, and manage general businessrisks, including losses from poor execution of business strategy,
negative cash flows, or unexpected and excessively large operating
expenses.＞
The operations carried out by Zengin-Net are the funds clearing businessand related operations. It does not carry out any other operations and does
not invest in securities or real estate.
Therefore, the anticipated business risks of Zengin-Net are the following
four risks: (1) the risk of not receiving payment of expenses from
Participating Banks; (2) the risk of the occurrence of a large unexpected
expense, such as due to lawsuit, that Zengin-Net cannot pay the costs for;(3) the risk that Zengin-Net incurs a large expense due to a natural
disaster or other event that it cannot pay the costs for; and (4) the risk that
Zengin-Net cannot facilitate continued operations due to the bankruptcy
of an outsourcing partner.
Of those identified business risks, as for the risk of nonpayment ofexpenses to be paid from Participating Banks to Zengin-Net, Zengin
64System Rules dictate that the nonpayment of Zengin System expenses
from a Participating Bank is the joint liability of all Participating Banksand such shortfalls can be borne from all Participating Banks. Therefore,
this risk is believed to be very small. Additionally, Zengin-Net holds
deposits in excess of its annual operating expenses, meaning there is very
little possibility of having a shortfall of funds.
As for the risk of a large unexpected expense that Zengin-Net cannot pay
the costs for, Article 30 of the Statement of Operational Procedures states,“Even if a Clearing Participant incurs any damage concerning the Funds
Clearing Business, etc., with the Association, the Association shall not beliable to provide compensation for such damage unless it is found to havebeen willful or gross negligence on the part of the Association.”
In addition, the Domestic Funds Transfer Handling Regulations states,“Losses incurred by Zengin-Net in the operation of the Funds Transfer
System is the joint liability of all Participating Banks and such losses
shall be borne jointly by all Participating Banks based on approval of theboard of directors.” Additionally, the budget is prepared at the start of the
fiscal year and based on this budget operations are carried out, whichmeans risks are extremely low.
＜Key consideration 2: An FMI should hold liquid net assets fundedby equity (such as common stock, disclosed reserves, or otherretained earnings) so that it can continue operations and services as agoing concern if it incurs general business losses. The amount ofliquid net assets funded by equity an FMI should hold should bedetermined by its general business risk profile and the length of timerequired to achieve a recovery or orderly wind-down, as appropriate,of its critical operations and services if such action is taken.＞
As joint liability with approval of its board of directors, losses incurred by
Zengin-Net related to the operation of the Domestic Funds Transfer
System is the joint liability of all Participating Banks and such losses are
the joint burden of all Participating Banks based on approval of the boardof directors. Additionally, Zengin-Net retains funds equivalent to its
annual operating expenses in liquid assets (bank deposits), which makes it
possible for Zengin-Net to continue its operations even when losses from65

its business operations are incurred.
Zengin-Net, even when it bears a large obligation from assuming a debit
for a settlement transaction, manages settlement risk appropriately and it
has a mechanism in place to ultimately collect funds or losses required for
repayment from virtually every bank in Japan, including foreign bankswith operations in Japan. Therefore, the period required to achieve arecovery is short and there are few related operating expenses.
＜Key consideration 3: An FMI should maintain a viable recovery ororderly wind-down plan and should hold sufficient liquid net assets
funded by equity to implement this plan. At a minimum, an FMI
should hold liquid net assets funded by equity equal to at least six
months of current operating expenses. These assets are in addition toresources held to cover participant defaults or other risks covered
under the financial resources principles. However, equity held underinternational risk-based capital standards can be included where
relevant and appropriate to avoid duplicate capital requirements.＞
Zengin-Net, even when it bears a large obligation from assuming a debit
for a settlement transaction, manages settlement risk appropriately and it
has a mechanism in place to ultimately collect funds or losses required for
repayment from virtually every bank in Japan, including foreign bankswith operations in Japan. Therefore, the period required to achieve arecovery is short and there are few related operating expenses.
As a result, a situation requiring a recovery or wind-down attributed tobusiness risk is practically speaking not anticipated.
Cases where liquid assets will be used on a net basis to fund capital for arecovery are not anticipated, but Zengin-Net retains funds equivalent to
its annual operating expenses in liquid assets (bank deposits).
＜Key consideration 4: Assets held to cover general business risk
should be of high quality and sufficiently liquid in order to allow the
FMI to meet its current and projected operating expenses under arange of scenarios, including in adverse market conditions.＞
Zengin-Net’s liquid assets on a net basis used for funding purposes are66

bank deposits (fixed-term deposits and call deposits). Deposits can be
refunded and exchanged for cash without loss of value.
Income for covering annual expenses for the current term and future years
is supplied from Participating Banks in the form of contributions to
expenses. This amount is determined based on the budget amount and isborne by Participating Banks regardless of market conditions.
Furthermore, losses incurred by Zengin-Net from the operation of thefunds transfer system is the joint liability of all Participating Banks and amechanism is in place where such losses can be jointly borne from all
Participating Banks with approval of the board of directors.
＜Key consideration 5: An FMI should maintain a viable plan for
raising additional equity should its equity fall close to or below theamount needed. This plan should be approved by the board of
directors and updated regularly.＞With regards to plans for procuring additional capital (capital plan),
Zengin-Net believes the necessity and significance of such a plan is low
based on the following matters, and thus unnecessary.
(1) Under the Payment Services Act, excluding cases where approvalis received from the Prime Minister of Japan, a Funds Clearing
Agency is responsible for funds clearing business and related
operations and cannot carry out other operations, meaning it has an
obligation to focus on these operations exclusively (Article 69-1 of
the Payment Services Act).
(2) The operating expenses of Zengin-Net are covered by contributions
toexpensescollected

