Electronic Business: Concepts, Methodologies, Tools, and Applications (4-Volumes) P257 pdf

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Utilizing Semantic Web and Software Agents in a Travel Support System
Wright, J., Gordon, M., Paprzycki, M., Williams,
S., & Harrington, P. (2003). Using the ebXML
registry repository to manage information in an
This work was previously published in Semantic Web Technologies and E-Business: Toward the Integrated Virtual Organiza-
tion and Business Process Automation, edited by A. Salam and J. Stevens, pp. 325-359, copyright 2007 by IGI Publishing (an
imprint of IGI Global).
Internet travel support system. In W. Abramowicz
& G. Klein (Eds.), Proceedings of the BIS2003
ConferenceSS3RODQG3R]QDĔ8QLYHUVLW\
of Economics Press.
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Chapter 8.9
Global Trends of Payment
Systems and the
Next-Generation RTGS Project
in Japan
Masaki Nakajima
Reitaku University, Japan
ABSTRACT
This chapter investigates the evolutionary process
of the payment system against the background of
structural changes. At the early stage, most pay-
ment systems were Designated-Time Net Settle-
ment (DTNS) systems. Then, Real-Time Gross
Settlement (RTGS) systems were introduced,
which had the merit of reducing settlement risks.
7KLV¿UVWWUHQGZDVIROORZHGE\WKHGHSOR\PHQW
of Hybrid systems and Integrated systems. The

Bank of Japan (BOJ) is proceeding with the
Next-Generation RTGS (RTGS-XG) project. This
project is regarded as a typical enhancement of
payment systems following the global trend. The
IHDWXUHVDQGEHQH¿WVRIWKH57*6;*DUHFORVHO\
analyzed.
INTRODUCTION
When the author worked for the Bank for Inter-
national Settlements (BIS) several years ago, he
JRWWRNQRZDVHQLRURI¿FLDORIDFHQWUDOEDQNLQ
Europe, who was the head of the payment sys-
WHPVGLYLVLRQ2QHGD\KHVDLGWRKLP³3D\ PHQW
systems are not the most fascinating topic in the
world.” The author was very surprised to hear
WKDW%XWWKHVHQLRURI¿FLDOFRQWLQXHG³+RZHYHU
the least fascinating topics are by no means the
least important.” The author fully agreed with
his opinion then, and still believes his remarks
are absolutely true. Payment systems are the in-
GLVSHQVDEOHLQIUDVWUXFWXUHVIRU¿QDQFLDOPDUNHWV
and business activities.
2496
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
BACKGROUND
A payment system is a mechanism that facilitates
VPRRWKWUDQVIHURIIXQGVDPRQJ¿QDQFLDOLQVWLWX-
t i o n s . G e n e r a l l y, i t c o n s i s t s o f a s e t of i n s t r u m e n t s ,
procedures, rules, and technical bases like com-
puters and networks. It is sometimes referred to
as an interbank funds transfer system.

Payment systems
1
are the important social
infrastructures that support the whole national
economic activities. Every commercial trade and
¿QDQFLDOWUDQVDFWLRQLV¿QDOL]HGRQO\ZKHQWKH
¿QDOVHWWOHPHQWLVPDGHWKURXJKSD\PHQWV\VWHPV
If malfunctions ever happen in a payment system,
which prevent the smooth transfer of funds, the
QDWLRQDOHFRQRP\DQG¿QDQFLDOPDUNHWVZRXOG
be thrown into extreme confusion and seriously
GDPDJHG7KHUHIRUHVDIHDQGHI¿FLHQWSD\PHQW
systems are critical to the effective functioning of
QDWLRQDOHFRQRPLHVDQG¿QDQFLDOV\VWHPV
7KLVFKDSWHULVVWU XFWX UHGDVIROORZV7KH¿UVW
section explains the structural changes in the pay-
PHQWV\VWHP¿HOG7KHVHFRQGVHFWLRQGHVFULEHV
the global trends of payment systems. The third
section focuses on the Next-Generation RTGS
Project in Japan. The fourth section analyzes
WKHIHDWXUHVDQGEHQH¿WVRIWKH1H[W*HQHUDWLRQ
RTGS system.
STRUCTURAL CHANGES IN
PAYMENT SYSTEM FIELDS
,QUHFHQW\HDUVVRPHVLJQL¿FDQWVWUXFWXUDO
changes have occurred in the payment system
¿HOGV1DNDMLPD0DVDVKLDQG-XQLFKL6KXNXZD
2005; Nakajima, Masashi, 2003).
Rapid Growth of Settlement Values
and Accompanying Settlement Risks

