Haruhiko Kuroda: The evolution of payment and settlement systems and
the role of central banks
Speech by Mr Haruhiko Kuroda, Governor of the Bank of Japan, at the Symposium for the
30th Anniversary of the Center for Financial Industry Information Systems, Tokyo,
2 December 2014.
* * *
Introduction
It is a great pleasure to have this opportunity to speak at the symposium commemorating the
30th anniversary of the Center for Financial Industry Information Systems (FISC). Since its
establishment in 1984, the FISC has greatly contributed to strengthening the safety of the
financial information system and improving the efficiency of financial services in Japan. As it
marks its 30-year milestone, I would like to express my respect and gratitude for the work it
has done over the years.
For the past 30 years, the FISC has been engaged in enduring work such as developing
industry guidelines and standards. These include "FISC Security Guidelines on Computer
Systems for Banking and Related Financial Institutions" and "FISC Information System Audit
Guidelines for Banking and Related Financial Institutions." It also publishes its "White Paper
on Financial Information Systems" every year. With new payment methods such as internet
banking and electronic money making their appearance, maintaining the security of such
payment methods has become an important issue. The FISC has also been active in
addressing a number of challenges related to information systems by revising the industry
guidelines or standards in order to address these issues. Furthermore, through its
wideranging research, analysis, and publicity activities - including various surveys or the
organization of study groups and seminars - the FISC's efforts have significantly supported
the development of payment and settlement systems, through which economic and financial
transactions are "settled."
Today, under the title, "The Evolution of Payment and Settlement Systems and the Role of
Central Banks," I will outline these systems' developments from the past to the future, and
explain the present and future challenges to be tackled by the Bank of Japan while touching
on the role of central banks within the systems.
I. Evolution of payment and settlement systems
Looking back over several decades at the history of payment and settlement systems in
Japan, both efficiency and safety have significantly improved. To put this in perspective,
certain periods from the middle of the 1960s to the beginning of the 1990s were ones when
more emphasis was put on raising efficiency. Since then, the emphasis has shifted to
enhancing the safety of the systems.
Let me be more concrete. From the middle of the 1960s to the beginning of the 1990s, on the
back of progress in financial liberalization and globalization as well as the increasing
issuance of JGBs, it was difficult to manually process the large number of payment and
settlement transactions. It was against this background that financial institutions implemented
the online processing of settlement and dematerialization of securities certificates. As a
result, the efficiency of payment and settlement systems significantly improved.
The periods coincided with those in which major payment and settlement systems initiated
their operations, including the Zengin Data Telecommunication System (Zengin System) in
1973, the Bank of Japan Financial Network System (BOJ-NET) in 1988, and the Japan
Securities Depository Center's system in 1991.
During and after the 1990s, payment and settlement systems put priority on strengthening
their safety by making use of the existing financial institutions' computer systems and market
infrastructures. From the 1990s to the beginning of the 2000s, efforts to reduce the
settlement risks made significant progress against the backdrop of the Asian currency crisis
and Japan's financial crisis. The BOJ-NET introduced delivery-versus-payment (DVP) for
JGBs in 1994 and real-time gross settlement (RTGS) in 2001. In 2002, major central banks
jointly supported the launch of the payments of two different currencies on a
paymentversus-payment (PVP) basis by Continuous Linked Settlement (CLS). By the middle of the
2000s, all other central counterparties (CCPs), including the current Japan Securities
Clearing Corporation (JSCC), were established.
After the global financial crisis in 2008, further initiatives were taken in order to enhance the
safety of payment and settlement systems. These include the introduction of international
regulations, such as the obligation to use the CCPs for standardized over-the-counter (OTC)
derivatives and the publication of the Principles for Financial Market Infrastructures (PFMIs)
jointly by the Committee on Payment and Settlement Systems (CPSS) of the Bank for
International Settlements and the International Organization of Securities Commissions
(IOSCO) in 2012.1 The PFMIs were introduced with the intent to reinforce the global
standards set during the first half of the 2000s.
