2494 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. 2495 Copyright © 2009, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited. 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 . 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. 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. 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