May 2013
Trends in and Challenges for the Money Market in Japan
Results of the Tokyo Money Market Survey (August 2012)
Financial Markets Department
Bank of Japan
Please contact the Bank of Japan at the address below in advance to request permission when reproducing or copying the
content of this paper for commercial purposes.
Financial Markets Department, Bank of Japan
P.O. Box 30, Nihonbashi, Tokyo 103-8660, Japan
Please credit the source when quoting, reproducing, or copying the content of this paper.
May 2013
Financial Markets Department
Bank of Japan
Trends in and Challenges for the Money Market in Japan
Results of the Tokyo Money Market Surve y ( August 2012)
Contents
I . INTRODUCTIO N: OVERVIE W OF THE TOK Y O M ONEY MARK ET SURVE Y .......... 3
II. DEVELOPM ENTS IN THE M ONEY M ARKET ................................................... 4
A. O VERV IEW ................................................................................................ 4
B. C ALL M ARKET .......................................................................................... 5
C. R EP O M ARKET ........................................................................................ 11
D. CP M ARKET ............................................................................................ 20
E. Y EN F UNDING A CTIV ITIES WITH F OREIGN I N VESTORS ............................... 21
F. Y EN O VERNIGH T I ND EX S WAP M ARKE T ..................................................... 22
G. M ARKET PARTI CIPAN TS ' ATTI TUDES TOWARD A RBITR AGE T RADIN G AND
O PERATION AL I SSUES ............................................................................... 23
III. M EASURES TAKEN TO ADDRESS ISSUES SURRO UNDING THE MONEY
MARKET ......................................................................................................... 25
A. W IDESPREAD A DOP TION OF FAILS P RAC TICE FOR JGB S ............................. 26
B. S HORTENIN G OF THE PAYMENT AND S ETTLEMENT P ERIOD FOR JGB S .......... 29
C. I MP ROV ING THE R OBUSTNESS AND PARTICIPATION OF C ENTR AL C LEARIN G OF
JGB S ....................................................................................................... 32
D. E NHANCIN G E FFECTIV ENESS OF THE BCP ................................................. 34
IV. CONCLUSION ................................................................................................. 38
Note: This paper is based essentially on the information available at the end of
November 2012.
1
▽ Number of Respondents in the Tokyo Money Market Survey (August 2012)
2010 survey
2012 survey
190
234
172
211
Total respondents
Eligible counterparties
in the Bank of Japan's
money market operations
Note: In addition to the eligible counterparties in the Bank of Japan's mone y mar ket operations,
so me of the major life insurance companies , general insurance companies and maj or asset
manage ment companies participated in the surve y.
2
I. Introduction: Overview of the Tokyo Money Market Survey
In August 2012, the Financial Markets Department of the Bank of Japan
conducted the third Tokyo Money M arket Survey to identify developments in
the Japanese money market and confirm how a number of market -related issues
were being addressed.
This paper ’s review is based on the results of the
survey.
The first survey, conducted in August 2008, reviewed the impact on the
Japanese money market of the subprime housing loan problem and the Lehman
shock, which occurred immediately after the questionnaires were collected,
and pointed in particular to issues arising in the repo market.
The second
survey, conducted in August 2010, reviewed developments in the money
market about two years after the Lehman shock, and confirmed that market
participants had made progress in addressing the issues identified in the first
survey.
This third survey investigated developments as of the end of July 2011 and
2012, focusing on the amounts outstanding of call and repo transactions.
The
number of respondents in the survey increased dramatically from the previous
survey, to 234 from 190.
Likewise, the number of eligible counterparties in
the Bank's money market operations rose significantly (to 211 from 172), and
major general insurance companies, which are not eligible counterparties in
the Bank's money market operations, participated in the survey for the first
time.
This paper comprises the following: Section 2 reviews developments in the
money market, focusing on developments since the previous survey, by
exploring market trends in each market and market participants' attitudes
toward money market transactions.
Section 3 reviews how issues in the
money market are being addressed.
In addition to the issues such as the
widespread adoption of the fails practice for Japanese government bonds
(JGBs), the shortening of the payment and settlement period for JGBs, and the
improving robustness and participation of central clearing of JGBs , all of
which have been recognized as market-wide issues in light of the experience of
the Lehman shock, this survey explored efforts to enhance the effectiveness of
the business continuity plan (BCP) for money market transactions, whose
3
importance has been recognized increasingly since the Great East Japan
Earthquake.
Lastly, Section 4 sums up the findings obtained from this survey.
II. Developments in the Money Market
A. Overview
The amounts outstanding in the money market remained flat , while
short-term interest rates, including term rates, remained stable at a low level
reflecting ample liquidity provision by the Bank, after showing a significant
decrease following the Lehman shock.
The volume has recently grown,
mainly because of the increase in repo transactions , while it is still at a level
below that prevailing prior to the Lehman shock (Chart 1).
Chart 1: Amounts Outstanding in the Money Market
▽ Cash Borro wing Side
350
tril. yen
300
250
200
150
100
50
0
CD/CP, CD/CP repos
Currency swaps
Repo transactions
Transactions with the BOJ's operations
Call (collateralized/uncollateralized) transactions
32
17
34
16
117
109
27
37
▽ Cash Lending Side
33
38
33
19
350
300
250
200
33
19
37
21
34
16
69
61
61
80
100
37
28
33
28
43
26
35
28
50
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
tril. yen
150
0
T-Bills
CD/CP, CD/CP repos
Currency swaps
Repo transactions
Call (collateralized/uncollateralized) transactions
65
58
28
31
54
63
115
34
106
36
82
70
80
66
25
37
21
30
20
44
68
62
60
77
26
26
25
27
20
44
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Among call transactions , the figures for un collateralize d call transactions are calculated as total
transactions through tanshi companies and non -group direct dealing (DD) transactions. The
source of data on transactions through tanshi companies is "Amounts Outstanding in the Call
Mone y Market " by the Bank of Japan (the sa me appl ies hereafter ).
4
B. Call Market
1. Overview
After showing a significant decrease following the L ehman shock, the
amounts outstanding in the call market (the collateralized and uncollateralized
call markets) generally remained at a low level (Chart 2).
There were two
main findings. First, the amounts outstanding in the uncollateralized call
market declined significantly immediately after the Lehman shock, mainly
because foreign banks faced difficulties in raising funds due to increased
caution regarding counterparty risks.
Thereafter, amounts generally remained
flat at a low level as perceptions of the abundance of liquidity remained strong
due to the Bank's provision of ample funds.
Second, the amounts outstanding
in the collateralized call market increased right after the Lehman shock,
mainly because regional banks and regional banks II shifted a significant
portion of their investing funds to the collateralized call market , reflecting
their preference for relatively safe investment.
virtually flat.
Thereafter, they remained
The ratio of the volume of the collateralized call market to the
total volume of call markets increased sharply right after the Lehman shock
and subsequently remained at around 60%.
Chart 2: Amounts Outstanding in the Call Market and
the Ratio of the Collateralized Transactions
40
Collateralized call
% 100
transactions
Uncollateralized call
90
transactions
Ratio of the collateralized call
80
transactions (right scale)
tril. yen
35
30
14.5
14.0
25
20
16.1
15
10
5
22.7
16.5
16.7
16.8
23.6
11.8
11.8
9.8
11.2
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Cash borrowing side.
5
70
60
50
40
30
20
10
0
2. Uncollateralized Call Market
The amounts outstanding in t he uncollateralized call market have generally
remained flat at a low level since the previous survey, as perceptions of the
abundance of liquidity remained strong due to the Bank's provision of ample
funds (Chart 3).
