Liquidity Saving Mechanisms in Payment Systems and Settlement Liquidity

Abstract

Payment systems are one of the key Financial Market Infrastructures (FMIs) and have showed remarkable progress over the past two decades. The first half of this paper focuses on the evolutionary process of payment systems, starting with the Deferred Net Settlement (DNS) system and progressing to the Real-Time Gross Settlement (RTGS) system. Subsequently, much more sophisticated payment systems have been put in place, which include the “Hybrid System,” and the “RTGS system with Liquidity Saving Mechanism (LSM).” In the latter half of this paper, experience from the “Next-Generation Real-Time Gross Settlement” (RTGS-XG) project of BOJ-NET is discussed. BOJ-NET is the large-value payment system operated by Bank of Japan (BOJ). BOJ-NET, a pure RTGS system, added an LSM in 2008 and became an RTGS system with LSM. The impact of the LSM's introduction is analyzed, which includes the participants' settlement liquidity, the liquidity-saving effect, the average settlement time, the average waiting time in the queue, the turnover ratio, and the volume of idle liquidity. These analyses would be useful for any nations considering the introduction of the same kind of enhanced payment system.