from

Clearing

Participants,

which

fundamentally differs from the management format ordinary
operating companies which is linked with sales performance(Article 13 of the Statement of Operational Procedures).
(3) The Zengin Data Telecommunication System, which is the core
operating system of the Domestic Funds Transfer System, isprovided for the use of Participating Banks based on a service
agreement concluded with the system vendor, and so this systemdoes not belong to Zengin-Net. (6th Generation Zengin Data
Telecommunication System User Agreement dated November 14,
67

2011).
(4) Zengin-Net does not invest at all in marketable securities orfinancial instruments that carry the risk of a loss of principal(reports concerning the funds clearing business, etc.)

Principle 16: Custody and investment risks
An FMI should safeguard its own and its participants’ assets and minimise the risk of loss
on and delay in access to these assets. An FMI’s investments should be in instruments withminimal credit, market, and liquidity risks.
Summary

Funds equivalent to the working capital and paid-in capital of Zengin-Net

narrative

are held on deposit at commercial banks. Collateral secured from
Clearing Participants is held by the Bank of Japan or Japan Securities
Depository Center, Inc.
As for whether rigorous accounting practices, custodian procedures andinternal control systems in place to sufficiently protect these main assets,banks are subject to the supervision of the Financial Services Agency
under the Banking Act. It has been determined through banks’ financial
reports and details disclosure information that they indeed have rigorous
accounting practices, custodian procedures and internal control systems inplace.
The Bank of Japan is Japan’s central bank. Japan Securities Depository
Center, Inc. (JASDEC) is required to have an internal control system
pursuant to Article 3-1-5 to Article 3-1-7 of the Act on Book-Entry
Transfer of Company Bonds, Shares, etc., and is a depository andbook-entry transfer institution that is supervised by the Financial Services
Agency and overseen by the Bank of Japan. Therefore, they are believed
to have rigorous accounting practices, custodian procedures and internal
control systems in place.
The entities that hold Zengin-Net’s deposits or store its collateral are eachlocated in Japan and Japanese law is present as the legal basis.
As for Zengin-Net’s holdings of security interests and credit obligations,rules requiring compliance with the written pledge submitted by68Participating Banks explicitly stipulate that the setting of security rights
and assignment to third parties is prohibited and are to be used to repay
obligations for cash collateral. The existence of this is confirmed bychecking current balance statements, deposit certificates, book-entry
account records and other recorded matters.
This ensures that the risk of loss of assets or delayed access to assets is
minimized.
Zengin-Net’s response to each individual key consideration is as follows.
＜ Key consideration 1: An FMI should hold its own and its
participants’ assets at supervised and regulated entities that haverobust accounting practices, safekeeping procedures, and internal
controls that fully protect these assets.＞
Funds equivalent to the working capital and paid-in capital of Zengin-Net
are held on deposit at commercial banks. Collateral secured from
Clearing Participants is held by the Bank of Japan or Japan Securities
Depository Center, Inc.
As for whether rigorous accounting practices, custodian procedures andinternal control systems in place to sufficiently protect these main assets,banks are subject to the supervision of the Financial Services Agency
under the Banking Act. It has been determined through banks’ financial
reports and details disclosure information that they indeed have rigorous
accounting practices, custodian procedures and internal control systems inplace.
The Bank of Japan is Japan’s central bank and Japan Securities
Depository Center, Inc. (JASDEC) is required to have an internal control
system pursuant to Article 3-1-5 to Article 3-1-7 of the Act on
Book-Entry Transfer of Company Bonds, Shares, etc. JASDEC is a
depository and book-entry transfer institution that is supervised by the
Financial Services Agency and overseen by the Bank of Japan. So they
are believed to have rigorous accounting practices, custodian procedures
and internal control systems in place.

69

Furthermore, Zengin-Net does not use a custodian bank.
＜Key consideration 2: An FMI should have prompt access to its
assets and the assets provided by participants, when required.＞
Zengin-Net requests custody of collateral after verifying the rights
concerning these assets.
The entities that hold Zengin-Net’s deposits or store its collateral are eachlocated in Japan and Japanese law is present as the legal basis.
＜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.＞
Zengin-Net does not use a custodian bank. Therefore, this key
consideration does not apply.
＜Key consideration 4: An FMI’s investment strategy should beconsistent with its overall risk-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.＞
Zengin-Net does not carry out financial investments. Therefore, this key
consideration does not apply.