By sector, it can be noted that over the past year or so the
share of city banks, the largest cash borrowing sector in the market, increased
further.
It appears that efforts in the sector to increase the funding amount,
mainly through term transactions, to diversify counterparties and activate the
uncollateralized call market contributed to the increase.
The size distribution
of market participants by sector on the cash lending side has no t changed
significantly since the previous survey.
Chart 3: Amounts Outstanding in the Uncollateralized Call Market
▽ Cash Borro wing Side
25
20
3.2
15
10
Others
tril. yen
2.7
▽ Cash Lending Side
2.0
3.2
25
Securities companies
Foreign banks
Regional banks and regional banks II
City banks
15
7.6
10.3
5
1.9
2.2
1.3
9.6
5.5
20
5.7
0
2.1
3.0
1.8
4.7
1.8
2.1
1.7
4.1
10
1.7
1.6
1.2
5
6.2
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
tril. yen
Others
Keitou/Shinkin banks
Regional banks and regional banks II
6.0
2.6
3.8
6.6
2.4
8.1
Trust banks
City banks
4.3
3.4
5.2
2.1
3.2
3.2
2.9
2.0
2.4
0.5
1.9
2.1
2.9
0.7
2.6
2.1
1.8
2.3
0.4
companies (money market brokers) and direct dealing transactions outside the
group (DD transactions) shows that the share of the amounts outstanding of the
DD transactions to the total (hereafter the "ratio of DD transactions") has
continued to rise gradually since the previous survey and recent ly reached
A major reason behind this trend includes the fact that
city banks, with their relatively higher ratio of DD transactions, increased
their share of fundraising, while the share of regional banks and regional banks
II, with their relatively lower ratio, decreased.
By sector, we can see that the
ratio of DD transactions (on the cash borrowing side) of foreign banks rose as
6
2.2
2.1
2.8
0.5
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
A review of transaction type broken down into transactions through tanshi
about 60% (Chart 4).
3.2
their volume of funding in the uncollateralized call market showed a sharp
decline right after the Lehman shock, while the ratio of regional banks and
regional banks II recently declined to around 0% (Chart 5).
The ratio of city
banks generally remained at around 70%.
Chart 4: Amounts Outstanding in the
Uncollateralized Call Market
and Ratio of DD Transactions
25
20
Non-group DD transactions %
tril. yen
8.0
Transactions through Tanshi
companies
Ratio of DD transactions
(right scale)
10.1
15
Chart 5: Ratio of DD Transactions by
Sector
100 100
90
80
70
60
50
40
30
20
10
0
90
80
70
60
50
10
14.7
5
5.8
13.5
6.1
6.7
5.1
0
40
6.7
5.8
30
20
10
4.5
4.0
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Cash borrowing side.
With
regard
to
Foreign banks
City banks
Securities companies
Regional banks and regional banks II
%
Note: Cash borrowing side.
the
participation
of
financial
institutions
in
the
uncollateralized call market, the number of cash lenders has generally
remained flat since the previous survey after showing a significant decrease
right after the Lehman shock.
The share of the amounts outstanding held by
the top 10 players on the cash lending side in terms of the balance has
remained at about 50% since the previous survey.
On the other hand, the
number of cash borrowers continued to decline gradually after the Lehman
shock, and the share of the amounts outstanding held by the top 10 participants,
most of which are city banks, continued to increase and recently reached
nearly 80% (Charts 6 and 7).
To sum up, in the uncollateralized call market,
the decrease in the number of cash lenders seems to have come to a halt, while
such a declining trend on t he cash borrowing side remains, demonstrating that
the influence of city banks and other major players on the market continues to
grow.
7
Chart 6: Number of Participants in the
Uncollateralized Call Market
120
Chart 7: Share of the Amounts
Outstanding Held by the
Top 10 Market Participants
number of respondents
100
Cash borrowing
100
Cash lending
80
60
70
40
60
20
50
0
40
As of End-July
2010
Cash borrowing
90
80
As of End-July
2008
%
Cash lending
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
As of End-July
2012
Note: Number of respondents covered by the surve y
since 2008 (excludin g tanshi companies and
asset manage ment companies ) for which the
amounts outstanding of uncollateralized call
transactions can be confirmed at each point in
ti me (excluding intragroup DD). Adjusted
for the impact of mergers between financial
institutions.
Note: The categories are the same as in Chart 6.
Immediately after the Lehman shock, credit lines for uncollateralized cash
lending transactions declined sharply reflecting the heightened caution about
counterparty risks among Japanese financial institutions.
This survey
examined changes in the number of credit lines established for such
uncollateralized cash lending transactions, and found that a very gra dual
movement toward reduction continued, while the abrupt narrowing-down seen
immediately after the Lehman shock had not been observed since then (Chart
8).
Concerning these recent trends, some market participants that had
reduced their credit lines since the previous survey stated, "We adjusted the
number of credit lines according to the trade records, as the number of cash
borrowers in the uncollateralized call market has declined and is not expected
to rebound for the time being."
8
Chart 8: Number of Credit Lines Established
100
90
80
70
60
50
40
30
20
10
0
100 = end-July 2008
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July
2008
2009
2010
2011
2012
Note: Number of respondents whose total number of credit lines
established can be confirme d for all ye ars from 2008 to 2012.
3. Collateralized Call Market
The amounts outstanding in the collateralized call market generally
remained flat after increasing significantly immediately following the Lehman
shock (Chart 9).
The trend in the trade volume share of major cash lenders by
sector since the previous survey shows that regional banks and regional banks
II have continued to increase their trade volume reflecting a preference for a
relatively safe investment, while cash lending activities by tanshi companies
have decreased.
On the cash borrowing side, the trade volume share of tanshi
companies has increased significantly while those of other sectors, such as city
banks and securities companies, have continued to decrease.
As just
described, in the collateralized call market, in a situation where there exists a
mismatch between supply and demand, tanshi companies compensated for the
mismatch by increasing the net funding amount in the market and the cash
lending amount in other markets.
This trend was also observed under the
Bank's quantitative easing policy from 2002 to 2006.
9
Chart 9: Amounts Outstanding in the Collateralized Call Market
▽ Cash Borro wing Side
18
tril. yen
Tanshi companies
Securities companies
Regional banks and regional banks II
▽ Cash Lending Side
Others
Foreign banks
City banks
18
16
16
14
14
12
10
8
6
4
2
0
Tanshi companies
Others
Trust banks
Regional banks and regional banks II
City banks
tril. yen
9.1
10.1
6.8
6.5
1.4
2.4
1.6
1.9
1.3
1.5
1.3
1.4
3.2
3.4
3.5
2.8
11.6
5.3
12
11.8
10
5.5
1.2
0.9
2.7
2.7
6
4
2
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
3.2
3.2
7.1
7.1
4.5
4.5
5.3
8
1.3
0.9
4.7
6.6
7.2
6.8
0.2
0.2
1.9
6.5
2.9
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
With regard to the participation of financial institutions in the collateralized
call market, the number of cash lenders has remained at around 60 since the
previous survey after increasing significan tly following the Lehman shock,
partly because regional banks and regional banks II entered the market.
In
these circumstances, the share of the amounts outstanding held by the top 10
players on the cash lending side , most of which are trust banks, declin ed to
70% from the 100% prevailing prior to the Lehman shock.
On the other hand,
the number of cash borrowers has continued its gradual decline since the
Lehman shock, similar to the pattern in the uncollateralized call market, and
the share of the amounts outstanding held by the top 10 players, most of which
are city banks, has increased to exceed 90% (Charts 10 and 11).
