Briefing Paper Bank Indonesia-Real Time Gross Settlement

I. BACKGROUND
As stipulated in Act 23 Year 1999 on Bank Indonesia Article 8, Bank Indonesia is
also authorized to regulate and maintain the smoothness of payment system in order to
attain and maintain Rupiah stability. This task becomes very important because the
efficiency of transactions in a modern economy will very much depend on the efficiency
of a payment system. Basically payment system is provided through the services of
commercial banks as well as infrastructure of a banking system consisting of a central
bank and commercial banks. Therefore a solid infrastructure that supports the mechanism
of inter-bank transfer in large amount and real time manner is necessary for a quick,
efficient and sound payment system.

In line with more globalized economic development, banking and public needs for
quick, efficient, and sound payment system in Indonesia are also increasing. In addition,
to accommodate Bank Indonesia’s requirement to reduce payment system risks, Bank
Indonesia developed a gross settlement system with on-line electronic connection
between Bank Indonesia and other banks. The system is known as Bank Indonesia’s
Real-Time Gross Settlement (BI-RTGS).

In macroeconomic view, the availability of RTGS system -which is also an

automated large-value inter-bank payment system- will create short-term money market
that could reflect a monetary condition in a certain period. While in micro economic
view, the availability of an automated large-value interbank payment system could
increase inter-bank money market liquidity as well as individual bank liquidity. In
addition, it is expected that the availability of a quick, cheap and sound payment system
could give incentive to the market to develop well. In turn, a more liquid market is
expected to reduce dependency of banks on liquidity support from central bank as well as
to stimulate bank in running more market oriented liquidity management. In addition,
with liquid inter-bank money market the monetary operated by central bank will be more
flexible.

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

The development of BI-RTGS system is associated with the policy to divide the
payment system in Indonesia into Large-Value Payments System/LVPS and Retail
Payments System, where transactions of LVPS will be settled by BI-RTGS system.

II. DEFINITION
BI-RTGS system is the last process of a payment settlement for individually
processed / gross settlement and real time (electronically processed), where the
participant bank account could be debited/credited several times per day according to
payment instructions.

With BI-RTGS system, the originating bank (initiating bank) through RTGS
terminal located in the bank transmits payment to the process center of RTGS system
(RTGS Central Computer /RCC) at Bank Indonesia for settlement process and if the
settlement process is successful, payment transaction will automatically and
electronically continue to its counterparty bank. The success of settlement process
depends on the adequacy of account balance of the bank that sent the payment transaction
because in BI-RTGS the bank is only allowed to credit another bank. In other words,
participant bank in BI-RTGS should make sure that its account balance with Bank
Indonesia is adequate before making a transfer to another BI-RTGS participant bank.

III. PURPOSES
1. To provide banks and customers with higher speed, more efficient, more reliable, and
safer interbank transfer facility.
2. To assure quicker settlement (irrevocable dan unconditional).
3. To provide information on bank account in a real time and overall manner.
4. To increase discipline and professionalism in managing liquidity.
5. To reduce settlement risks.

IV. CURRENT SETTLEMENT MECHANISM

Currently, inter-bank transactions for banks as well as customers purposes are
settled by clearing media. Unlike the BI-RTGS system that uses gross settlement method

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

in which each transaction is settled individually, the clearing system uses a net settlement
method for final completion. The net settlement is a final completion process of payment
transactions at the end of a period by offsetting payables and receivables so that there will
be only 1 net receivable or payable to be settled for each participant account.

Thus there will be risks at the end of a day that a bank suffers clearing loss in
large amount because up to now all retail as well as large value inter-bank transactions
are settled by clearing. When the clearing loss amount exceeds account balance with
Bank Indonesia, the account with Bank Indonesia will be negative (overdraft) which in
turn causes difficulties to Bank Indonesia when the bank could not cover the overdraft on
the following day.

V. PAYMENT SYSTEM RISKS

In general there are two kinds of risk in the payment system, i.e. credit and
liquidity risks. Credit risk is when counterparty could not fulfill its liabilities in full upon
maturity or thereafter. This risk includes unrealized gains on failed contracts
(replacement cost risk) and worse even is the risk that a transaction is not paid in full
(principal risk). While liquidity risk occurs when counterparty could not make payment
in full upon maturity, but afterwards. It will impose liquidity problem on the receiving
bank which in turn may increase bank cost of fund because the bank should search in the
money market immediately.