The question now is: What does the future of payment and settlement systems look like?
Looking at the environment surrounding the current situation in Japan, economic activity
continues to be globalized at a faster pace. For example, Japanese firms and financial
institutions are increasingly deploying their operations in Asia, and businesses and
households are diversifying their needs for payment and settlement services in light of rapid
progress in information technology. In order to respond to these wide-ranging needs of end
users, it is important that we take measures to improve the efficiency and convenience of
these services while maintaining their safety.
In overseas economies, we have witnessed that their payment and settlement systems are
making some improvement. Major central banks have substantially extended the operating
hours of their payment and settlement systems since the beginning of the 2000s. Moreover,
in the United Kingdom, bank transfers have become available 24 hours a day, 7 days a week
on a real-time basis since 2008. In Europe, a standard format for credit transfers and direct
debits became obligatory this August as part of the initiatives taken by the Single Euro
Payments Area (SEPA) to make euro payments faster and cheaper.
Looking at the situation in Japan, a similar progress is also underway, including initiatives
taken by the Japanese Bankers Association (JBA) and the Japanese Banks' Payment
Clearing Network (Zengin-Net) with the aim of enhancing the retail payment services. Going
forward, it is important for a wide range of stakeholders to understand overseas
developments and take measures as appropriate.
II. Role of central banks in payment and settlement systems
Before discussing the Bank's initiatives in light of such circumstantial changes, let me now
explain the role of central banks in payment and settlement systems.
Payment services constitute the core of banking business. As "the bank of banks," this is
also true for a central bank, as it plays a pivotal role in payment and settlement systems.
Moreover, central banks conduct monetary policy and fulfill their policy objectives, such as
ensuring financial stability, through the provision of their banking services. In order to
implement their policies effectively, payment services and those systems provide vital
underpinnings.
The first role of central banks in payment services is to provide the means of payment with
finality. These include banknotes and current accounts held at central banks. In addition,
central banks operate interbank payment and settlement systems in order to facilitate smooth
online settlements of funds and JGBs between financial institutions.2 Moreover, central banks
are engaged in the oversight activities for payment and settlement systems provided by other
entities to call for the enhancement of these systems as appropriate while taking account of
the balance between safety and efficiency. Furthermore, they are involved in such activities
as helping market participants formulate appropriate market practices spanning from
execution to settlement. These activities are conducted from the viewpoint that payment and
settlement systems provide the foundation for the stability of the financial system and the
sound development of the economy.
Looking to the future of payment and settlement systems, central banks are expected to
contribute to economic growth and financial stability not only by improving their own payment
services but also by helping financial institutions enhance services provided by those
institutions.
III. Bank of Japan's initiatives: present and future
Next, I would like to explain the Bank's initiatives in four areas at present and in the future.
They are namely (i) to build the New BOJ-NET and extend its operating hours, (ii) to consider
improving cross-border transactions, (iii) to support enhancing retail payment services, and
(iv) to support shortening the JGB settlement cycles. Let me explain these items in turn.
A. New BOJ-NET and extension of its operating hours
At present, the Bank is in the middle of building the New BOJ-NET.
Since its inception in 1988, the environment surrounding the BOJ-NET has been changing
dramatically. On the back of financial globalization and innovation in information technology,
people involved in major payment and settlement systems around the world have been
making efforts to strengthen the IT infrastructure to cope with the diversified needs in
transactions and settlement. On the part of financial institutions, connecting their computer
systems directly with the BOJ-NET has become widespread, and this enables those
institutions to realize straight-through processing (STP). Moreover, a cross-border linkage
among payment and settlement systems has become more widespread, as exemplified by
the enlargement of cross-currency PVP transactions through the CLS and the cross-border
linkage of securities settlement systems. It is against this background that the BOJ-NET
needs to meet the diversified needs in response to the enlargement of the network structure
and the globalization of financial transactions.