As just
described, the number of cash lenders in the collateralized call market
increased after the Lehman shock as they sought an opportunity to invest
short-term funds, but the number of cash borrowers has continued to fall.
10
Chart 10: Number of Participants in the
Collateralized Call Market
70
number of respondents
Cash borrowing
Cash lending
Chart 11: Share of the Amounts
Outstanding Held by the Top
10 Market Participants
100
%
60
90
50
80
40
30
70
20
Cash borrowing
60
10
50
0
As of End-July
2008
As of End-July
2010
As of End-July
2012
Cash lending
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Number of respondents covered by th e surve y Note: The categories are the same as in Chart 10.
since 2008 (excluding tanshi companies and
asset manage ment companies ) for which the
amounts outstanding of collateralized call
transactions can be confir med at each point in
ti me. Adjusted for the impact of mergers
betwe en financial institutions .
C. Repo Market 1
1. General Collateral (GC) Repo Market
Although the amounts outstanding in the GC repo market continued to fall
after the Lehman shock, mainly because of reduced inventory financing
activities
among
securities
significantly (Chart 12).
companies,
they
have
recently
increased
With regard to recent trends by sector share, the
amounts outstanding of funds raised expanded among securities companies,
which are the major players on the cash borrowing side.
On the cash lending
side, the amounts outstanding of investments is increasing for all categories
including trust banks, which have the largest share.
1
A number of market
In this paper, the market for cash -collateralized securities lending transactions (so
called gentan repo) and securities repurchase transactions (so called gensaki repo)
is called the "repo market."
11
participants pointed out that a factor behind this increase in the amounts
outstanding in the GC repo market was that the fundraising methods of
securities companies are shifting from the Bank 's money market operations to
GC repos.
More specifically, many market participants commented, "As
money market operations with longer durations increased under the Bank 's
comprehensive monetary easing policy, we reduced fundraising activities
through the Bank's money market operations and increased those through GC
repo transactions to use collateral more efficiently."
In fact, while the
amounts outstanding of the variable-rate funds-supplying operations with
relatively short durations decreased, the amounts outstanding of repo
transactions increased (Chart 13).
Chart 12: Amounts Outstanding in the GC Repo Market
▽ Cash Borro wing Side
60
tril. yen
50
40
30
10.6
7.3
Tanshi companies/securities financing companies
Others
tril. yen
Securities companies (foreign)
60
Securities companies (Japanese)
Trust banks
50
City banks
12.0
24.4
11.7
24.8
8.3
20
10
12.1
13.8
12.0
▽ Cash Lending Side
8.3
8.0
9.9
5.6
9.0
8.1
14.4
40
30
7.9
10.6
10
0
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
7.8
10.3
4.1
20
14.2
11.8
Tanshi companies/securities financing companies
Others
Securities companies (foreign)
Securities companies (Japanese)
Trust banks
City banks
15.5
5.3
15.0
8.2
10.4
7.3
3.3
8.4
9.3
10.2
2.7
7.7
2.7
10.1
1.7
4.9
14.4
3.6
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
12
Chart 13: Amounts Outstanding of the Variable-Rate/ Fixed-Rate
Operations and the Amounts Outstanding in the Repo Market
70
tril. yen
60
Amounts outstanding of the
variable-rate operations
Amounts outstanding of the fixedrate operations
Amounts outstanding of the repo
market (right scale)
tril. yen
120
110
50
100
40
90
30
80
20
70
10
60
0
50
As of
As of
As of
As of
As of
As of
End-Dec. End-June End-Dec. End-June End-Dec. End-June
2009
2010
2010
2011
2011
2012
Sources: Bank of Japan, "Sources of Changes in Current Account Balances at the Bank of Japan Market
Operations (Final Figures) "; Japan Securities Dealers Association, "Balance of Bond Transactions
with Repurchase Agree ment s ( B y In vestor Type)," "Bond Margin Loans ".
With regard to the amounts outstanding of GC repo transactions by maturity
of transaction, overnight transactions still account for around 60% and term
transactions account for around 40% , as in the previous survey.
Furthermore,
with regard to the breakdown of overnight transactions by start date, as the
settlement cycle for JGB outright purchases was shortened in April 2012 by
one day, from a T+3 basis to a T+2 basis, the settlement cycle for most of the
overnight GC repo trades was also shifted from a T+2 basis to a T+1 basis
(Chart 14).
period.
The percentage of T+0 basis transactions decreased during this
By way of background, several market participants commented, "In
terms of funding costs, T+0 basis transactions are no longe r advantageous
compared with forward-dated transactions since the GC repo rates remain
stable at a low level.
This lower incentive and liquidity risk management
requirements led us to conclude adjustments of cash positions earlier than
before."
13
Chart 14: Amounts Outstanding of GC Repo Transactions by Term
▽ By Term
tril. yen
70
60
▽ By Start Date of Overnight Transactions
Open-ended transactions
%
Over one month
Over one week and up to and including one month
100
One week or less
Overnight transactions
90
Ratio of overnight transactions (right scale)
50
40
30
20
10
36.2
37.8
24.6
17.8
0
26.7
15.4
80
70
60
50
40
30
20
10
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
tril. yen
40
T+3 or more
%
T+2 (S/N)
100
T+1 (T/N)
90
T+0 (O/N)
80
T+0 (O/N) ratio (right scale)
35
30
25
20
15
2.3
28.1
31.1
17.8
12.6
10
5
0
2.3
3.0
3.3
2.8
23.7
11.4
1.6
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Cash borrowing side.
With regard to the participation of financial institutions in the GC repo
market, the numbers of both the cash borrowers and the cash lenders have
remained relatively stable at around 40, including during the period
immediately before and after the Lehman shock (Chart 15).
In this context,
the share of the amounts outstanding held by the top 10 players in terms of the
balance, most of which are major securities companies on the fund borrowing
side and trust banks on the lending side, remained stable a t around 70% on
both sides (Chart 16).
Thus, in the GC repo market, although the amounts
outstanding of transactions fell significantly after the Lehman shock, the
structure of market participants has not changed notably in terms of the
participation of financial institutions.
14
70
60
50
40
30
20
10
0
Chart 15: Number of Participants in the
GC Repo Market
60
number of respondents
Chart 16: Share of the Amounts
Outstanding Held by the Top
10 Market Participants
Cash borrowing
100
Cash lending
50
%
90
40
Cash lending
Cash borrowing
80
30
70
20
60
10
50
0
40
As of End-July
2008
As of End-July
2010
As of End-July
2012
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Number of respondents cov ered by the surve y
since 2008 (excluding tanshi companies, asset
manage ment companies , and so me securities
companies) for which the amounts outstanding
of GC repo transactions can be confirmed at
each point in time. Adjusted for the i mpact
of mergers between financial institutions .
Note: The categories are the same as in Chart 15.
2. Special Collateral (SC) Repo Market
The amounts outstanding in the SC repo market have remained more or less
flat at around 30 trillion yen since 2009 after a significant decrease in bond
borrowing transactions to cover short positions due to the large fall in JGB
outright purchases after the Lehman shock (Chart 17).
By sector share, no
drastic change has been seen in the share of the balance of transactions since
the previous survey, either on the bond borr owing side or the bond lending side.
Thus, securities companies that need to cover short positions when carrying
out JGB outright purchases and others at the client 's request hold a majority
share in the amounts outstanding of bond borrowing.
On the othe r hand, on
the bond lending side, trust banks that need to invest in JGBs for securities
trusts hold a large market share.
