The Microstructure of Japan's Interbank Money Market: Simulating Contagion of Intraday Flow of Funds Using BOJ-NET Payment Data

Under a real-time gross settlement (RTGS) system, there is an incentive for system participants to delay making their outgoing payments to facilitate their funding, and this creates the risk of settlement delays spreading throughout the entire system. Intraday credit facility and market practices have been established to avoid the risk and led to settlement concentration in the morning, as well as concentrations at the specific times due to other deferred net settlement (DNS) systems. The heterogeneity of intraday progress of settlements causes intraday fluctuation in interest rates. In this paper, we analyze and run simulations on the payment network to understand the intraday flow of funds within Japan's interbank money market, especially recycling of the "receipt-driven payments." We find that (1) the shape of the payment network changes with the time of day, and payment recycling becomes more likely when the density of the network is high; (2) patterns of intraday payment flow differ across the three RTGS systems of the United States, the United Kingdom, and Japan, reflecting differences in each country's system for, and underlying approach to, settlement and funding; and (3) participants comprising the hub of the payment network function as absorbers of contagion under a condition sufficiently stressful to cause a cascade of settlement delays.