First of all, settlement values of payment sys-
tems in industrialized countries have increased
in a very rapid pace which is faster than that of
economic growth. The progress in globalization
DQGODELDOL]DWLRQRI¿QDQFLDOWUDGHKDGDGLUHFW
impact on the rapid growth of settlement amount.
The settlement values of payment systems in an
Country Payment System
Settlement values relative to Nominal
GDP
France
TBF 65.8
PNS 10.6
Germany RTGS
plus
57.0
Japan
BOJ-NET 41.2
FXYCS 8.7
United Kingdom
CHAPS Euro 19.1
CHAPS Sterling 44.9
United States
Fedwire 40.0
CHIPS 29.5
Table 1. Settlement values of payment systems as a percentage of GDP (as of 2004)(in %)
Source: Statistics on payment and settlement systems in selected countries, Bank for International Settlements,
March 2006
2497
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan

industrialized country are as much as 50 to 80
times as the nominal GDP of each country. This
fact means that the settlement value of a payment
system in only a week is larger than the nominal
GDP of the nation for a whole year. It is worth
m e n t i o n i n g t h a t l a r g e r s e t t l e m e n t v a l u e s w o u l d b e
accompanied with larger settlement risks (Bank
of Japan, 2006b).
Activities of the BIS for Settlement
Risk Awareness
Secondly, the BIS published several important
reports for the reduction of payment system risks.
A range of risks could arise in payment systems,
which include credit risk, liquidity risk, legal risk,
operational risk, and systemic risk. These risks
DUH FROOHFWLYHO\ UHIHUUHG DV ³VHWWOHPHQW ULVNV´
Important reports of the BIS for mitigating the
settlement risks include Lamfalussy Report, DVP
Report, Noël Report, Allsopp Report, RTGS
Report, and Core Principles Report (Bank for In-
ternational Settlements, 2001). These educational
campaigns of the BIS increased the awareness for
the settlement risks gradually across the globe.
Then, the overseers and operators of the payment
systems became to actively work for the reduction
of settlement risks, which lead to the evolution
of payment systems as well as the improvement
of risk management.
Competition between Payment
Systems

Thirdly, competitions between payment systems
have been the driving forces for the innovation of
payment systems. In some cases, the competition
has taken place between the two payment systems
in one country. The competition between the
Fedwire and the CHIPS in the U.S. would be a
good example. Major U.S. banks can use one of
two payment systems, depending on the urgency
of the payment and request of the customers.
In other case, cross-border competition has
occurred among the several national payment sys-
tems. The typical cross-border competitions have
been observed in EU, where the single currency
Euro was introduced in 1999 and legacy curren-
Date of
publication
The name of the report
November 1990
Report of the Committee on Interbank Netting Schemes of
the Central Banks of the Group of Ten Countries (Lamfalussy
Report)
September 1992
Delivery versus Payment in Securities Settlement Systems (DVP
Report)
September 1993
Central Bank Payment and Settlement Services with respect to
Cross-border and Multicurrency Transaction (Noël Report)
March 1996
Settlement Risk in Foreign Exchange Transactions (Allsopp
Report)