In connection with recent trends in the SC
repo market, some trust banks, which are the major entities involved in bond
lending, commented, "Although we have maintained the investment utilization
15
rate of JGBs held as trust assets by maintaining the amounts outstanding of SC
repos, the profitability of investments has declined, as securities companies '
demand for bond borrowing through the SC repos remains weak ."
Chart 17: Amounts Outstanding in the SC Repo Market
▽ Bond Borro wing Side
80
70
60
50
40
tril. yen
11.1
28.3
20
10
0
Tanshi companies/securities financing companies
tril. yen
Others
80
Securities companies (foreign)
70
Securities companies (Japanese)
11.5
City banks
60
10.1
50
40
23.3
30
6.7
30.0
▽ Bond Lending Side
21.2
6.8
12.5
10.1
11.3
13.1
7.5
12.6
13.5
10.1
30
20
12.1
10
12.4
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Tanshi companies/securities financing companies
Others
Securities companies (foreign)
Securities companies (Japanese)
Trust banks
City banks
10.0
13.8
5.3
19.6
20.3
8.5
6.2
7.0
6.8
2.6
11.4
3.4
1.8
14.2
3.1
6.9
9.1
2.2
1.9
15.2
14.5
4.5
4.0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
By maturity of transaction, term transactions continue to play a central role
in SC repo transactions (Chart 18).
This partly reflects strong demand to
reduce the rollover burden from the bond borrowing side (from s ecurities
companies in particular) and steadfast demand from the bond lending side
(particularly from trust banks) for bond lending with longer durations to
correspond to lengthening of the fund le nding period, given that short-term
interest rates -- including term rates -- remain stable at a low level.
However,
the percentage of overnight transactions is slightly higher than it was at the
time of the previous survey.
By way of background, many securities
companies, which are major players in bond borrowing, commented, "As
borrowers of bonds, we procure bonds flexibly according to our bond short
positions by shortening the maturity of trades, as many issues and a high
volume of bonds continue to be available from trust banks ."
Some trust banks,
which are major players in bond lending, commented, "We essentially prefer
term transactions given their high profitability and low administrative burden,
but we accept overnight bond lending to accommodate securities companies '
needs for the time being."
16
Chart 18: Amounts Outstanding of SC Repo Transactions by Term
80
tril. yen
%
Term
Overnight
Overnight ratio (right scale)
70
60
50
40
53.9
46.7
30
20
10
0
16.1
8.7
25.0
26.2
5.6
3.8
25.4
26.7
8.0
8.4
100
90
80
70
60
50
40
30
20
10
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Note: Bond b orrowing side.
With regard to participation in the SC repo market, first, the number of bond
borrowers has generally remained at around 30 (Chart 19).
Among these
borrowers, the share of the amounts outstanding held by the top 10 players in
terms of the balance has remained at around 70-80% (Chart 20).
On the bond
borrowing side, while the demand to cover short positions from securities
companies remains low as described earlier, the situation has not yet reached a
stage that would cause them to leave the market.
The number of bond lenders
has recently increased slightly after a significant drop following the Lehman
shock.
However, during this period, the share of the amounts outstanding
among the top 10 participants, most of which are trust banks, generally
remained stable in the 70-80% range.
17
Chart 19: Number of Participants in the
SC Repo Market
80
number of respondents
70
Chart 20: Share of the Amounts
Outstanding Held
by the Top 10 Market
Participants
100
Bond lending
Bond borrowing
%
90
60
50
80
40
70
30
Bond borrowing
Bond lending
60
20
50
10
40
0
As of End-July
2008
As of End-July
2010
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
As of End-July
2012
Note: Number of respondents covered by the surve y
since 2008 (excluding tanshi companies, asset
manage ment companies, and so me securities
companies) for which the amounts outstanding
of SC repo transactions can be confirmed at
each point in time. Adjusted for the i mpact
of mergers between financial institutions.
Note: The categories are the same as in Chart 19.
3. Legal Aspects and Haircut Behavior
We have focused thus far on the quantitative aspect of the repo market,
looking separately at the GC and the SC repo markets.
However, this survey
also examines legal aspects and haircut behavior for repo transactions in
general.
First, we examined the distribution of the amounts outstanding of the repo
transactions by form of contract. We found that (1) the percentage of contracts
called shin-gensaki contracts, which basically allow substitution of collateral
assets, is lower than 10%
2
2
and nearly 90% of transactions are still
Collateral substitution is a mechanism allowing a cash borrower to replace the
bond to be collateralized before the maturity of the trade based on the
counterparty's agreement.
This mechanism is expected to facilitate term
transactions for cash borrowers.
A "shin-gensaki" is a repo transaction under the "Master Agreement on the
Transaction with Repurchase Agreement of the Bonds, etc ." as revised in 2001. In
this paper, any repo transaction under the master agreement before this revision is
called a "kyu-gensaki."
18
cash-collateralized securities lending called gentan repos; and (2) nearly half
of transactions using shin-gensaki contracts do not allow substitution of
collateral assets (Chart 21).
not
become
a
more
As for the reason why collateral substitution has
widespread
practice,
several
market
participants
commented, "Given the administrative burden of both counterparties to
substitute collateral assets, the demand to use this practice is limited for the
time being."
Chart 21: Percentage of the Amounts Outstanding of Repo Transactions
by Form of Contract
4 .3 %
3 .5 %
4 .3 %
8 7 .9 %
G entan repo
Kyu - gens aki
Shin - gens aki(w ithou t s ubs titution)
Shin - gens aki(w ith s ubs titution)
The survey then asked whether haircuts were set or not and, if so, what was
the haircut level by collateral assets to examine the behavior in the domestic
repo market.
The results show that for repo transactions secured by JGBs,
which account for more than 99% of domestic repo transactions, a haircut was
set for only a very limited number of transactions, and the level at which the
haircut was set was very low, at 2% or less ( Chart 22).
As for the reason,
many market participants commented, "Since JGBs have maintained a high
degree of credibility, it is possible to control risks, through margin calls for
example, without setting a haircut."
In contrast, for repo transactions
collateralized by bonds other than JGBs, such as corporate bonds, it seems that
haircuts are basically implemented for all transactions at a relatively high
level of around 3-10%.
Thus, in the Japanese repo market, whether or not a
19
haircut is set and the haircut level are determined according to the risks of
collateral assets.
Chart 22: Haircut Setting Level
JGBs with coupons
Treasury discount
bills (T-Bills)
Inflation indexed
government bonds
Floating-rate
government bonds
General bonds
0.0-2.0%
No haircut
0.0-1.0%
0.0-1.5%
3.0-10.0%
Note: Based on the b alance as of the end of July 2012.
D. CP Market
In the CP market, the issuing environment deteriorated rapidly after the
Lehman shock against the backdrop of heightened risk aversion among
investors.
Thereafter it began to improve, partly because of the effects of the
Bank's special funds-supplying operations to facilitate corporate financing and
the comprehensive monetary easing policy.
conditions have continued.
On the whole, the stable
In these circumsta nces, the amounts outstanding
generally remained at the previous year 's level from 2011 to 2012 (Chart 23).
Chart 23: Amounts Outstanding of issued CP
25
Others
Special purpose companies
Business companies
Financial institutions
tril. yen
20
15
10
5
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Source: Japan Securities Depository Center, "Outstanding
Amounts of CP b y Issuer ’s category".
20
During this period, CP holdings among financial institutions remained flat
after falling following the Lehman shock, while spreads between CP and
treasury discount bills (T-Bills) have remained stable at low levels since the
previous survey (Chart 24).
By sector share, the amounts outstanding show
that city banks and tanshi companies, both of which are underwriters of CP,
hold 30-40% and nearly 20%, respectively, with the remaining balance held by
the end-investors (Chart 25).