The New BOJ-NET, which is due to be in full operation in October 2015, is based on several
overarching principles.3 First, we employ the latest information technology to enrich our
services and improve convenience for our customers in the future. Second, the New
BOJNET is designed to accommodate greater flexibility so that it can respond to ongoing and
future banking needs and market developments. Last, but not least, it enhances accessibility,
allowing longer operating hours, in light of the globalized financial markets to encourage
interconnectedness among market infrastructures.
In particular, as Japan is in the first set of time zones, we aim to contribute to invigorating
financial markets and enhancing financial services by encouraging financial institutions to
make the most of the longer operating hours of the New BOJ-NET. It is for that reason that
the Bank decided to extend the operating hours until 21:00 from February 2016 after the New
BOJ-NET starts full operation in October 2015, at which point its operating hours will be up to
5
19:00.4, Further extended operating hours are expected to be used by respective financial
institutions at their own judgment.6
At the forum toward making effective use of the New BOJ-NET, we have been discussing
issues with major financial institutions and those institutions' associations, such as covering
the same-day cross-border settlements in the afternoon in Asia and in the morning in
Europe. For example, the New BOJ-NET enables financial institutions to collect and
distribute their customers' funds between Japan and Asia within the same day, to allow JGBs
to be posted to the CCPs overseas, and to increase cross-currency repos by posting JGBs
as collateral in European markets.
B. Improvement in cross-border transactions
Looking further out, by taking advantage of the enhanced accessibility of the New BOJ-NET,
we aim to build an infrastructure that facilitates the smooth delivery of the Japanese yen and
JGBs anywhere and anytime. This is what I would call the ubiquity of the Japanese yen and
JGBs.
On this point, the ASEAN+3 economies have started discussing a possible cross-border
linkage between the securities settlement system in one country and the funds settlement
system in another with a view to establishing a cross-border securities settlement
infrastructure in the region. The Bank is also participating in this discussion. In May this year,
finance ministers and central bank governors agreed with the direction of developing an
implementation roadmap of CSD-RTGS linkages in the medium term so as to make it
possible to deliver securities smoothly and safely versus payment across borders. Further
study and analysis on CSD-RTGS linkages is expected to be carried out by practitioners.
Given that market participants and central banks are undertaking similar initiatives in Europe
with an aim of improving securities settlement across borders in the region, it would be
conceivable that market participants in Asia will start dialogue with their counterparties in
regions outside Asia to review the possibility of a cross-border linkage between settlement
infrastructures.
Such cross-border linkage will enable market participants to settle foreign currency funding
transactions against domestic sovereign bonds as collateral - this is known as
crosscurrency repos - on a DVP basis by using safe central bank money. Facilitating smooth and
safe cross-border settlement will be expected to contribute to enhancing the convenience
and efficiency of the Japanese yen and JGBs, and eventually to raising the profitability of
financial institutions.
Developing an infrastructure that will enable the smooth delivery of the Japanese yen and
JGBs anywhere and anytime will support the globalization of the yen - a longstanding
challenge - from the settlement aspect. The Bank is committed to enhancing payment
services by utilizing the renewed functionalities of the New BOJ-NET and to underpinning the
medium- to long-term growth of Japan's economy from not only the monetary policy
perspective but also the settlement perspective.
C. Enhancement of retail payment services
Next, I would like to talk about the initiatives taken to enhance retail payment services.
Currently, the JBA and the Zengin-Net have started looking into the issues of extending the
Zengin System's operating hours and achieving financial electronic data interchange (EDI).
These also were included in the revised Japan Revitalization Strategy, which was released
by the Japanese government in June 2014. The Bank, as a provider of the settlement
platform for interbank settlement in the Zengin System, will play an active role to support
these actions taken by the JBA and the Zengin-Net.