March 1997 Real-time Gross Settlement Systems (RTGS Report)
January 2001
Core Principles for Systemically Important Payment Systems
(Core Principles Report)
Table 2. List of the BIS reports for reducing the settlement risks
2498
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
cies, like Deutsche Mark and French Franc, were
abolished. As a result of introduction of single
currency, more than 20 payment systems were
converted from the payment systems of legacy
currencies to the Euro payment systems. Then,
they had to compete with each other in the same
currency zone, namely the Euro zone.
These competitions have been conducive to
the improvement and radical changes of payment
systems. In order to survive in the competition,
some payment systems introduced very innova-
tive and enhanced payment mechanisms, which
promoted the evolution of the payment systems.
Innovation of Information
Technology
Fourthly, the progress of information technology
,7 DOVR PDGH VLJQL¿FDQW FRQWULEXWLRQ WR WKH
enhancement of payment systems (Bech, Morten,
L., & Hobijn, Bart, 2006). Advanced processing
capability of computers enabled the settlement in
very sophisticated ways, such as the continuous
netting and queue management with complex
algorithms. In addition, enhanced communication

networks enabled real-time exchanges of messages
as well as real-time monitoring of liquidity and
interactive management of the queue.
GLOBAL TRENDS OF PAYMENT
SYSTEMS
During the past 15 years, payment systems have
evolved in the environmental changes mentioned.
Three movements could be pointed out as the
global trends of payment systems.
Introduction of RTGS systems
RTGS System and DTNS System
7KH¿UVWWUHQGZDVWKHLQWURGXFWLRQRIWKHReal-
Time Gross Settlement (RTGS) systems. There
DUHWZRIHDWXUHVRIWKH57*6V\VWHP7KH¿UVW
feature is that the settlement of funds occurs on
a gross basis, which means payment instructions
are processed one-by-one basis without netting.
7KHVHFRQGIHDWXUHLV¿QDOVHWWOHPHQWLVPDGHRQ
a real-time basis during the day.
Before the changeover to the RTGS systems,
many countries adopted the Designated-Time Net
Settlement (DTNS) systems. The DTNS system
is a net settlement system, thus the settlement of
funds occurs on a net basis. In concrete terms, a
net position of each participating bank is calcu-
ODWHGZKLFKLVGH¿QHGDVDQDPRXQWRIGLIIHUHQFH
between the sum of the outgoing payments and
the sum of the incoming payments. If the amount
of out going payments is larger than the amount
of incoming payments, the participant has a net

debit position and has to pay the net amount be-
fore the settlement time. The DTNS system is a
designated-time settlement system, in which the
¿QDOVHWWOHPHQWWDNHVSODFHDWDGHVLJQDWHGWLPH
usually at the end of the day. In short, in the DTNS
V\VWHPWKH¿QDOVHWWOHPHQWRIQHWSRVLWLRQVRFFXUV
at the end of the day.
Merits of the RTGS System
The RTGS system has two merits in reducing
settlement risks. Firstly, unsettled payment in-
structions accumulate until the end of the day
LQWKH'716V\VWHP7KHUHIRUHXQWLOWKH¿QDO
settlement is completed at the end of the day, the
settlement risks still exist. Compared with this,
the RTGS system processes each payment instruc-
WLRQRQHE\RQHDQGPDNHVWKHP¿QDOGXULQJWKH
daytime. Thus, the RTGS system can effectively
reduce the settlement risk.
6HFRQGO\ ³V\VWHPLF ULVN´ LV WKH NH\ ZRUG
This is the risk that the failure of one participant
to meet its required obligation will cause other
participants to be unable to meet their obligations
when due. Such a failure may cause widespread
liquidity or credit risk problems and, as a result,
PLJKWFUHDWHWRWDOFKDRVLQ¿QDQFLDOPDUNHWV$V
2499
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
overseers of payment systems, central banks are
particularly concerned with the systemic risk. The
DTNS system has potentiality of systemic risk,