This shows that the structure of market
participants in the CP market did not change after the Lehman shock.
Chart 24: Amounts Outstanding of
Financial Institutions' CP
Holdings
20
Others
%
Regional banks and regional banks II
100
Securities companies
Insurance companies
90
Trust banks
Tanshi companies
80
City banks
tril. yen
18
16
14
12
10
8
6
4
2
Chart 25: Share of the Amounts
Outstanding of CP
Holdings by Category
70
5.5
6.0
2.0
2.1
6.7
6.6
2.3
6.5
30.7
60
3.5
3.8
3.7
3.2
1.9
2.2
2.3
4.4
4.3
4.4
0
Others
33.0
24.4
29.6
29.4
25.6
14.9
17.1
18.3
34.6
33.9
35.1
15.6
50
40
11.2
11.3
36.8
37.3
30
20
10
45.2
Regional banks and
regional banks II
Securities
companies
Insurance
companies
Trust banks
Tanshi companies
City banks
0
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
As of As of As of As of As of As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
E. Yen Funding Activities with Foreign Investors
First, with regard to yen fund ing trades with overseas counterparties, the
amounts outstanding of trades executed to raise yen funds from overseas -such as by yen conversion -- generally remained flat within a range, as those
executed by securities companies increased while those affected by foreign
banks decreased 3 after the previous survey (Chart 26).
On the other hand, the amounts outstanding of yen investment trades with
3
Yen funding transactions with overseas parties are the total of conversion into
yen/conversion into foreign currency (including transactions with a term of more
than one year), Euroyen transactions, and yen lending transactions with the overseas
offices of financial institutions .
21
overseas counterparties, such as raising yen funds in exchange for foreign
currency, increased markedly among city banks in particular.
As for the
reason, many market participants cited the increase in U.S. dollar funding
through the conversion of yen into foreign currency, reflecting the growth in
loans to overseas, while the decline in new investments in dollar-denominated
bonds and securitization products due to deterioration of the investment
environment such as in overseas credit markets, had come to a halt.
Chart 26: Amounts Outstanding of Yen Fund Transactions with Overseas
▽ Yen Borro wing fro m Overseas
30
tril. yen
25
Others
Foreign banks
Securities companies (foreign)
Securities companies (Japanese)
City banks
20
15
10
5
0
9.1
4.1
2.6
3.3
▽ Yen Lending to Oversea s
7.9
11.9
8.4
2.9
2.2
4.7
10.8
13.4
1.5
1.8
4.5
100
90
80
70
60
50
40
30
20
10
0
3.3
2.5
5.2
4.3
2.2
4.0
2.8
4.1
5.4
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
Others
Trust banks
Regional banks and regional banks Ⅱ
Foreign banks
Securities companies (foreign)
Securities companies (Japanese)
Keitou/Shinkin banks
City banks
tril. yen
39.7
27.1
16.4
26.2
20.3
22.2
15.2
16.4
12.7
21.3
27.1
As of
As of
As of
As of
As of
As of
End-July End-July End-July End-July End-July End-July
2007
2008
2009
2010
2011
2012
F. Yen Overnight Index Swap Market
With regard to the yen overnight index swap (OIS) market, which is a major
short-term interest rate derivatives market, after the lifting of the Bank's
quantitative easing policy in 2006, the volume of transactions -- particularly in
transactions speculating on the cha nge in monetary policy -- increased sharply.
However, given the market consensus that short-term interest rates would
remain stable at a low level after the Lehman shock, the volume of transactions
decreased dramatically and most of the trades reflected an incentive among
securities companies to hedge the price volatility risk associated with their
JGB and derivative positions (Chart 27).
As a result, the amounts
outstanding in the market is currently about 100 trillion yen (Chart 28).
22
25.1
Chart 27: Volume and Number of Yen
OIS Transactions via Brokers
300
tril. yen
cases
250
200
800 1,000 tril. yen
Amount
700
Number of transactions
(right scale)
600
150
100
500
0
Jan.
2007
Jan.
2008
Jan.
2009
Jan.
2010
Jan.
2011
700
600
300
400
300
200
100
0
0
Jan.
2006
800
500
100
With clients
With banks/securities companies
(via brokers)
With banks/securities companies
(DD)
900
400
200
50
Chart 28: Amounts Outstanding in the
Yen OIS Market
Jan.
2012
As of End- As of EndMay 2007 July 2008
As of End- As of EndJuly 2011 July 2012
Source: Mone y Brokers Ass ociation.
As to the reasons yen OIS transactions are not active, in addition to the
abovementioned macroeconomic environment, market participants pointed out
that (1) the transactions are not very common among their client companies;
and (2) there is still much room for improvement in rates and trade volume
statistics related to such transactions.
G.
Market
Participants'
Attitudes
toward
Arbitrage
Trading
and
Operational Issues
We have focused thus far on the amounts outstanding of major transactions
in the money market.
In addition to this analysis, to understand whether the
market can function smoothly as a venue for lending and borrowing of funds, it
is important to ascertain what attitudes market participants have on such
transactions and the administrative structu re -- which can be characterized as
the market infrastructure -- behind the developments in trade volume.
On this point, first, with regard to their attitudes toward arbitrage trading,
short-term interest rates including term rates in general remain stab le and at a
23
low level, but no positive move ment has been seen since the previous survey,
as 80% of respondents commented that they "do not engage in arbitrage
transactions at all" 4 (Chart 29).
We asked the 20% of respondents who said
that they "basically engage in arbitrage transactions " or "do not engage in
arbitrage transactions frequently" about the specific nature of the transactions
in which they engaged.
Most of them listed (1) transactions to invest cash
collateral obtained by SC repos in GC repos; and (2) transactions to invest
funds obtained at a rate of 0.10% or lower in the call market in GC repos or
their current account balances at the Bank.
On the other hand, very few
respondents said that they engaged in arbitrage trading focused on distortions
in daily fluctuations in interest rates in different market s.
Chart 29: Stance on Arbitrage Transactions
Basically engage
in arbitrage
transactions
10%
Do not engage
in arbitrage
transactions
frequently
10%
Do not engage in
arbitrage
transactions at all
80%
Next, with regard to changes in the administrative structure for call and repo
transactions, the trend toward downsizing was seen obviously to have
weakened in comparison with the situation immediately after the Lehman
shock.
In addition, at this point in time, unlike the situation when
quantitative easing policy was being implemented, most respondents maintain
the administrative structure necessary to carry out transactions at both their
front and back offices.
4
For example, with regard to uncollateralized call and
The previous survey examined arbitrage transactions between the uncollateralized
call market and other short -term money markets, with 70% of the respondents
saying they "do not engage in such transactions at all" and 20% that they "do not
engage in such transactions frequently."
24
repo transactions, which were examined in the previous surveys, the number of
respondents who said they had "downsized" their administrative structure over
the past year has been decreasing.
Furthermore, with regard to the
collateralized call transactions, which were surveyed for the first time in this
survey, only a very limited number of respondents said that they had
"downsized" their administrative structure over the past year (Chart 30).
By
way of background, a number of market participants pointed out that because
there is a remuneration rate under the complement ary deposit facility -- unlike
the situation when the quantitative easing policy was being implement ed -some financial transactions are carried out to capture the divergence if the
market rate exceeds or falls below this rate.
