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The outstanding balance of securities issued by the Japanese government was JPY 461 trillion (USD 3.5 trillion) at the end of 2001, which comprised JPY 387 trillion (USD 2.9 trillion) in JGBs, JPY 31 trillion (USD 236 billion) in treasury bills (TBs) and JPY 43 trillion (USD 327 billion) in financing bills (FBs). The value of JGB transactions in the over-the-counter (OTC) market reached JPY 3,863 trillion (USD 31.8 trillion) during 2001, accounting for 95% of cash bond transactions.28 The volume of JGB transactions effected through a variety of screen-trading systems began to grow from mid-2000.

Repo transactions29 are actively made between various entities including securities companies, banks, insurance companies, investment trusts and other corporations. Prior to April 2001, there were two types of repo transactions in the Japanese repo market, namely gensaki (buy/sellback transactions which did not incorporate risk management measures such as margining and closeout netting) and cash-collateralised bond lending.

The JGB lending market has grown tremendously since the abolition of restrictions on cash-collateralised bond lending in 1996, and cash-collateralised bond lending is currently the predominant transaction in the repo market. At the end of 2001, the outstanding amount of bond lending transactions totalled JPY 46.4 trillion (USD 353 billion), of which the bulk - JPY 40.2 trillion (USD 306 billion) - consisted of cash-collateralised bond lending.

In addition to the two types of repo transactions above, a new type of repo transaction (repurchase agreement), which is almost the same as repos in the US and European markets, was introduced to replace gensaki in April 2001.After the introduction of repurchase agreements, gensaki transactions were abolished in March 2002.

4.2.2 Clearing and settlement

There is no major trade confirmation system or clearing system for JGB transactions in the OTC market. However, there are plans to extend the confirmation services offered in the pre-settlement matching system operated by JASDEC to include JGB transactions. Also, market participants and relevant parties have been conducting a feasibility study for the introduction of a CCP mechanism in OTC JGB transactions.

There are two arrangements for the settlement of JGBs without physical delivery: the JGB Registration System and the JGB Book-entry System. Physical delivery of certificates is also possible, but rarely occurs.

27

JGB transactions include those involving both treasury bills (TBs) and financing bills (FBs). 28

Total of purchases and sales including gensaki transactions.

The JGB Registration System was introduced in 1906 with the Bank of Japan as the registrar, based on the Law Concerning Government Bonds. In this system, registrations are made on the book kept at the registrar, so that JGBs are transferred without physical delivery. Participants are not limited to financial institutions; any JGB holder can use the system. In recent years, participants have been shifting their holdings of JGBs from the JGB Registration System to the JGB Book-entry System, due largely to the relevant tax reforms.30

The JGB Book-entry System was introduced in 1980 in response to the rapid growth of the volume of JGB transactions and their settlement. It is a tiered system, consisting of direct participants, indirect participants, foreign indirect participants, customers and the depository, namely the Bank of Japan. There are requirements set by the Bank of Japan for participation in the JGB Book-entry System (see Section 1.2.2). Direct participants, indirect participants and foreign indirect participants include financial institutions such as banks and securities companies. The deposit rate31 in the JGB Book-entry System was 99% at the end of 2001.

The daily average volume and value of transactions settled during 2001 were 11,500 transactions and JPY 42 trillion (USD 346 billion) for the JGB Book-entry System, and 94 transactions and JPY 60 billion (USD 494 million) for the JGB Registration System.

JGB transfers under the JGB Registration System and the JGB Book-entry System are processed through the BOJ-NET JGB Services, an online system for the transfer of JGBs, owned and operated by the Bank of Japan. The BOJ-NET JGB Services began operation in 1990, and the DVP mechanism was introduced in 1994 by connecting the BOJ-NET JGB Services with the BOJ-NET Funds Transfer System.

Participants in the JGB Registration System or the JGB Book-entry System can give instructions regarding JGB delivery to the Bank of Japan, either in paper form or online through the BOJ-NET JGB Services. At the end of 2001, the number of users of the BOJ-NET JGB Services was 360 for the JGB Book-entry System and 398 for the JGB Registration System. Operating hours of the BOJ-NET JGB Services are from 09:00 to 16:30.