In addition to the above risks, Bank Indonesia as the supervisor of payment

system in Indonesia is also very concerned about possible systemic risk in the payment
system in Indonesia. Systemic risk is when a bank fails to fulfill its liabilities upon
maturity, so that other banks encounter liquidity problems which in turn could not fulfill
their liabilities. This failure, in a very extreme condition, might trigger broader financial
problems that could threaten the stability of payment system in an overall economy.
With respect to the above risks of payment system, the introduction of BI-RTGS
is expected to minimize the risks. With the competency to make transfers in real time and
continuously during window time, BI-RTGS could reduce or even elimiate risks in the

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

settlement process because transactions are executed when bank account balance with
Bank Indonesia is adequate. With BI-RTGS system, when a bank account balance is
adequate, the bank could directly make settlement to other banks which will credit their
customer’s accounts so that the fund could immediately be used by the customers.

In addition, it is expected that the availability of a quick payment mechanism

required for Delivery Versus Payment (DVP) transaction such as shares and other
securities. For this type transaction, fund transferred through BI-RTGS (the payment leg)
could be coordinated with the final transfer of assets (delivery leg), so that delivery of
assets will be matched with payment. This is important to reduce risks in the securities
market.

In addition, with the introduction of BI-RTGS system it is expected that systemic

risk could be reduced by three ways. First, a significant reduction intraday interbank
exposure could minimize possible inability of a bank to cover loss or liquidity
inadequacy resulting from the incapability of another bank to fulfill its liability. Second,
BI-RTGS system could avoid possible unwinding payment that could arise systemic risk
in net settlement. Third, the possibility of a bank to make settlement any time during
window time, settlement time no longer focuses on a certain period. It will provide a
bank with enough time to solve a liquidity problem by borrowing from another bank or
waiting for an incoming transfer from another bank.

VI. CHARACTERISTICS
BI-RTGS system is the eighth RTGS system used in countries within the EMEAP
environment after 7 other countries, Thailand, Hong Kong, Singapore, Malaysia, South
Korea, Australia and New Zealand, have earlier applied RTGS system. With respect to
this first- phase application of BI-RTGS system, Bank Indonesia obliges banks operating
in Jakarta to participate in the BI-RTGS system. Banks with head quarters outside Jakarta
shall participate in the BI-RTGS system through their branch offices in Jakarta. Up to
now there are 125 banks recorded as BI-RTGS participants. BI-RTGS system
characteristics are as follows:

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

a. V-Shaped Structure
As used by most RTGS system in the world, BI-RTGS also uses V-shaped
structure in sending messages from sender bank to receiving bank via Bank Indonesia as
the BI-RTGS agent (attachment 1) In this structure, all information in a transaction will
be sent by the sender bank to RTGS Central Computer (RCC) and be further sent to the
receiving bank when the transfer has been settled by Bank Indonesia.

b. Transfer mechanism
In general it could be described that the mechanism of inter-bank fund transfer in
the BI-RTGS is as follows:
1. Sender bank enters credit transfer input into RTGS terminal which will be
further transmitted to RCC at Bank Indonesia.
2. Further, RCC will process the credit transfer with following mechanism:
i. To verify whether the checking account balance of the sender bank
is higher or equal to the nominal amount of credit transfer.
ii. When the sender bank’s checking account is adequate, a posting in
the sender bank and receiving bank checking accounts will be
executed simultaneously.
iii. When the sender bank checking account is not adequate, the credit
transfer will be placed in a queue within the RTGS machine.
3. Settled credit transfer information will be transmitted automatically to
RCC to the RTGS terminal to receiving bank.

c. Window Time
The time for inter-bank transfer transaction for the bank’s own or customer
purposes starts from 06.30 a.m. to 5.00 p.m. Western Indonesia Time. This window time
is expected to ease economic players in Indonesia, which has 3 time zones, to execute
transactions in a smoother manner. However for certain cases that need longer time, Bank
Indonesia is prepared to prolong the window time to accommodate that need.

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

d. No Money No Game
The BI-RTGS system allows participant bank to merely credit other BI-RTGS
participant accounts. Thus, BI-RTGS participant is not allowed to debit other BI-RTGS
participant accounts. It gives a new paradigm in the payment system in Indonesia where
banks shall manage their liquidity in a wise manner so that all transactions could be
settled properly, because a transaction will be placed in a queue if the bank’s balance is
not adequate. The transaction placed in a queue could be settled when the bank receives
incoming transfer from other banks.

e. Capping
In order to minimize vairous payment system risks resulting from the usage of net
settlement in a clearing process, Bank Indonesia will determine the maximum transaction
nominal (capping) allowed for clearing. In the beginning, capping in a clearing is set to
an amount of Rp.1 billion so that transactions via BI-RTGS will not be too many. When
the BI-RTGS system is stable and proven solid, capping in clearing will be decreased so
that transaction executed by clearing will be less and in turn will reduce the risk resulting
from net settlement.