Chart 30: Changes in Administrative Structure by Type of Transaction
▽ Uncollateralized Call
Transactions
▽ Collateralized Call
Transactions
▽ Repo Transactions
Downsized
Downsized
Downsized
No change
Enhanced
No change
Enhanced
2008→09
2008→09
2008→09
2009→10
2009→10
2009→10
2011→12
2011→12
2011→12
0%
50%
100%
0%
50%
100%
0%
No change
50%
Note: Surve ys regarding collateralized call transactions were not imple mented at the end of 2009
(balance between 2008 and 2009) and 2010 (balance between 2009 and 2010).
III. Measures Taken to Address Issues Surrounding the Money Market
Based particularly on the experience of deter ioration in the repo and JGB
market functions after the Lehman shock, since the previous survey market
participants have continued to proceed with examinations and actions with
regard to the issues under consideration.
Market participants recognize the
issues as matters that must be addressed by the market as a whole, including
the "widespread adoption of the fails practice for JGBs," the "enhancement of
risk management through a shortening of JGB settlement cycle, etc." and
25
Enhanced
100%
"Improving Robustness and Participation of Central Clearing of JGBs.
In
addition, the Great East Japan Earthquake, which occurred in March 2011,
resulted in greater recognition among market participants of the importance of
a BCP for the money market transactions in the event of a disa ster or other
emergency, and they are proceeding to strengthen their efforts.
A. Widespread Adoption of Fails Practice for JGBs
The fails practice was introduced in Japan in January 2001, when the Bank
made real-time gross settlement (RTGS) the sole sett lement mode.
However,
a number of market participants did not accept the fails practice because of a
lack of understanding of fails, given that they recognized a fail as a debt
default, and the administrative capacity to handle fails was underdeveloped .
Therefore, the number of firms that had adopted the fails practice was
insufficient.
In this situation, following the Lehman shock enormous debt
defaults occurred in JGB transactions, triggering a significant increase in fails,
and as a result, the time schedule of JGB settlements was significantly delayed
(Chart 31).
As a result, liquidity declined not only in the JGB market but also
in the repo market, which was assumed to be a relatively robust funding
channel as secured transactions, and market functi oning deteriorated notably
in these markets. This experience demonstrated the importance of ensuring that
the fails practice was adopted more widely, and boosted awareness of the need
to review the practice.
In May 2009, the Working Group concerning Revie w
of Fails Practice for Bond Trading was established as a subordinate
organization of the Japan Securities Dealers Association Bond Committee, and
examinations were held on appropriate measures to ensure that the fails
practice was adopted more widely whil e preventing the frequent occurrence of
fails under a cross-sectional review system.
was published in April 2010.
The working group 's final report
In addition, a partial revision of "The Japanese
Government Securities Guidelines for Real Time Gross Settl ement" was
publicly announced in June 2010, and the revised fails practice, including the
introduction of the fails charge trading practice, was implemented in
November 2010.
26
Chart 31: Basic Figures on Fails
1,800
tril. yen
cases
Number of fails
1,600
Face value (right scale)
1,400
1,200
5
4
1,000
3
800
600
2
400
1
200
0
6
Jan.
2008
Jan.
2009
Jan.
2010
Jan.
2011
Jan.
2012
0
Source: Bank of Japan, "Ba sic Figure s on Fails."
This survey investigated the level of acceptance for fails and the widespread
adoption of the fails practice for JGBs among market participants, given the
revisions made before and after the previous survey.
First, with regard to the level of acceptance for fails, 78% of respondents
said that they "accept fails."
In particular, all of the participants in the Japan
Government Bond Clearing Corporation (JGBCC), whose JGB settlement
amount is relatively large, said that they "accept fails" (Chart 32).
However,
the remaining 22% of respondents said they "do not accept fails," and some of
them commented as follows: "We do not want to accept fails if at all possible,
because we have not experienced any fails yet, and administrative tasks such
as paying or receiving the fails charge trading practice cause exceptionally
large handling costs."
However, the volume of JGBs these respondents settle
is relatively small, and their share of JGB settlement transactions amounts to
only 0.3% of the total (Chart 33).
27
Chart 32: Level of Acceptance for Fails
Chart 33: Level of Acceptance for Fails
Weighted by Number of
Settlements in the JGB Market
Do not
accept fails
22%
Do not
accept fails
0.3%
Accept fails
78%
Accept fails
99.7%
Note: Weighted average of the surve y respondents'
answers using the nu mber of J GB deliver y
versus p ayment (DVP ) settlements as of July
31 2012.
In addition, with regard to the degree of adoption of the fails practice for
JGBs as a whole, 64% of respondents said that it "has been adopted
sufficiently widely," while 13% said it "has been adopted to a certain degree ."
Thus, nearly 80% of respondents suggested that the fails practice had been
adopted to some degree (Chart 34).
Nevertheless, 6% of respondents said
"adoption is still insufficiently widespread ."
As described earlier, these
respondents cited the reason that some investors in certain markets avoid fails
because they have never experienced them .
Chart 34: Adoption of the Fails Practice
Adoption is
still
insufficiently
widespread
6%
Others
16%
Has been
adopted
sufficiently
widely
64%
Has been
adopted to a
certain degree
13%
28
As just described, the number of fails in Japan is quite small, partly because
market participants try to avoid fails in advance, and some market participants
have never experienced fails.
The situation is quite different from that
prevailing in the United States, where fails occur much more frequently than in
Japan and market participants take action in accordance with the fails practice
on a daily basis.
However, it is still possible to conclude that the fails
practice has generally been adopt ed in Japan, in the sense that major
participants in the JGB and the repo markets have accepted this practice.
B. Shortening of the Payment and Settlement Period for JGBs
As mentioned previously, when the Lehman shock occurred, enormous debt
defaults occurred in JGB transactions, triggering a significant increase in the
number of fails.
In these circumstances, market participants attempted to
dispose of the enormous volume of fails, and engaged in the procurement and
disposal of JGBs pledged as collateral to reestablish fund and JGB positions,
which were determined to be unavailable for payment or receipt through
close-out netting for repo transactions.
Based on this experience, market
participants started to place a greater emphasis on recognizing liq uidity risk,
which makes it impossible to receive funds or securities as planned when the
market faces significant stress and debt defaults and/or fails occur.
To effectively prevent/resolve these risks and the confusion they entail, it is
effective to reduce the unsettled amount of bonds and accelerate the
dissolution of fails.
Market participants understand that shortening of the
payment and settlement period for JGBs is essential to achieving these
objectives.
In September 2009, the Working Group on Shortening of JGB
Settlement Cycle was established under the Council on Reform of Delivery and
Clearing/Settlement of Securities and the Forum on Reform of Securities
Clearing and Settlement System to promote securities settlement system
reforms.
Since then, discussions have been held on basic issues and the
concepts underlying settlement practices/trading administration to promote a
shortening of the payment and settlement period for JGBs through related
market infrastructure and a broad range of market participants.
In November
2011, the "Working Group on Shortening of JGB Settlement Cycle Final
29
Report" was published, summarizing the results of examinations carried out by
the working group over nearly two years.
It contained the following
suggestions: (1) the payment and settlement period for JGB outright purchases
should be shortened to a T+2 basis from April 2012; and (2) deliberations
should be resumed on a further shortening of the payment and settlement
period for JGB outright purchases from T+2 to T+1 in the second half of fiscal
2012, with the goal of starting such implementation as early as possible in
2017 or later.
In response, the settlement for JGB outright purchases was
shortened to a T+2 basis on April 23 2012, and the working group was
relaunched in October 2012 to advance deliberations aimed at shortening the
settlement for JGB outright purchases to a T+1 basis.
Given these circumstances, this survey investigated the transition to T+2 for
the settlement for JGB outright purchases.
It also examined the shift of a
common settlement cycle for repo transactions (T+3 to T+2 for SC repos, and
T+2 to T+1 for GC repos) and the impact of the shifts on the volume of
transactions in the money market.