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 and fulfilment of the
FMI’s obligations, including in the event of a wide-scale or major disruption.
Summary

Zengin-Net stipulates its operational risk management policy in its

narrative

Internal Control Basic Policy, and operational risk comprisingadministrative risk and system risk, among others, is categorized anddefined based on the cause. Departments in charge of each operationalrisk regularly carry out assessments of each operational risk.
70

The validity of this risk management policy including these categories
and definitions is examined regularly based on changes in external
environment and reviews of the medium-term management plan, andchanges are made as necessary.
Zengin-Net’s operations are believed to be impacted the most byadministrative risk and system risk, in particular. In accordance with theadministrative risk management policy and system risk management
policy, an Administrative Risk Management Regulation and System Risk
Management Regulation have been created that do not limit the source ofrisk. On top of this, pursuant to these regulations, the Planning &Coordination Department is chiefly responsible for regularly identifying
and assessing administrative risk and system risk.
Zengin-Net, based on each cause, categorizes operational risk asadministrative risk, system risk, information security risk, legal risk,
event risk, human resource risk and reputational risk.
As for administrative risk that affects administrative processing, thecauses of latent risk and how administrative risk will emerge from whichcause is identified in groups following procedures and manuals, andcontrolled based on the extent of the risk.
Zengin-Net’s response to each individual key consideration is as follows.
＜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.＞
Zengin-Net stipulates its operational risk management policy in its
Internal Control Basic Policy, and operational risk, comprisingadministrative risk and system risk, among others, is categorized anddefined based on the cause. Departments in charge of each operationalrisk regularly carry out assessments of each operational risk.
Zengin-Net, based on each cause, categorizes operational risk as71

administrative risk, system risk, information security risk, legal risk,
event risk, human resource risk and reputational risk.
Additionally, Zengin-Net carries out Risk and Control Self-Assessments(RCSA) based on procedures and manuals with regards to administrative
risks affecting administrative processes, and persons in charge of each
operation identify the causes of administrative risk and causes of latentrisk. Under the management of the Planning & Coordination Department,risk is controlled based on its magnitude.
Zengin-Net’s operations are believed to be impacted the most byadministrative risk and system risk, in particular. In accordance with theadministrative risk management policy and system risk management
policy, an administrative risk management regulation and system risk
management regulation have been created that do not limit the source ofrisk.
＜Key consideration 2: An FMI’s board of directors should clearly
define the roles and responsibilities for addressing operational risk
and should endorse the FMI’s operational risk-management
framework. Systems, operational policies, procedures,and controls
should be reviewed, audited, and tested periodically and after
significant changes.＞
The Zengin-Net Board of Directors has established the Operational Risk
Management Policy, Administrative Risk Management Policy and System
Risk Management Policy, while a department has been designated incharge of each type of operational risk, which it manages.
Additionally, the board of directors receives reports on operational risk
regularly, and when necessary, the board of directors instructs the senior
managing director to make improvements and report on the status of these
improvements.
Zengin-Net, within its Domestic Funds Transfer Working Group andOperations and Systems Committee, examines necessary matters for theoperation of the Zengin System, including matters concerning risk
management, such as reporting obligations during a system failure by a72

bank’s systems, as well as examines the functions of the Zengin System.
As for internal procedures of Zengin-Net, based on policies resolved by
the board of directors, and under the senior managing director’s
management, the secretariat carries out reviews and examinations
regularly and obtains the approval of the senior managing director andheads of departments.
Additionally, the status of Zengin-Net’s operations and systems is auditedby the Internal Audit Department and outside experts based on an internal
audit plan.
The Domestic Funds Transfer Working Group and Operations andSystems Committee mentioned above are comprised of representatives
from Participating Banks and members of the secretariat. Representatives
from Participating Banks are always included in these assessments andreviews.
＜ Key consideration 3: An FMI should have clearly defined
operational reliability objectives and should have policies in placethat are designed to achieve those objectives.＞
The purpose of Zengin-Net, as stated in its Articles of Incorporation, is toimplement smooth, safe and efficient fund settlements between financial
institutions and business operations related thereto.
On top of this, the funds clearing business and funds transfer settlement
operations and data exchange operations, which are a core operation
closely related to the funds clearing business, are stipulated as operations
receiving the highest priority for continuity. For this reason, a Recovery
Time Objective (RTO) and Recovery Point Objective (RPO) have been
established.
From the perspective of achieving the reliability of administrative
processing, Zengin-Net’s Administrative Risk Management Policy
stipulates that each department include the reduction of administrativerisk within various manuals, the department in charge of administrativerisk management to examine and assess administrative risk for all of73

Zengin-Net, and for necessary measures to be in place for controlling andreducing risk.
＜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.＞
Zengin-Net identifies various limitations including the processing
capacity of the Zengin System, and forecasting is carried out forlimitation values determined to require forecasting, and every month theforecast values and actual values are compared to examine the accuracyof forecast values.
Additionally, Zengin-Net examines the needs and expected timing toincrease processing capacity based on every month’s processing values.
When a future increase in processing capacity is believed to be required,
Zengin-Net confirms maximum expendability of the limit value.
From the perspective of securing needed personnel, in accordance with
the Administrative Risk Management Rules, the General Manager of the
Planning & Coordination Department and General Manager of theBusiness Development Department examine the future anticipatedadministrative processing volume for each department each fiscal year,
and conduct an analysis regarding needed personnel levels, based on
which personnel are secured and developed.
＜Key consideration 5: An FMI should have comprehensive physicaland information security policies that address all potential
vulnerabilities and threats.＞
Zengin-Net has established an Information Security Policy as acomprehensive policy concerning information security. This policy also
covers physical security as well, such as access controls.
With regards to the management of specific information assets as well asplanning and implementation of protection measures, the Information
Security Promotion Secretariat for the Risk Management Group of the
Planning & Coordination Department supports the operations of eachdepartment head, who serve as the chief manager of information security.
74