because if one participant is unable to settle its net
debit position at the end of the day, the payment
system has to recalculate a new set of net positions
for each of the remaining participants by deleting
the payments involving default participant. This
SURFHGXUHLVFDOOHG³XQZLQGLQJ´7KHXQZLQG-
ing could lead to unexpected changes to the net
positions of remaining participants, which could
result in further knock-on effects or a cascade of
settlement failures. On the contrary, there is no
possibility of systemic risk in the RTGS system,
EHFDXVH HDFK WUDQVIHU RI IXQGV EHFRPHV ¿QDO
instantly during the day and there is no need for
unwinding.
Hence, the RTGS system is more robust to
settlement risk than the DTNS system. However,
the elimination of risk comes at the cost of an
increased demand for intraday liquidity. In fact,
there is a certain trade-off between the settlement
r i s k a n d t h e c o s t o f l i q u i d i t y. N e e d s f o r m u ch m o r e
liquidity is the only and non-negligible demerit of
the RTGS system. Usually, central banks provide
intraday credit to the participants in the RTGS
system. Most commonly the intraday credit is
provided with no fee, but the intraday liquidity
is not cost-free because collaterals are required
for the intraday credit.
Adoption of the RTGS System
In the 1980s, only a few countries adopted the
RTGS systems, namely the Fedwire in the U.S., the

Country Payment System
1
Timing of the introduction of RTGS
system
United States Fedwire 1982
Switzerland SIC 1987
Germany EIL-ZV 1988
United Kingdom CHAPS 1996
Belgium ELLIPS 1996
France TBF 1997
Italy BI-REL 1997
Netherlands TOP 1997
Korea BOK-Wire 1994
Hong Kong CHATS 1996
Singapore MEPS 1998
Australia RITS 1998
Japan BOJ-NET 2001
1
The name of payment system at the time of introduction of RTGS system.
Table 3. Timing of the introduction of RTGS system in selected countries
2500
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
SIC in Switzerland, and the EIL-ZV in Germany.
I n t h e 19 9 0 s , a n u m b e r o f c o u n t r i e s i n t r o d u c e d t h e
RTGS systems. This trend was apparent especially
for the payment systems which central banks
operated, because huge amount of funds were
settled through central bank operating payment
systems and it was the urgent task for the central
banks to reduce the settlement risks.

Additionally, the central banks of the European
Union (EU) were obliged to introduce the RTGS
system as a precondition to link to the TAR-
GET
2
system and reconstructed their payment
systems as the RTGS systems in 1996-1997, one
DIWHU DQRWKHU ,QÀXHQFHG E\ WKHVH PRYHPHQWV
some Asian countries also introduced the RTGS
systems in the late 1990s. The use of the RTGS
also grew outside industrialized countries. Some
countries in Eastern Europe, CIS countries, and
Latin America were similarly reported to have the
RTGS systems. These countries were character-
ized to construct the electronic payment systems
from scratch as RTGS systems. According to the
survey of Federal Reserve Bank of New York, 90
out of the 174 countries in the world adopted a
RTGS system at the end of 2005. By this means,
the adoption of the RTGS system became the
global trend of payment systems.
In Japan, the Bank of Japan (BOJ) reconstruct-
ed the BOJ-NET as a RTGS system in January
2001. The case of the BOJ-NET was rather special,
because the BOJ-NET already had two functions
of the DTNS mode and the RTGS mode. But, the
RTGS mode was seldom used by participants due
to the higher liquidity cost. For this reason, the
characteristics of the old BOJ-NET was basically
regarded as the DTNS system. The BOJ changed

the BOJ-NET into the RTGS system by abolishing
the DTNS mode.
HYBRID SYSTEM
Feature of the Hybrid System
The second evolution of the payment system was
the emergence of the Hybrid System. The Hybrid
System means the combination of the best features
of the DTNS system and the RTGS system.
0
10
20
30
40
50
60
70
80
90
100
1981
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004