Extension of the Zengin System's operating hours
First, let me explain the extension of the operating hours of the Zengin System. The Zengin
System is a system operated by the Zengin-Net, through which interbank payment
instructions for bank transfers are processed in Japan. Since it started its operation in 1973,
the Zengin System has allowed near real-time payment services during the daylight hours of
working days, and has long been regarded worldwide as one of the most advanced retail
payment services provided to customers. More recently, however, some countries have
developed near real-time payment services available 24 hours a day, 7 days a week (known
as "24/7 services"), beginning with the launch of the Faster Payments Service by the United
Kingdom in 2008. Singapore also initiated Fast and Secure Transfers, called FAST, in March
this year, and Australia is expected to launch 24/7 services in the second half of 2016. In the
United States, the Federal Reserve has been playing an active role in enhancing payment
services. In September 2013, the Federal Reserve Banks released the paper in which they
identified the establishment of a ubiquitous system for near real-time payments as one of
desired outcomes.
In recent years, more and more consumers are making purchases through the internet. The
use of credit cards and electronic money is also increasing, and new payment instruments
such as payment via mobile phone are making their appearances one after another. If we
look at the situation in Japan, the vast majority of people hold bank accounts, so bank
transfers play a key role both as a payment instrument and as an infrastructure for other
payment instruments. We expect this convenience of bank transfers to be enhanced through
advances in information technology, which will lead to further innovation via competition with
other means of payment, therefore allowing for the smooth operation of retail payment
services to underpin business and household activities.
The JBA and the Zengin-Net are currently considering the extension of the operating hours
of the Zengin System in light of the need to facilitate better access to the end users, and are
expected to release a final report on their decision by the end of this month. After the release
of the report, the Zengin-Net is expected to give consideration on the details. The Bank will
continue to support these initiatives in order to enhance retail payment services.
Realization of financial EDI
Another issue is the use of financial EDI. With regard to their purchasing, firms often opt for
payments to be processed together at a certain future date instead of immediately.
Therefore, they have to manually reconcile payment information with remittance information,
which is a process called accounts receivable reconciliation. In particular, for industrial firms
with a number of purchasing/selling transactions going on, this reconciliation involves large
operating costs. Financial EDI is seen as a solution that will address this problem.
EDI is a framework in which businesses electronically exchange remittance information, such
as purchases and sales orders. Since remittance information can be in diverse formats,
businesses are adopting a more flexible and extensible data format, called XML (eXtensible
Markup Language) format, in realizing EDI, instead of the fixed-length data format currently
used.
If a framework were built in which remittance information could be attached to payment
information, such as a beneficiary's bank account or payment date information, firms would
be able to automate accounts receivable reconciliation, thereby considerably enhancing the
efficiency of payment-related operations. This framework that enables the link of payment
information and remittance information is financial EDI.
In Europe, with the aim of maximizing the benefits stemming from the single currency, a
project is underway in order to achieve financial EDI, including the adoption of the XML
format as a standardized data format. This is a grand project that has been worked on by
stakeholders for more than 10 years. At present, banks have finished complying with the
XML format, and are now providing their customers with services that convert the remittance
information from the old format to the XML format, with a view to encouraging use of the new
format.
In Japan, the banking industry, led by the JBA and the retail industry, jointly conducted an
experiment last month related to the use of financial EDI. Both industries and other
stakeholders will collaborate to make further efforts to realize the utilization of remittance
information in bank transfers. The Bank will again help promote these initiatives.
D. Shortening of JGB settlement cycle
The Bank also has been supporting market participants with regard to shortening the time lag
between the execution of JGB trading and settlement. Back in 1984, when the FISC was
established, there was no standard settlement cycle for JGBs, varying among each trade.
From 1986 to 1987, the settlement cycle was standardized to within 10 business days from
the trade date, with settlement only on particular days.7 The settlement cycle was then
shortened to T+7 in 1996, and to T+3 in 1997, each through rolling settlement, which
became the standard settlement cycle for JGBs for 15 years.