Since 1997, settlement of JGB transactions has been taking place on a T+3 basis.32 Before rolling settlement was introduced in 1996, JGBs were settled in principle on the 5th, 10th, 15th, 20th, 25th and the last business day of every month as a market practice in which the average period between trade and settlement was around seven days.

4.2.2.1 Changeover to the RTGS system

The Bank of Japan provided two different modes for settlement of JGBs - real-time gross settlement (RTGS) and designated-time settlement - until January 2001, when it abolished designated-time settlement and made RTGS the only available mode for settlement. After the changeover, settlement through the BOJ-NET JGB Services took place on an RTGS basis with the following three exceptions, which were settled simultaneously at 15:00: (1) transactions involving JGBs kept in custody with the Bank of Japan by foreign central banks and international organisations; (2) JGB issuance for which payments are made online; and (3) JGB transactions involving the Bank of Japan or the government as the buyer or borrower, and outright purchases/sales of TBs/FBs in the Bank’s open market operations. In April 2001, however, the Bank of Japan published its Schedule for Additional Measures Relating to Real-Time Gross Settlement of Japanese Government Securities Transactions, in which it laid out a schedule for switching to RTGS for these types of transactions. Switching has been proceeding according to this schedule (for example, JGB issuance for which payments are made

30

The exemption from withholding tax on interest payments on JGBs is granted only to book-entry JGBs held by designated financial institutions, and by non-residents of Japan and foreign corporations.

31

The ratio of the outstanding amount of book-entry JGBs, TBs and FBs to the total outstanding amount of JGBs, TBs and FBs. That of registered JGBs was 0.7%. Both TBs and FBs can only be held in the JGB Book-entry System.

online (ie (2) above) has been processed on an RTGS basis since June 2002), and so far the majority of these exceptions have been removed.33

4.2.2.2 Liquidity-saving facility

To facilitate smooth settlement of a large volume of JGB transactions on a real-time DVP basis, the Bank of Japan started providing a liquidity-saving facility, or simultaneous processing of DVP and collateralisation (SPDC), with the changeover to the RTGS system in January 2001.

Using SPDC, a participant in the BOJ-NET JGB Services may post the securities traded in DVP transactions as collateral to the Bank of Japan to obtain an intraday overdraft needed for payments for the transactions concerned. For example, in the case of JGB purchases, a buying participant is able to do the following at the same time: (1) receive JGBs from a seller; (2) pledge these JGBs to the Bank as collateral for an intraday overdraft; (3) draw the intraday overdraft from the Bank; and (4) pay for the JGBs received from the seller with the intraday overdraft. A selling participant is able to do the following at the same time: (1) receive the pledged JGBs from the Bank; (2) deliver these JGBs to a buyer; (3) receive from the buyer the proceeds from the JGBs sold; and (4) repay the intraday overdraft to the Bank with the proceeds received in (3). These two sets of processes take place at the same time when both the buyer and the seller of the JGBs use SPDC.34

To use SPDC, a participant in the BOJ-NET Funds Transfer System must open a special current account at the Bank of Japan, separate from its ordinary current account. A participant may transfer funds between the ordinary current account and the special current account for SPDC. The use of special current accounts is limited to the operating hours of the BOJ-NET JGB Services, which are shorter than those of the BOJ-NET Funds Transfer System (see Section 3.5.4). Participants are required to return the balance of their special current accounts to zero prior to the BOJ-NET JGB Services’ closing time.

4.2.2.3 Conversion to the New JGB Book-entry System

From 27 January 2003, the JGB Book-entry System is scheduled to begin operations under the Transfer of Corporate Debt Securities Law enacted in June 2002, although this is subject to the fulfilment of certain conditions, such as the Bank’s designation as an eligible operator (“transfer institution”) by the competent ministers. Under the new system, JGBs, TBs and FBs will be fully dematerialised (rather than immobilised as in the existing system), and transfer of these securities will be effected by book entries based on the new law, while the basic mechanism of settlement will not change. The conversion to the new system will achieve greater efficiency of safekeeping and settlement of JGBs, TBs and FBs. It will also make the legal structure of book-entry transfers easier to understand than under the existing system, in which book-entry transfers are governed by contracts between the Bank and system participants under general private laws.