number of adoption
accumulated number of
countries
Figure 1. Number of countries that adopt the RTGS system
2501
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
The Hybrid System derived from the DTNS
V\VWHPLQZKLFK¿QDOVHWWOHPHQWWDNHVSODFHRQO\
once at the end of the day. In the Hybrid System,
net settlements are made at frequent intervals
or continuously and transfer of funds become
¿QDODWWKHWLPHRIIUHTXHQWQHWVHWWOHPHQWV7KH
DTNS system has a disadvantage that transfer
RIIXQGVEHFRPH¿QDORQO\DWWKHHQGRIWKHGD\
even though it has an advantage that settlement
can be made with small liquidity only for the net
position. With the frequent net settlements, the
Hybrid System keeps the merit of the DTNS sys-
tem, that is, the settlement capability with small
liquidity, and additionally realizes the merit of the
57*6V\VWHPWKDWLVHDUO\¿QDOLW\7KDWLVWKH
reason why this kind of system is called Hybrid
3
system. This system is sometimes referred as
the Continuous Net Settlement (CNS) system,
compared to the DTNS system.
Examples of the Hybrid System
7KH¿UVW+\EULG6\VWHPLQWKHZRUOGZDVWKH
EAF2 in Germany. It became the Hybrid sys-
tem from the DTNS system in March 1996. In

EAF2, bilateral netting settlements were made
every 20 minutes for the whole morning and two
multilateral netting settlements were made in the
DIWHUQRRQ7KHVHWWOHPHQWVEHFDPH¿QDODWHDFK
netting settlement.
Following the EAF2, the LVTS in Canada, the
PNS in France, and the CHIPS in U.S. became
Hybrid Systems during 1999-2001. In this way,
the introduction of the Hybrid system for net
settlement systems became the trend in indus-
trialized countries.
The CHIPS is the latest and the most advanced
Hybrid System, in which the system judges the
capability of net settlement for each payment
instruction and net settlement is made continu-
ously, if possible. The system, which is called
³EDODQFHGUHOHDVHHQJLQH´VHOHFWVWKHSURFHVVLQJ
mode from the three types: the individual release,
the bilateral release, and the multilateral release,
according to the available balances of payer and
payee and incoming and outgoing payment situa-
tion. The individual release is a simple processing
of a payment instruction without netting. The
bilateral release is just like bilateral netting be-
tween two participants. The multilateral release
is a kind of multilateral netting among three or
more participants.
Situation in Japan
In Japan, the FXYCS (Foreign Exchange Yen
Clearing System) is still operated as a simple

'716V\VWHP:H¿QGRXUVHOYHVZLWKQRFKRLFH
but to feel uneasy to look at the out-of-date net
settlement system. To our relief, however, the
Country Payment System
Timing of the introduction of Hybrid
System
Germany EAF2 March 1996
Canada LVTS February 1999
France PNS April 1999
United States CHIPS February 2001
Table 4. Introduction of hybrid system
2502
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
project is going on to enhance the FXYCS and
reduce the settlement risk. This project will be
described.
INTEGRATED SYSTEM
Feature of the Integrated System
The next evolution of the payment system was the
transition to the Integrated System. The Integrated
6\VWHPLVGH¿QHGDVWKHSD\PHQWV\VWHPZKLFK
has both the RTGS mode and the Hybrid mode.
P a r t i c i p a n t s o f t h e I n t e g r a t e d S y s t e m c a n u s e b o t h
modes as the situation demands. For example,
participants can use the RTGS mode for the ur-
gent payment and time-critical payment, while
they can use the Hybrid mode for non-urgent
payment. The Hybrid mode executes continuous
or frequent settlement as mentioned. The Hybrid
mode in the Integrated System is often referred

DV³OLTXLGLW\VDYLQJPRGH´EHFDXVHSDUWLFLSDQWV
can make their payment with smaller amount of
liquidity by using frequent netting.
Integrated System and Hybrid System are
VRPHWLPHV FROOHFWLYHO\ UHIHUUHG DV ³$GYDQFHG
System,” since both systems implement advanced
technologies and complex handling method of
payment instructions.
The LVTS in Canada
The pioneer of the Integrated System was the Large
Value Transfer System (LVTS) in Canada. The
LVTS started its operation in February 1999. The
LVTS has two functions of payment. One is called
Tranche 1, which is the RTGS mode. The other
is called Tranche 2, which is the liquidity saving
mode. Participants can select either Tranche 1 or
Tranche 2 and send their payment instructions to
the appropriate Tranche.
The PIS in France
The second Integrated System was the Paris
Integrated System (PIS) in France. France has
two large-value payment systems of Euro. One
is the Paris Net Settlement (PNS) operated by
CRI,
4
which became the Hybrid System from
the DTNS system in April 1999. Another is the
Transferts the Banque de France (TBF), which is
the RTGS system operated by Banque de France.
,Q$SULO&5,GHYHORSHG³OLTXLGLW\EULGJH´