＜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-scale or major
disruption. The plan should incorporate the use of a secondary siteand should be designed to ensure that critical information technology(IT) systems can resume operations within two hours following
disruptive events. The plan should be designed to enable the FMI tocomplete settlement by the end of the day of the disruption, even incase of extreme circumstances. The FMI should regularly test thesearrangements.＞
Zengin-Net has established a BCP Basic Policy and has prepared adetailed emergency response manual based on this policy.
The BCP Basic Plan stipulates the funds clearing business and funds
transfer settlement operations and data exchange operations, which are acore operation closely related to the funds clearing business, as operations
receiving the highest priority for continuity. A Recovery Time Objective(RTO) and Recovery Point Objective (RPO) have also been established,
as well as a Business Continuity Countermeasure Headquarters.
The RTO for data exchange operations is set at within two hours at thegreatest. The RTO for funds transfer settlement operations is set as thetime by which the Bank of Japan must be notified of the funds transfer
settlement amount so that the settlement can take place at the Bank ofJapan by the final allowable time for settlement on the same day.
To achieve these RTO, data exchange operations adopt a redundant twocenter system, and rules stipulate responses to system failures, making it
possible to continue with business operations. As for funds transfer
settlement operations, rules are in place for communication to the Bank ofJapan’s backup system and the sending and receiving of data withmagnetic tape or paper-based documents, ensuring that the day’s
settlements will be completed.
Nearly every year, Zengin-Net carries our training exercises with
Participating Banks as participants based on the scenario that one of the75

centers has suffered an extensive and serious interruption, based on whichbusiness continuity measures are verified and mastered.
In addition, manuals have been prepared by Zengin-Net for otheropportunities and nearly every year these manuals are revised andupdated to ensure the robustness of their information.
＜Key consideration 7: An FMI should identify, monitor, and manage
the risks that key 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 toother FMIs.＞
Zengin-Net identifies, monitors and manages risks that each entity poses
to the administrative processing of Zengin-Net as follows.
In addition, if Zengin-Net’s operations are suspended, it is believed thatsuch an occurrence will have a very serious impact not simply on other
FMI, but all of Japanese society in general.
For this reason, the Zengin System adopts a redundant system using two
centers that employ a redundant structure to every extent possible withregards to equipment and networks, which reduces the risk of an
operational shutdown.
The main participant of Clearing Participants
Risks posed by Clearing Participants include the risk that they will
engage in transactions beyond the anticipated volume and systeminterruptions of each Clearing Participant’s banking system.
As for the former, limit values to be monitored are identified andmonitored and for certain operations an overload control function has
been introduced, and if monitoring results show that future processing
volume is forecast to be exceeded, capacity increases will be carried out.
As for the latter, in the case that the interruption of a Participating Bank’s
own center occurs that is determined to affect other Participating Banks,
the status of this interruption, expected recovery and other information76

must be immediately communicated to a Zengin Center, while
Zengin-Net also monitors the situation and responds.
Other FMIFMI that are essential to the implementation of operations are the Bank ofJapan and the Japan Securities Depository Center, Inc. (JASDEC)
Of these, the risk posed by the Bank of Japan is the interruption of the
Bank of Japan Net services. In such a case, large-value domestic funds
transfer transactions will be restarted through processing with a backup
center and the standard value of large-value domestic funds transfer
transactions will be increased so that all large-value domestic funds
transfer transactions will be settled without being sent to the current
account at the Bank of Japan (simultaneous settlement account).
The risks posed by JASDEC, too, are examined and assessments arecarried out on impacts in case of interruption.
Service providers
A document custodian provider is considered a service provider for
Zengin-Net. The risk posed by this company is assessed and risk
management methods are examined.
Public utility companies
Public utility companies that pose a risk to Zengin-Net’s administrative
processing includes power companies, public transit such as railways, andcommunication providers.
Of these, impacts when services provided by communication providers
cannot be accessed are managed and addressed in rules as communicationline interference. The suspension of power or railway services isstipulated in a manual for responses to power outages and public transit
shutdowns.

