Developments in the Short-term Money Market - Settlement Risk and the Real Time Gross Settlement (RTGS) System

Taizo Ueda

Introduction

Unfamiliar money market terminologies such as RTGS and repos have recently cropped up in the newspapers. Most people are less familiar with the money market than with stock and bond markets， especially since individuals are unable to participate directly. But as seen by the strong interest in the BOJ’s recent monetary policy shift， developments in the money market can impact other markets including the more familiar stock and bond markets.

Indeed， since the money market is integral to cash settlements in other markets， we might even say that it lies at the core of the securities and financial markets. The money market has changed significantly under financial liberalization， whose goal is to enhance the efficiency and openness necessary for this demanding role. In addition， abnormal conditions in recent years — including the financial system instability， zero-interest rate policy， and year 2000 problem — have brought critical issues to the fore. The first half of this paper examines how the short-term money market has changed in view of these developments.

The second half discusses the future direction of the money market. As seen by the introduction of the real time gross settlement (RTGS) system in January 2001， one of the most critical issues is the reduction of settlement risk. In addition， cash management at financial institutions will be greatly affected in fiscal 2002， when the trade settlement date for stocks and bonds is changed from three business days to the next business day.Thus we describe the implications of the reforms to the settlement system in some detail.