f. Queue Management and Gridlock Resolution

When the balance of a bank’s checking account that will be debitted is lower than
the payment transaction amount sent by a bank, the payment transaction will be placed in
a queue within BI-RTGS.
1. The queue in BI- RTGS system based on priority level and First In First
Out (FIFO).
2. The queue modul in BI-RTGS system shall be completed with Bypass
FIFO facility which automatically operates when the queue reaches a
certain amount, for the purpose of reducing the number of queues.
3. The priority level in queue module in BI-RTGS system is as follows:
a. First priority: Coverage of clearing result.
b. Second priority: Bank transaction with BI/the government.

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

c. Third priority: Credit transfer originating from BI-RTGS

participant banks.
4. When BI-RTGS detects gridlock, gridlock resolution facility will be
operated automatically as well as manually based on the criteria of balance
adequacy or using First Available First Out (FAFO) method.

g. Intraday Liquidity Facility (FLI)

As already informed, transactions executed by BI-RTGS system are gross
settlement so that they will be settled individually and continuously during the window
time. This is different from the present clearing mechanism that uses net settlement. In
the net settlement system, a bank does not need to have high liquidity all day long. While
the in RTGS system, a bank shall have sufficiently high liquidity all day long. This
condition triggers the requirement for FLI for the purpose of assisting inter-bank payment
smoothness all day long. Please refer to attachment 2 for the difference between net
settlement and gross settlement mechanism.

The scheme in attachment 2 shows that gross settlement could take place any
time, for example in the morning, a bank account balance is lower than its nominal
transaction to be settled that place the transaction in a queue. It does not mean that the
bank encounters a chronic liquidity problem, because the bank basically expects an
incoming transfer from another bank some time later. It is merely an intraday gap
between outgoing and incoming transactions in a certain period.

To solve the intraday gap, most RTGS systems in the world need some supporting
facility in form of FLI that functions to smoothen real time transaction. Some conditions
of FLI facility in BI-RTGS are among other things:
1. BI-RTGS participant banks shall file application to obtain FLI with Bank
Indonesia.
2. Banks shall pledge SBI and or government bonds as collateral so that FLI
facility is fully secured.

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

3. Bank Indonesia will determine the maximum FLI that could be withdrawn
in a certain period within 1 day. The FLI used by BI-RTGS participant
banks as required by the bank’s real need in an intraday (provided when
needed).
4. When a bank receives incoming transfer, the incoming transfer will
automatically be used to reduce FLI balance used.
5. On a certain limitation, FLI facility shall be returned to Bank Indonesia at
the end of a day. If the bank could not return it on time, the FLI facility
will be transformed into FPJP overnight.
6. On T+1, Bank Indonesia will claim all the bank liabilities by using "Super
Priority" transactions which will be settled before other transactions.
7. At a certain time in the morning, if the bank has not settled the payables,
the bank will be suspended from the BI-RTGS system. It means that the
bank could merely receive incoming transfers and not make any outgoing
transfer. Suspension on any bank shall be informed to all participants by
broadcasting administrator’s message through BI-RTGS system.

h. Bye-Laws
In addition to the BI-RTGS conditions issued by Bank Indonesia, Bye-Laws are
valid amongst the BI-RTGS participant banks themselves in order to reach unity in
executing inter-bank payment amongst the BI-RTGS participants. Bye-Laws are applied
to all payment activities of each bank in a payment series, where the payment series starts
from originator/initiator and ends at ultimate beneficiary. Some conditions in the Bye-
Laws are among other things:

1. Cut-off times for payment and repayment

The fund for payment transactions in intraday inter-bank money
market shall reach the borrower account at the latest 30 minutes after the
transactions are completed. In the meantime the repayment of intraday
inter-bank money market shall be executed at the latest at 5.00 p.m. on the
same day.

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

Same day value Money Market / Foreign Exchange deals executed

before 4.30 p.m. shall be settled at the latest 5.00 p.m.. While the
repayment shall be executed at the latest 5.00 p.m. upon maturity. In the
meantime fund for end of day shall reach the borower bank checking
account at the latest 6.00 p.m. on the same day.

2. Compensation for inter-bank payment failure

When inter-bank payment fails, associated parties could apply for
compensation for the failure. Payment failure can be in form of lateness,
early payment, excessive payment, payment less than the nominal amount
and wrongly sent payment.