Apart from the United Kingdom and the United States, which had already realized T+1
settlement from an early stage, T+3 settlement had long been recognized as the international
standard for the securities settlement cycle. However, since the financial crisis of autumn
2008, the world has been moving toward a shorter settlement cycle in order to reduce risks
arising from unsettled positions. In Europe, the basic settlement cycle for a wide range of
securities moved to T+2 this October. Meanwhile, in the United States, an industry-wide
committee was established this October to facilitate the move toward T+2 settlement for
trades in equities, corporate and municipal bonds, and unit investment trusts.8
In April 2012, JGB trading moved to a shorter settlement cycle, from T+3 to T+2, for the first
time in 15 years. In accordance with the global move, further efforts toward shortening of the
settlement cycle are being made in Japan, with an aim of achieving T+1 for JGB outright
transactions. Last month, the Working Group on Shortening of JGB Settlement Cycle, which
was set up under the auspices of the Japan Securities Dealers Association, released the
final version of "Grand Design towards Shortening of JGB Settlement Cycle (T+1)" (hereafter,
"Grand Design"), revealing the challenge and strategies that could be taken for realizing T+1
settlement.
In some cases, shortening the settlement cycle can be viewed as unprofitable, since the
short-term merit is hard to see and large investment to streamline post-trade operations often
is required. In the medium to long run, however, the Japanese economy as a whole can
greatly benefit not only from the reduction of settlement risks arising from unsettled positions,
but also from the enhanced efficiency of settlement operations and through financial
innovation. In that context, the Grand Design also identifies the reduction of operational risk
through standardized operations and the development of STP as another aim of
achieving T+1. Other issues, such as the creation of market-wide infrastructure for collateral
management, as well as unifying the form of repo trades to the globally used repurchase
agreement, are also discussed in the Grand Design, indicating that we can expect a
strengthening of the global competitiveness of the JGB market and the expansion of related
services. Furthermore, when JGB outright transactions move to T+1 settlement, it is
envisaged that most repo transactions will move to T+0 settlement. This warrants attention,
as it also means the development of a new large money market for same day funds
transactions. While I am very grateful for the stakeholders' unremitting efforts, we will
continue to provide support toward achieving T+1 settlement.
Conclusion
Let me conclude. When developing payment and settlement systems, it is essential to
capture and analyze the needs and risks of those systems from broader perspectives. In
addition, it is important to build an infrastructure from the medium- to long-term perspective
due to the fact that it usually takes considerable time from developing plans to managing the
operation.
I explained earlier today the measures taken in Europe for making use of financial EDI by
utilizing XML formats. In Japan, the core payment and settlement systems - such as the
BOJ-NET, the Zengin-System, and the system operated by the Japan Securities Depository
Center (JASDEC) - have already incorporated such formats. We expect that financial
institutions participating in those systems will make effective use of the formats to enhance
the quality of services they provide. In light of such circumstances, the FISC is expected to
act as a "catalyst of global knowledge," by collaborating with relevant parties in Asia and the
rest of the world, thereby steering the initiatives taken by financial institutions in our country.
The FISC is also expected to play an important role in overcoming new challenges arising
from information security, such as cyber-attacks. Currently, high attention has been paid
around the globe to the cyber resilience of payment and settlement systems. In this regard,
the Committee on Payments and Market Infrastructures of the Bank for International
Settlements published a report last month titled, "Cyber resilience in financial market
infrastructures." As more and more security violations are being witnessed around the world,
the serious influence of these is attracting much more attention, and new findings in terms of
strategic decisions and technical options are being made. The FISC is again expected to
play a key role in research, analysis, and public relations activities with regard to these
issues.
Before closing my remarks, I would like to pay great respect to the FISC for its enduring
efforts over the past 30 years, and am sure that it will continue to play an important role in
the various fields relevant to developing payment and settlement systems in our country.
Thank you.