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OTC Japanese Government BondsShortening of JGB Settlement Cycle to T+1

Japan Securities Dealers Association has announced that the implementation date for Shortening of JGB Settlement Cycle to T+1 shall be Tuesday, May 1, 2018 (trade date basis). JSCC hereby notifies the participants of our actions taken in relation to this project, as the update.

Background of the project

Shortening of JGB Settlement Cycle is the project developed along with the promotion of shortening of settlement cycle and expansion of use of clearing organizations in order to reduce settlement risk, under ”Development of Institutional Frameworks Pertaining to Financial and Capital Markets” (*1) by the Financial Services Agency, which was set after the financial crisis in 2008.

At ”Working Group on Shortening of JGB Settlement Cycle” of Japan Securities Dealers Association, 49 discussions for the project were held during the period from 2009 to 2017 and Grand Design (*2) was announced in 2014. The points under discussion were as follows:

  • For Shortening of GC Repo Transaction Settlement Cycle to T+0, which is needed for realization of Shortening of JGB Settlement Cycle to T+1, Subsequent Collateral Allocation Repos was introduced, where JSCC shall allocate Collaterals.
  • Aiming to enhance market function, it was concluded that, in relation to Repos, Cash-secured Bond Lending Transactions(“gentan” transacton), which have been traded as major repo transactions in Japanese repo market, are desired to be migrated with Repo Transactions(“gensaki” transaction) which are traded as the global standard. Along with the revision of the template for “Master Agreement on the Transaction with Repurchase Agreement of the Bonds, etc.” (*3) by Japan Securities Dealers Association, Best Practice Guide was revised by Bond Repo Transactions Study Group (*4).

JSCC’s actions, Introduction of Subsequent Collateral Allocation Repos

JSCC announced the outline associated with the introduction of Subsequent Collateral Allocation Repos in November 2014, which was further revised in May 2015, June 2017 and January 2018, given further condition of discussion (*5). Inflation-Indexed JGB will be newly covered, together with the implementation of the project.

Subsequent Collateral Allocation Repos

JSCC, in relation to JGB OTC Clearing Business, shall introduce Subsequent Collateral Allocation Repos, transaction, contracting by basket (a group of multiple issues) without specifying collateral, and allocating collateral from inventory of JGB by a delivering party just before the delivery for the Starting Transaction.

Time for clearing related to Subsequent Collateral Allocation Repos shall be set three (3) times a day. A delivering Participant related to Subsequent Collateral Allocation Repos shall notify JSCC of Issues to be Allocated and Allocable Quantities, for JGB, as Allocable Balance Notice. JSCC shall, for each time for clearing (three (3) times a day), allocate collaterals, according to Allocable Balance Notice so received.

Timing of Clearing and Collateral Allocation

1st 2nd 3rd
Start Receiving Application/
Application Cutoff Time
2:00 p.m. on previous day
9:00 p.m. on previous day
7:00 a.m. on current day
11:00 a.m. on current day
11:00 a.m. on current day
2:00 p.m. on current day
Timing of Clearing and
Collateral Allocation
7:00 a.m. on current day 11:00 a.m. on current day 2:00 p.m. on current day

Settlement Cutoff Time

For 1st Collateral
Allocation and
Ending/Unwind
For 2nd Collateral
Allocation
For 3rd Collateral
Allocation
Settlement between
Delivering Clearing
Participant and JSCC
10:30 a.m. 1:30 p.m. 3:30 p.m.
Settlement between
JSCC and Receiving Clearing
Participant
11:00 a.m. 2:00 p.m. 4:00 p.m.

Baskets for Subsequent Collateral Allocation Repos (Type / Limitation by Term to Maturity of Covered JGBs)

Basket Issue Short Name Treasury
Discount
Bills
Interest-
bearing
/Term to
Maturity
10y or less
Interest-
bearing
/Term to
Maturity
more than 10y
Interest-
bearing
(Floating Rate)
Inflation-
Indexed
Strips
JGBB-TDB *
JGBB-U10 * *
JGBB-Fixed * * *
JGBB-Large * * * *
JGBB-All * * * * *
JGBB-Strips *

*Strips; Principal-only Book-entry Transfer JGBs,Coupon-only Book-entry Transfer JGBs

Running Test

In order to confirm and ensure the operational procedures after the implementation of shortening to T+1, the Running Test commenced in October 2017 and the connecting test to JSCC’s system, including Collateral Allocation was conducted. Phase 3, which is the final stage of the test, has completed in March, 2018 and Japan Securities Dealers Association has announced that it judges the results for the test as successful.

Please refer to “Working Group on Shortening of JGB Settlement Cycle”, web-site of Japan Securities Dealers Association for the details of determination of the implementation date and judgement for the results for Running Test, etc. (*6)

Requested cooperation

The above-mentioned Working Group has concluded that all contracts executed after the implementation date, are desired to be settled in to T+1 for all participants. (*7) JSCC understands each participant concerning JGB market will bear operational and technical burden relating to the introduction of Subsequent Collateral Allocation Repos and appreciates each participant’s continuous understanding and support, as this project is essential to enhance the function of JGB market in Japan.

*1 ”Development of Institutional Frameworks Pertaining to Financial and Capital Markets” (January 2010)(FSA)
*2 “Grand Design for Shortening of JGB Settlement Cycle to T+1 “ (November 2014) (Japan Securities Dealers Association)
*3 “Master Agreement on the Transaction with Repurchase Agreement of the Bonds, etc.” (For reference) (Japan Securities Dealers Association) (Japanese Only)
*4 “Best Practice Guide (4th edition)”(Bond Repo Transactions Study Group) (Japanese Only)
*5 For the latest outlines, please refer to the web-site linked hereto
*6 “Working Group on Shortening of JGB Settlement Cycle” (Japan Securities Dealers Association) (Japanese Only)
*7 “Notices for stable operations for trading and settlement of JGB associated with Shortening of JGB Settlement Cycle to T+1” (December 2017)(Japan Securities Dealers Association) (Japanese Only)