between the TBF and the PNS. Liquidity bridge is
the scheme that participants can transfer liquidity
between the two payment systems at any time of
the day. In this way, the PNS and the TBF became
closely linked. So even though these are two
Country Payment System
Timing of the introduction of Integrated
System
Canada LVTS February 1999
France PIS: PNS and TBF April 1999
Germany RTGS
plus
November 2001
Italy new BI-REL April 2004
Singapore MEPS+ December 2006
Table 5. Introduction of integrated system
2503
Global Trends of Payment Systems and the Next-Generation RTGS Project in Japan
separate payment systems, they appear as one
combined payment system to the participants.
Therefore, these two systems are called the PIS
(Paris Integrated System) as a whole and regarded
as a kind of Integrated System.
The RTGS
plus
in Germany
The RTGS
plus
in Germany was the third Integrated
System, which started operation in November

2001. RTGS
plus
has two modes; the EX payment
mode and the Limit payment mode. The EX pay-
m e n t m o d e i s t h e RT G S s e t t l e m e n t f o r h i g h p r i o r i t y
payment. And the Limit payment mode is liquidity
saving element with continuous offsetting settle-
ment. When a payment instruction is sent to the
system, a special algorithm searches the central
queue to see if some set of payment instructions
might offset each other. Once such a set of pay-
ment instructions is found, these instructions are
settled in the form of offsetting.
³2IIVHWWLQJ
5
” means the simultaneous booking
of outgoing payment and incoming payment, and
the effect of the offsetting is quite similar to the
netting. In the Limit payment mode, participants
can set sender limit bilaterally or multilaterally
to control their own liquidity. Participants can
manage their liquidity in a single liquidity pool
and can use two modes according to the priority
of the payment.
Other Examples
Bank of Italy added the same kind of liquidity
saving mode to their RTGS system BI-REL, and
made it into the Integrated System in April 2004,
ZKLFKZDVFDOOHG³QHZ%,5(/´
Integrated system came into use in Asia.

Monetary Authority of Singapore (MAS) has been
operating the RTGS system since 1998, which is
called MEPS (MAS Electronic Payment System).
They have developed liquidity saving mode in
MEPS and make it into the Integrated System.
7KLVQHZV\VWHPLVFDOOHG³0(36´0(36LV
WKH¿UVW,QWHJUDWHG6\VWHPLQ$VLDDQGVWDUWHGWKH
operation in December 2006.
NEXT-GENERATION RTGS
PROJECT IN JAPAN
Following the evolutionary movements, the Bank
of Japan (BOJ) plans to enhance its RTGS system
to a sophisticated system. This project is called
the Next-Generation RTGS (RTGS-XG) Project
of the BOJ-NET.
Background of the RTGS-XG Project
In Japan, there are three payment systems: the
Bank of Japan Financial Network System (BOJ-
NET
6
), the Foreign Exchange Yen Clearing System
(FXYCS), and the Zengin Data Telecommunica-
tion System (Zengin System). The BOJ-NET
is operated by the BOJ, and two private-sector
payment systems, the FXYCS and the Zengin
System, are operated by Tokyo Bankers Associa-
tion (TBA).
The BOJ-NET
The BOJ-NET is a RTGS system and used mainly
for the funds transfers for money market transac-

tions and government bond transactions, settle-
ment of net positions of private-sector netting
systems, and funds transfers arising from BOJ’s
open market operations. Payment instructions
processed in the BOJ-NET are mainly inter-bank
transactions and are very high value payments.
As mentioned earlier, the BOJ-NET became the
RTGS system from the DTNS system in Janu-
ary 2001.
The FXYCS
The FXYCS is basically a DTNS system that
handles yen payments to settle foreign exchange