Principle 18: Access and participation requirements
77

An FMI should have objective, risk-based, and publicly disclosed criteria forparticipation, which permit fair and open access.
Summary

Zengin-Net’s Statement of Operational Procedure, which is published on

narrative

its website, contains eligibility requirements for Clearing Participants andAgency Participants as well as requirements for entities to fulfill theeligibility of Clearing Participants.
According to Article 75 of the Payment Services Act, “A Clearing
Institution for Interbank Funds Transfer must not provide unjust
discriminatory treatment to a particular person in relation to the Clearing
Services for Interbank Funds Transfer.” The requirements forparticipation is limited to deposit-taking financial institutions that engage
in domestic funds transfer business as banking so that stability will not belost from the standpoint of risk management. Until now, a number ofbanks requesting to become participants have become new Participating
Banks, permitting fair and open access.
Documents required to be submitted when applying to gain participant
qualification include documents on the summary of the financial
institution, its anticipated data volume for funds transfer transactions,summary of system configuration, and development schedule related toparticipation. This is information essential to Zengin-Net’s managementof operational risks.
The written pledge submitted when obtaining participant qualifications orwhen applying to gain clearing qualifications requires compliance with
the Statement of Operational Procedures, conflict resolution, necessary
facilities, and enhanced administrative processing system, including
training and exercises for employees.
The requirements limiting participation to deposit-taking financial
institutions that engages in domestic funds transfer business as part of thebanking business is believed to be justified from the perspective ofsecurity and efficiency.
By making participants banks or other financial institutions that obtainlicensing based on supervision of the Financial Services Agency for their78

financial base and soundness is extremely important from the standpointof reducing and mitigating risks of interruption posed to Zengin-Net’s
operations with regard to credit risk, liquidity risk, and system risk. For
this reason, this is believed to be a just requirement.
Zengin-Net’s response to each individual key consideration is as follows.
＜Key consideration 1: An FMI should allow for fair and open accessto its services, including by direct and, where relevant, indirect
participants and other FMIs, based on reasonable risk-relatedparticipation requirements.＞
The Payment Services Act states, “A Clearing Institution for Interbank
Funds Transfer must not provide unjust discriminatory treatment to aparticular person in relation to the Clearing Services for Interbank Funds
Transfer.”
Zengin-Net’s requirement for participation is limited to deposit-taking
financial institutions that engage in domestic funds transfer business as
part of the banking business so that stability will not be lost from thestandpoint of risk management. Until now, a number of banks requesting
to become participants have become new Participating Banks, permitting
fair and open access.
＜Key consideration 2: An FMI’s participation requirements should
be justified in 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 to maintaining
acceptable risk control standards, an FMI should endeavour to set
requirements that have the least-restrictive impact on access thatcircumstances permit.＞
In accordance with laws, in Japan, only banks and other deposit-taking
financial institutions with a license and under the supervision of the
Financial Services Agency can carry out funds transfer transactions,excluding small-value transactions (equal to or less than 1 million yen).
Given this current situation, the requirements limiting participation todeposit-taking financial institutions that engages in domestic funds
79transfer business as part of the banking business is believed to be justified
from the perspective of security and efficiency.
Making participants banks or other financial institutions that obtainlicense based on supervision of the Financial Services Agency for theirfinancial base and soundness is extremely important from the standpointof reducing and mitigating risks of interruption posed to Zengin-Net’s
operations with regard to credit risk, liquidity risk, and system risk.
The necessary requirements of participation and acquisition as well as therequirements for acquiring clearing qualification are stipulated in theStatement of Operational Procedures, which is published on Zengin-Net’s
website.
Details concerning matters to include in necessary documents forapplications are stipulated in the Statement of Detailed Operational
Procedures, which is disclosed to Participating Banks and presented tobanks wishing to participate.
＜Key consideration 3: An FMI should monitor compliance with its
participation requirements on an ongoing basis and have clearly
defined and publicly disclosed procedures for facilitating thesuspension and orderly exit of a participant that breaches, or nolonger meets, the participation requirements.＞
Article 15 of Zengin-Net’s Statement of Operational Procedures requiresthat Participating Banks report to Zengin-Net in the event that they are
subject to loss of their participation qualification, including loss ofrequirements for participation.
Additionally,

Zengin-Net

regularly

confirms

publicly

disclosed

information from the Financial Services Agency to check if any Clearing
Participants are no longer deposit-taking financial institutions. Also, thechange in status of Agency Participants is secured correctly and in atimely manner by receiving reports from Agency Participants.
Pursuant to Article 52 its Statement of Operational Procedure, Zengin-Net
requires the pledging of collateral based on the Sender Net Debit Cap,80

and in case the collateral cannot be secured due to the emergence of credit
risk or liquidity at the Participating Bank, transfer messages will nolonger be able to be sent. Therefore, this indicates that management
measures similar to reinforced supervision and additional regulations areincluded.
In Article 16 of Zengin-Net’s Statement of Operational Procedures, aParticipating Bank will lose its participation qualification in case it nolonger fulfills the requirements, commences bankruptcy proceedings, orthe succession of participation qualification by another financial
institution.
Also, in cases where facts are present that determine a Participating
Bank’s operational status is under threat, the Participating Bank will begiven an opportunity to state its case prior to approval, and this bank can
be moved from the roster of funds transfer system with resolution passedby the board of directors.
In addition, Article 21 of the Statement of Operational Procedures makes
it possible to temporarily suspend participant banks use of the funds
transfer system in case they violate the Statement of Operational
Procedures.
Clearing qualifications can be lost in cases of nonpayment of funds
transfer settlement amount, excluding when determined to be caused by
special circumstances, per Article 33 of the Statement of Operational
Procedures.
Furthermore, according to Article 38 of the Statement of Operational
Procedures, if a Participating Bank violates the Statement of Operational
Procedures, the Participating Bank will be given an opportunity to state
its case and indicate the reason, and the Participating Bank can have its
use of the funds transfer system temporarily suspended and othermeasures deemed necessary and appropriate by Zengin-Net taken as well.
The Statement of Operational Procedures is published on Zengin-Net’s
website.
81