In terms of results, concerning the transition to T+2 for the settlement for
JGB outright purchases, 98% of respondents said that the "transition was made
smoothly" or the "transition was largely smooth ," confirming the smooth
transition (Chart 35).
Chart 35: Transition to T+2
Others
2%
Transition
was largely
smooth
1%
Transition
was made
smoothly
97%
30
To confirm how the shift of settlement cycle in the repo market proceeded,
we focused on the timing of the contract with reference to the start date of the
transaction.
First, we can see that before the transition most SC repo
contracts were executed on the morning of the day three business day s prior to
the start date (S-3), after the transition, but most were executed on the morning
of the day two business days prior to the start date (S -2).
Thus, the timing of
contract execution was generally postponed by about one business day (Chart
36).
In this context, most GC repo contracts before the transition were also
executed on the afternoon of the day three business days prior to the start date
(S-3), but most are now executed on the afternoon of the day two business days
prior to the start date (S-2); thus, their timing has generally been postponed by
about one business day.
This shows that the shift in the common settlement
cycle for repo transactions implemented in response to the reduced settlement
period for JGB outright purchases to T+2 has advanced smoothly.
Chart 36: Shift in the Timing of the Repo Contract
▽ SC Repos
100
90
80
70
60
50
40
30
20
10
0
▽ GC Repos
%
100
90
80
70
60
50
40
30
20
10
0
Before transition to T+2
After transition to T+2
AM
PM
S-3
AM
PM
S-2
AM
PM
S-1
AM
PM
S
%
Before transition to T+2
After transition to T+2
AM
PM
S-3
AM
PM
S-2
AM
PM
S-1
AM
PM
S
With regard to the impact of this shortening of the payment and settlement
cycle on the volume of money market transactions, 99% of respondents said
that they were "not specifically affected" (Chart 37).
From this, it can b e
concluded that this shortening of the settlement period did not lower market
liquidity.
31
Chart 37: Impact of Shortening to T+2 on the Volume of Money Market
Transactions
Affected 1%
Not specifically
affected
99%
The shortening of the payment and settlement cycle is a measure taken to
contribute to the stability and efficiency of the JGB and money markets.
This
has been achieved through support measures such as mitigating settlement
risks by reducing the unsettled amount for contracted trades and accelerating
actions to resolve fails.
In addition, given that the payment settlement period
for government bond outright purchases has already been shortened to T+1 in
countries such as the United Kingdom and the United States, realizing a
reduced T+1 period in Japan may also strengthen the competitiveness of
Japanese financial markets.
Although it appears that some issues remain to
be resolved to accomplish the shortening to T+1 rather than T+2, going
forward it is expected that market participants will deepen their understanding
of the significance of shortening the payment and settlement cycle for JGBs,
and that they will make steady progress in their efforts to achieve a shortened
T+1 period.
The Bank aims to continue providing positive support to these efforts.
C. Improving the Robustness and Participation of Central Clearing of
JGBs
When the Lehman shock occurred, market participants reiterated the
importance of the functions of a central clearing, including their guarantee of
settlement, from the perspective of dealing smoothly with debt defaults and
fails and reducing counterparty risks.
In this context, the JGB CC faces a
range of issues in regard to further enhancing the existing functions of central
32
clearing of JGBs and using such functions more effectively by expanding the
number of participants.
The Bank supports the JGBCC 's efforts in these
areas.
As part of its efforts, the JGBCC announced in September 2010 that it was
boosting collaboration with the Japan Securities Clearing Corporation to
proceed with activities to enhance governance, and in November 2010 it
clarified the fail assignment rules with its clearing participants in line with the
revision of the fails practice.
The JGBCC is also continuing with
deliberations to enhance its fundraising scheme in the event of an emergency.
Moreover, as part of its efforts to expand participants, it agreed with trust
banks, which are major players in the JGB and repo markets, on the basic
scheme of their participation,
characteristics.
with due consideration given to their
The JGBCC and trust banks are developing systems for
participation, which is expected to begin in the first half of 2014.
Given these circumstances, this survey asked respondents who are not
JGBCC participants about their views on participation in the JGBCC.
Although no new respondent had participated in the JGBCC since the previous
survey, some respondents said that they "plan to participate" or are
"considering participation," including the trust banks mentioned previously.
To capture the approximate quantitative impact of such an expansion in
JGBCC participants, we estimated the percentage of the transaction volume
cleared by the JGBCC against the entire market under certain assumptions.
We found that the percentage of transactions cleared by the JGBCC, which is
now 46%, would rise to 80% if all respondents that plan to participate or ar e
considering participation were added, including trust banks, which are major
JGB lenders in the SC repo market 5 (Chart 38).
5
The estimated figures were obtained by multiplying the outstanding balance of
repo transactions among JGBCC participants (and those planning to
participate/considering participation) on the fund lending (bond borrowing) and fund
borrowing (bond lending) sides, respectively. (For the purpose of calculation, their
share was divided into the share of the outstanding balance of funds managed by
counterparty business category and the share of the outstanding balance of funds
raised by business category.) Because these are only approximate trial calculations
based on the outstanding balance figures obtained by this survey, some leeway
should be allowed.
33
Chart 38: Ratio of Repo Transactions among JGBCC Participants
(Trial Calculation)
Respondents not
considering
participation
Existing
participants
80%
Respondents
that plan to
participate/are
considering
participation
46%
Note: Based on the balance as of the end of Jul y 2012.
D. Enhancing Effectiveness of the BCP
Although the Great East Japan Earthquake of March 2011 occurred
following the previous survey, inflicting enormous social and economic
damage on the country, the settlement system and financial institutions
continued to operate smoothly even after the earthquake took place, and they
maintained their normal functions as the financial infrastructure.
By way of
background, in addition to the efforts of financial institutions located in
disaster-stricken areas to maintain their financial and settlement functions,
patient efforts by the domestic payment and settlement infrastructure and
financial institutions to enhance the effectiveness of their BCPs seem to have
made a significant contribution.
In these circumstances, awareness of the
importance of BCPs in the money market has increased among market
participants to a higher level than before, and moves to strengthen BCP efforts
have become more widespread.
Given this situation, the survey investigated the financial institutions'
efforts regarding their BCPs.
With regard to BCP efforts related to money market transactions following
the earthquake, 63% of respondents with departments involved in money
market activities in Tokyo and 46% of all respondents said that they had
strengthened their efforts (Chart 39).
The specific strengthening measures
they listed included (1) upgrading and reviewing the organizational status of
34
the backup system in the Tokyo metropolitan area and Osaka, including
revising their BCPs and related training; (2) reviewing and revising their
emergency response manual and other internal rules; and (3) relocating
departments involved in money market transactions.
Chart 39: BCP Efforts Relating to Money Market Transactions after the Great East
Japan Earthquake
▽ Respondents with Departments
Involved in Transactions in Tokyo
Have not taken any
strengthening measures
and do not plan to do so
Have not taken any
strengthening
measures and do not
plan to do so
21%
Considering
strengthening
measures
▽ All Respondents
38%
Had
strengthened
their efforts
46%
Had
strengthened
their efforts
63%
16%
Considering
strengthening
measures
16%
As part of a quantitative analysis of efforts regarding BCPs, we calculated
the functional loss ratio, defined as the "ratio of the amounts outstanding of
respondents who said they would be unable to carry out transactions, even if
their backup sites are went into operation, to the market as a whole if the
functions of the Tokyo office were lost (even if settlement infrastructure
including the BOJ-Net is operating and market transactions and funding
settlements are available) in the early morning on a weekday," separately for
the uncollateralized and the collateralized call and the repo transactions.