Compensation is calculated differently for each form of correction,

such as adjustment of effective date, return of wrongly sent payment, late
payment or repayment and change of beneficiary. Interest level used in
calculating compensation is 120% from the average JIBOR overnight
interest rate.

3. Compensation agreement is made to avoid unfair benefit taking.

Spirit of compensation is to enable BI-RTGS participants
compensate each other on a condition that causes a right for compensation.
Compensation shall be executed in a certain way that no one bank is
unjustly penalized or enriched.

4. Dispute settlement through Arbitration Committee

To settle disputes or problems amongst the BI-RTGS participants
with respect to RTGS transactions, and/or to end bank incompliance with
BI-RTGS system, a BI-RTGS arbitration committee is established. The
committee decision is the final decision and binds all BI-RTGS
participants.

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

i. Information Technology Security and Disaster Recovery Plan

The BI-RTGS system is a system that is loaded with information technology (IT).
The application of sophisticated hardware, software as well as telecommunication facility
needs an extra effort to assure that BI-RTGS system is secure. A number of security
layers have been applied in the system so that it is expected that the BI-RTGS system
could operate soundly. In order to reassure this, Bank Indonesia has requested an
independent IT auditor to audit all applications as well as network used in the BI-RTGS
system. While testing BI-RTGS system security, the independent IT auditor has also
conducted a penetration test to verify possible loop holes that might be benefitted by
hackers to go through BI-RTGS system security. Although the IT audit opinion on the
BI-RTGS system has shown a satisfying result, in the future the IT audit will periodically
be conducted to keep the BI-RTGS system sound.

In addition, the more massive and intense IT existence which implicates

dependency on information technology has obliged all institutions using IT to have solid
policies, procedures as well as backup facilities. Bank Indonesia as the host of BI-RTGS
system has prepared Disaster Recover Plan (DRP) and Disaster Recovery Centre (DRC)
to guarantee that the payment system in Indonesia is supported by a solid infrastructure.
Banks are suggested to choose adequate backup systems in a location different from the
main location that could be active within a short period when the main system fails so
that it will not imperil the smoothness of the overall banking inudstry. All BI-RTGS
participants are also obliged to periodically try out the backups and DRP to assure that
everything runs well.

j. Future Plan
After the first-stage BI-RTGS is implemented well, in the year 2001 BI-RTGS is
planned to be implemented in Bank Indonesia branch offices gradually. Integration of the
BI-RTGS system at Bank Indonesia head office and branch offices will eliminate bank
checking account with Bank Indonesia head office so that there will be 1 bank checking
account only with Bank Indonesia head office (centralized settlement account / CSA).

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Briefing Paper Bank Indonesia-Real Time Gross Settlement

The advantages of applying CSA by BI-RTGS system participant banks are among
others:
1. To ease bank in controlling its liquidity position.
2. Money in transit that could happen when bank makes transfer to branch
offices can be eliminated so that banking cost of fund can be decreased.
3. To accelerate fulfillment of banking cash requirement at each Bank
Indonesia branch office because bank does not wait for transfers from
other Bank Indonesia offices.
4. To assist banks in managing their fund effectively and efficiently.

For Bank Indonesia, application of CSA will give among other things the following
advantages:
1. To ease Bank Indonesia in monitoring bank’s compliance with minium
reserve requirement (GWM).
2. It is easier for Bank Indonesia to monitor bank’s liquidity because the
position of bank checking account is consolidated and can be monitored in
a real-time manner.

Jakarta, October 30, 2000

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 Attachment 1.

V - SHAPED STRUCTURE

SENDER RECEIVING
BANK BANK

1. Full payment 3. Full payment

message message

2. SETTLEMENT

RCC
BI-RTGS
 Attachment 2

COMPARISON BETWEEN
NET SETTLEMENT AND GROSS SETTLEMENT

A. NET SETTLEMENT

I. INTER-BANK GROSS PAYMENT BEFORE NETTING

Sender Receiving Bank Amount of

Bank A B C D Liabilities

A - 90 40 80 210
B 70 - 0 0 70
C 0 50 - 20 70
D 10 30 60 - 100

Total claims 80 170 100 100 450

II. NET CLAIMS (+) OR LIABILITIES (-) OF EACH BANK

Bank A B C D Net
Total -130 100 30 0 0

B. GROSS SETTLEMENT

(40)
BANK A BANK C

(80)

(10) (50) (60) (20)

(90) (70)

BANK B (30) BANK D

Source : Bruce J. Summers, " The Payment System - Design, Management and Supervision",
International Monetary Fund, 1994, p.36 & p.39