Principle 19: Tiered participation arrangements
An FMI should identify, monitor, and manage the material risks to the FMI arising fromtiered participation arrangements.
Summary

Zengin-Net has a tiered participation arrangement consisting of Clearing

narrative

Participants who are direct participants and Agency Participants who areindirect participants.
To facilitate the smooth execution of funds settlements for the overall
Domestic Funds Transfer System, Zengin-Net, pursuant to Article 15 of
the Statement of Operational Procedures, requires that Agency
Participants report whenever changes occur in important matterspertaining to their management operations. Additionally, interviews are
conducted with Agency Participants to collect information on the status of
their domestic funds transfer business operations. On top of this, reviews
are conducted on any risks to be considered and the results are reported to
relevant meeting bodies and managed.
Zengin-Net’s response to each individual key consideration is as follows.
＜ Key consideration 1: An FMI should ensure that its rules,
procedures, and agreements allow it to gather basic information
about indirect participation in order to identify, monitor, and manage
any material risks to the FMI arising from such tiered participation
arrangements.＞
Zengin-Net has a tiered participation arrangement consisting of Clearing
Participants who are direct participants and Agency Participants who areindirect participants.
To facilitate the smooth execution of funds settlements for the overall
Domestic Funds Transfer System, Zengin-Net, pursuant to Article 15 of
the Statement of Operational Procedures, requires that Agency
Participants report whenever changes occur in important matterspertaining to their management operations, and Zengin-Net manages thisinformation.

82

Additionally, interviews are conducted with Agency Participants at least
once per year to collect information on the status of their domestic funds
transfer business operations, while reviews are conducted on any risks to
be considered and the results are reported to relevant meeting bodies andmanaged.
＜ Key consideration 2: An FMI should identify material
dependencies between direct and indirect participants that might
affect the FMI.＞
Zengin-Net conducts interviews with each Agency Participants at least
once per year to collect information such as the number of transactions byspecific Agency Participants, overages of the Sender Net Debit Cap due
to sudden increases in value, and possible affects on system load, etc.
Additionally, a review is carried out to check whether an importantdependence exists between direct participants and indirect participantsthat can affect Zengin-Net.
＜Key consideration 3: An FMI should identify indirect participants
responsible for a 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 to manage the risks
arising from these transactions.＞
Zengin-Net conducts interviews with Agency Participants at least once
per year to check the share of transaction volume and value of Agency
Participants. Additionally, checks are carried out for Agency Participantsthat account for a significant share of transaction value or Agency
Participants that have an especially large number or value of transactions
compared to their capacity.
＜Key consideration 4: An FMI should regularly review risks arisingfrom tiered participation arrangements and should take mitigating
action when appropriate.＞
Zengin-Net conducts interviews of Agency Participants at least once per
year with regard to the risks arising from tiered participation and carries
out monitoring.

83Based on this, if a situation is found where risk is caused to Zengin-Net,
measures are considered.

Principle 21: Efficiency and effectiveness
An FMI should be efficient and effective in meeting the requirements of its participants
and the markets it serves.
Summary narrative

The purpose of Zengin-Net is to facilitate smooth, safe and efficient fundsettlements between financial institutions, which are a foundation ofsociety.
Zengin-Net organizes a meeting of experts to meet at least once every
year which identifies the needs of Participating Banks and theircustomers. Issues that come to light during this meeting are examinedfurther and solutions considered within each meeting body comprising
representatives of Participating Banks.
Additionally, as for the operations of the Zengin-System, the core
operating system, a Recovery Time Objective (RTO) for the event of asystem interruption has been established and a Service Level Agreement(SLA) has been concluded with the service vendor. Monthly monitoringis carried out and the results reported to the board of directors and othermeeting bodies.
Under this system, there has never been a situation where a stoppage haslasted longer than the RTO, and effectiveness is secured if issues arefound by ordering remedial actions taken.
Furthermore, Zengin-Net ensures the efficiency with regard to each year’s
income and expenditures budget and system expenses by reviewing anddeliberating these by the board of directors and each meeting bodycomprising representatives of Participating Banks, which bear these costs.
Zengin-Net’s response to each individual key consideration is as follows.
＜Key consideration 1: An FMI should be designed to meet the needsof its participants and the markets it serves, in particular, with84

regard to choice of a clearing and settlement arrangement; operating
structure; scope of products cleared, settled, or recorded; and use oftechnology and procedures.＞
Zengin-Net carries out a survey every fiscal year targeting Participating
Banks from the standpoint of managing the organization and operations
based on the needs of Participating Banks. Through this survey,
satisfaction levels are ascertained, issue identified, and solutions
examined.
In fiscal 2014, Zengin-Net conducted the Study on Domestic BankTransfers in July 2014 as part of its reviews concerning approaches to the
Zengin-System. This study investigated the satisfaction level and needs ofindividuals and corporations, with the results now being utilized to plan
new services.
＜Key consideration 2: An FMI should have clearly defined goals andobjectives that are measurable and achievable, such as in the areas ofminimum service levels, risk-management expectations, and businesspriorities.＞
The purpose of Zengin-Net is to facilitate smooth, safe and efficient fundsettlements between financial institutions, which are a foundation ofsociety.
Zengin-Net organizes a meeting of experts to meet at least once every
year which identifies the needs of Participating Banks and theircustomers. Issues that come to light during this meeting are examinedfurther and solutions considered within each meeting body comprising
representatives of Participating Banks.
Additionally, as for the operations of the Zengin-System, the core
operating system, a Recovery Time Objective (RTO) for the event of asystem interruption has been established and a Service Level Agreement(SLA) has been concluded with the service vendor. Monthly monitoringis carried out and the results reported to the board of directors and othermeeting bodies for management.
＜Key consideration 3: An FMI should have established mechanisms
85