The
results show that the functional loss ratio on the cash lending side, and in the
call markets in particular, would be higher than the ratio on the cash borrowing
side (Chart 40).
This implies that the way in which the market as a whole
compensates for the existing gap in the functional ratio on the cash borrowing
and the cash lending sides is a major issue that should be addressed in BCP
efforts.
35
Chart 40: Functional Loss Ratio in the Disaster Period
40
%
Cash borrowing
35
Cash lending
30
25
20
34.1
15
10
5
0
5.6
9.6
11.2
Uncollateralized Collateralized
call transactions call transactions
17.2
19.7
Repo
transactions
Note: Based on the balance as of the end of July 2012.
In addition, if we aggregate the amounts outstanding of each respondent 's
transactions in the call markets, adjusting for their attitudes toward trades
immediately after the loss of Tokyo offi ce functions as described earlier, the
following observations can be made.
While respondents that said, "If it is
possible to confirm that some business partner s in normal times are available,
will basically borrow funds in the call market" or "If it is possible to confirm
that most market participants are available for transactions, will basically,
borrow funds in the call market" accounted for 91% of the total on the cash
borrowing side, the corresponding percentage of respondents on the cash
lending side was only 49% (Chart 41).
As shown earlier, coupled with the
fact that the functional loss ratio is greater on the cash lending side in the call
market, this implies that some issues remain outstanding to ensure call market
functions when BCPs are implem ented.
36
Chart 41: Stance on Transactions Immediately after a Disaster in the Tokyo
Metropolitan Area
―Stance on borrowing/lending transactions in the call market if the functioning of the Tokyo
market deteriorates in the event of an earthquake directly beneath the Tokyo metropolitan
area (early morning on a weekday) (assuming that settlement infrastructure including the
BOJ-Net is operating and market transactions/fund settlements are available).
▽ Cash Borro wing Side
Do not borrow large amount of
funds in the call market, even
in normal times
1.7%
Will temporarily
refrain from
borrowing funds
in the call market
regardless of the
damage to other
market
participants
6.4%
If it is possible to confirm
that most market
participants are available for
transactions, will basically
borrow funds in the call
market
11.8%
▽ Cash Lending Side
Others
0.9%
Do not lend large
amount of funds in
the call market,
even in normal
times
1.4%
79.2%
Others
21.1%
28.9%
If it is possible to confirm
that some business partners
in normal times are
available, will basically
borrow funds in the call
market
Will temporarily refrain
from lending funds in
the call market
regardless of the
damage to other market
participants
If it is possible to confirm
that some business partners
in normal times are
available, will basically
lend funds in the call
market
23.0%
25.7%
If it is possible to confirm
that most market
participants are available
for transactions, will
basically lend funds in the
call market
Note: Weighted average of the surve y respondents' answers using the amounts outstanding of
uncollateralized /collateralized call transactions as of the end of July 2012.
With regard to how they could strengthen their BCPs, several re spondents
commented that it was desirable for the market as a whole to improve the
effectiveness of BCPs through industry-wide efforts, such as sharing action
guidelines when their BCPs were put into practice and the implementation of
joint training.
The Bank will continue to provide positive support for the
market participants' efforts to strengthen their BCPs.
37
IV. Conclusion
This paper reviewed recent developments in money market transactions in
Japan and examined how a number of related issues we re being addressed,
based on the results of the Tokyo Money Market Survey (August 2012) .
The money market is the venue where financial institutions raise liquidity
and invest excess funds.
Therefore, the potential feasibility of carrying out
such transactions smoothly in the market can be used as an indicator to assess
how well the market is functioning.
Although this is difficult to capture
directly from the observed data, it can be assumed to a certain degree based on
the findings of this survey, inclu ding (1) attitudes regarding transactions; (2)
trends in factors that play a role in terms of market infrastructure , such as
administrative structure and credit line-setting behavior; and (3) trends in the
amounts outstanding of transactions.
In other wor ds, if market participants
have positive attitudes regarding transactions, and if market infrastructure is
maintained, it should be possible to carry out transactions in the market more
smoothly.
Furthermore,
such
attitudes
on
transactions
and
market
infrastructure should be maintained more readily if active trading takes place
in the market.
Based on this idea, a review of trade developments in the domestic money
market since the previous survey uncovers no sign of market participants '
attitudes becoming more active in terms of arbitrage trading, and shows that
the amounts outstanding of transactions remains below the level prior to the
Lehman shock.
This is because short -term rates, including term rates, remain
stable at a low level due to the provisio n of ample funds by the Bank.
In
these circumstances, moves to downsize the administrative structure have not
come to a halt, although they are clearly progressing more slowly than they
were immediately after the Lehman shock.
Furthermore, the number of credit
lines established for uncollateralized trades has continued to decline, albeit
very gradually.
However,
under the
complementary deposit
facility,
since
financial
transactions occur when the market interest rate exceeds or falls below the
remuneration rate on reserve balances -- unlike when the quantitative easing
policy was being implemented -- certain administrative structures required to
carry out transactions in the short-term money market and credit lines for
38
uncollateralized trades are being maintained.
In addition, as the Bank
increased the percentage of longer-term funds-supplying operations under its
comprehensive monetary easing policy, the major fundraising method adopted
by securities companies shifted from the Bank 's operations to GC re po
transactions, resulting in a recent increase in money market transactions.
In
this context, some market participants are taking a longer -term perspective in
anticipation that the market will become more active.
Given the findings of this survey descr ibed above, conditions that
reasonably support smooth trading seem to have continued in the domestic
money market, as the venue for raising liquidity or investing excess funds as
appropriate, while monetary easing has become more widespread since the
previous survey.
In fact, some market participants commented that the
formation of short-term interest rates is less likely to be excessively affected
by sudden events, compared with the period when the quantitative easing
policy was being implemented.
In thi s sense, it seems unlikely that the
functions of the Japanese money market have suffered significant damage at
this point in time.
With regard to the challenges faced by the domestic money market, efforts
have intensified since the previous survey in reg ard to issues recognized as
market-wide challenges given the experience of the Lehman shock.
These
efforts include the widespread adoption of the fails charge trading practice for
JGBs, the shortening of the payment and settlement period for JGBs, and the
improvement of robustness and participation of central clearing of JGBs.
Looking at these efforts individually, the fails practice is being adopted,
particularly among major participants in the JGB and the repo markets, since
the review conducted in November 2010, including the introduction of the fails
charge trading practice.
With regard to shortening the settlement cycle for
JGB outright purchases, T+2 basis outright purchases and T+1 basis GC repo
trades were realized smoothly in April 2012.
Deliber ations are ongoing to
shorten the settlement cycle to a T+1 basis for JGB outright purchases.
In
addition, regarding the improvement of robustness and participation of central
clearing of JGBs, the JGBCC continues to consider enhancing the fundraising
scheme for emergencies and advancing system development to prepare for the
participation of trust banks, which is scheduled for the first half of 2014.
39
As for BCP-related efforts regarding money market transactions, the
importance of which was further highl ighted after the Great East Japan
Earthquake, a number of financial institutions have already strengthened their
activity, but further efforts may be necessary to secure money market
functioning, even after BCPs are put into practice.
This can be done, for
example, by improving the effectiveness of the BCP for the market as a whole.
The Bank plans to conduct this survey each year based on market
participants' needs to assess market trends more precisely and follow up on the
challenges in the market.
Based on the results of the survey, the Bank intends
to provide support for market participants ' efforts as they relate to issues in the
money market.
40