for the regular review of its efficiency and effectiveness.＞
Zengin-Net ensures efficiency with regard to each year’s income andexpenditures budget and system expenses by reviewing and deliberatingthese by the board of directors as well as the Corporate Planning Working
Group and Corporate Planned Committee, which are comprised ofrepresentative from banks that bear these costs.
As a mechanism for assessing effectiveness, reports are made once every
three months to the board of directors as well as the Domestic Funds
Transfer Working Group and Operations and Systems Working Group,
both comprising representatives of Participating Banks. Reports on theoperating status of the Zengin System that include transaction volume andthe status of interruptions are made to the board of directors as well as theDomestic Funds Transfer Working Group and Operations and Systems
Working Group, both comprising representatives of Participating Banks.
If an issue is found, remedial action is ordered, so efficiency is secured
through this process.

Principle 22: Communication procedures and standards
An FMI should use, or at a minimum accommodate, relevant internationally accepted
communication procedures and standards in order to facilitate efficient payment, clearing,
settlement, and recording.
Summary narrative

Zengin-Net does not engage in cross-border business operations, but the
6th Generation Zengin System launched in 2011 adopts communication
procedures and standards that are used and accepted internationally.
Specifically, the Zengin System uses TCP/IP as communication protocol
and an IP-VPN (closed domain) and ISDN for communication between
Participating Banks and the Bank of Japan.
In addition to the fixed length telegraphic message format that has been
conventionally used, the 6th Generation Zengin System launched in 2011
adopts the option of XML-formatted (ISO 20022) telegraphic messages.
This format can be used in case a Participating Bank requests it.

86The fixed length telegraphic message format used conventionally has
been made compliant with international standards by comparing it withthe elements of ISO20022 and submitting additional application to ISO
20022 message registering body for those items that need to be added.
Zengin-Net’s response to each individual key consideration is as follows.
＜ Key consideration 1: An FMI should use, or at a minimum
accommodate, internationally accepted communication procedures
and standards.＞
Zengin-Net does not engage in cross-border business operations, but the
6th Generation Zengin System launched in 2011 adopts communication
procedures and standards that are used and accepted internationally.
Specifically, the Zengin System uses TCP/IP as communication protocol
and an IP-VPN (closed domain) and ISDN for communication between
Participating Banks and the Bank of Japan.
In addition to the fixed length telegraphic message format that has been
conventionally used, the 6th Generation Zengin System launched in 2011
adopts the option of XML-formatted (ISO 20022) telegraphic messages.
This format can be used in case a Participating Bank requests it.
The fixed length telegraphic message format used conventionally has
been made compliant with international standards by comparing it withthe elements of ISO20022 and submitting additional application to ISO
20022 message registering body for those items that need to be added.

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 therisks, fees, and other material costs they incur by participating in the FMI. All relevant
rules and key procedures should be publicly disclosed.
Summary

Zengin-Net publishes it Articles of Incorporation and Statement of

narrative

Operational Procedures, both of which contain fundamental rules andmajor

proceduresof87

Zengin-Net,

on

its

website(https://www.zengin-net.jp/).
Participating Banks can obtain the latest documents related to rules andprocedures, including contributions to expenses standards, from a
dedicated website. Banks that wish to newly become participants canobtain the necessary documents upon concluding a confidentiality
agreement.
Various documents related to these regulations, rules and procedures arereviewed during the drafting phase by committees comprising
representatives of Participating Banks, which confirms a high level ofsufficiency and that the documents are clear and comprehensive.
In addition, Zengin-Net provides Participating Banks with information forunderstanding risks, including the basic specifications of the Zengin
System, operational status reports, and system audit results.
Statistics are published on the Zengin-Net website monthly andcommentary is provided on the system and the mechanism of funds
clearing operations. The Zengin System is also explained using pamphlets
and video postings.
Information concerning business continuity for possible loss of security
or soundness of Zengin-Net is not made available to the public, with the
exception of specific entities such as the Financial Services Agency andBank of Japan.
Zengin-Net will continue to promote understanding of regulations among
Participating Banks as well as plans on enhancing information disclosureson risk management, such as information concerning stress tests.
Zengin-Net’s response to each individual key consideration is as follows.

＜ Key consideration 1: An FMI should adopt clear andcomprehensive rules and procedures that are fully disclosed toparticipants. Relevant rules and key procedures should also be88publicly disclosed.＞
Zengin-Net publishes its Articles of Incorporation, which contain
important rules about its operations, and the Statement of Operational
Procedures, which contains comprehensives provisions on the operationsof Zengin-Net, on its website.
Additionally, the dedicated webpage for Participating Banks found on the
Zengin-Net website contains a collection of regulations on the domestic
funds transfer system featuring a compilation of necessary rules andprocedures for the operation of the domestic funds transfer system.
These rules and procedures contain detailed contents that can beunderstood by all Participating Banks, which is believed to ensure
clearness and sufficiency.
Participating Banks can make inquiries to Zengin-Net at any time withregard to these rules and procedures. Zengin-Net compiles case studies
provided by Participating Banks into cautionary points and notifies
Participating Banks and requests improvements be made.
＜Key consideration 2: An FMI should disclose clear descriptions of
the system’s design and operations, as well as the FMI’s andparticipants’ rights and obligations, so that participants can assess
the risks they would incur by participating in the FMI.＞
The design of the Zengin System is stated in the Basic Specifications andsystem operations and usage methods are stated in the Zengin System
Rules.
Zengin-Net issues these documents to Participating Banks and the Bankof Japan. Zengin System Rules are submitted to the Financial Services
Agency and disclosed to Participating Banks on the dedicated webpage
for Participating Banks on the Zengin-Net website.
In addition, banks that would like to become participants receive an
explanation on the summary of costs involved prior to participation,
including the obligation of pledging collateral. (Refer to Principle 4[Credit Risk] for information on collateral requirements).
89

By concluding a confidentiality agreement, information on the domestic
funds transfer system rules and Zengin System’s basic specifications isdisclosed and information is also provided for understanding of the risks
related to participation in Zengin-Net, even when prior to participation.
＜Key consideration 3: An FMI should provide all necessary andappropriate documentation and training to facilitate participants’
understanding of the FMI’s rules and procedures and the risks they
face from participating in the FMI.＞
Zengin-Net provides necessary rules and procedures for operational
administration on the dedicated webpage for Participating Banks and all
Participating Banks can freely reference this webpage.
Within these documents is the Statement of Operational Procedures thatclarifies the risks associated with participating in the domestic funds
transfer system as well as the rights and obligations of Zengin-Net andParticipating Banks (including Liquidity Providing Banks).
Additionally, once every year Zengin-Net calls for case studies from
Participating Banks regarding handling that differs from the stipulationsof the domestic funds transfer handling regulations. This is compiled into
cautionary notes and made known to all Participating Banks. Requests arethen made for improvement, which makes it possible to facilitate theoperations and administration.
In addition, system revisions that may affect the operations or requests for
Participating Banks to bear risks are explained at the board of directors orcommittees comprising representatives of Participating Banks. Ifquestions arise, additional explanation is provided to promote
Participating Bank understanding.
Furthermore, the handling of system interruptions or settlement defaults
differ in particular from the handling of normal situations, so training
exercises are carried out regularly at least once per year with theparticipation of Participating Banks.

90

＜Key consideration 4: An FMI should publicly disclose its fees at thelevel of individual services it offers as well as its policies on any
available discounts. The FMI should provide clear descriptions ofpriced services for comparability purposes.＞
Expenses required for the operation of Zengin-Net are paid by eachParticipating Bank based on their funds transfer transaction volume andother factors. Expenses related to the Zengin System are paid by eachParticipating Bank, the Bank of Japan, densai.net Co., Ltd., and theJapanese Bankers Association based on their funds transfer transaction
volume. Commissions from settlements are not collected.
These contributions to expenses are stipulated in the Zengin System
Rules established by the board of directors, which is provided toParticipating Banks and provided to banks wanting to become aParticipating Bank after the conclusion of a confidentiality agreement.
＜ Key consideration 5: An FMI should complete regularly anddisclose

publicly

responses

totheCPSS-IOSCO

disclosure

framework for financial market infrastructures. An FMI also should,
at a minimum, disclose basic data on transaction volumes and values.
＞
This is the first information disclosure by Zengin-Net for its official
response to the disclosure framework for financial markets infrastructures(CPSS-IOSCO). Going forward, Zengin-Net will continue to prepare
responses regularly and make them public.
Basic data on transaction volume and value is published monthly on the
Zengin-Net website and includes the number of Participating Banks andbranches as well as the transaction volume and value (including a detailed
breakdown of each by type) for each transfer message type.

91

V. List of publicly available resources
Information about the Japanese Banks’ Payment Clearing Network (“Zengin-Net”) can be foundon the following website: https://www.zengin-net.jp/.
The main contents of this website are as follows.
・Zengin-Net
・Domestic Funds Transfer
・Commercial Activities and Funds Transfers
・Funds Transfers and Banks・Funds Transfers through Clearing Systems
・Clearing of Funds
・Clearing of Funds
・Zengin - Net as a Fund Clearing Agency
・Business Operations Based on the Statement Operation Procedures・Zengin System
・The Zengin System
・Operations of the Zengin System
・6th Generation Zengin System
・Pamphlet – Guide to Zengin-net
・Introductory Video of Zengin System: “Welcome to the Zengin System”
・Pamphlet about Zengin System – The Zengin Data Telecommunication System
・Articles of Incorporation
・Operational Procedures・Financial Statements
・Statistical Data
・Privacy Policy

92