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The Role of REPO Market for Government Bond Market

The Role of REPO Market for Government Bond Market. Merrill Lynch Japan Incorporated Jun Ono July 25, 2000. Over view. Static of JGB Outstanding volume (source JSDA). Over view (continued). Static of Cash JGB Transaction volume (source JSDA). Over view (continued).

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The Role of REPO Market for Government Bond Market

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  1. The Role of REPO Market for Government Bond Market Merrill Lynch Japan Incorporated Jun Ono July 25, 2000

  2. Over view • Static of JGB Outstanding volume (source JSDA)

  3. Over view (continued) • Static of Cash JGB Transaction volume (source JSDA)

  4. Over view (continued) • Static of REPO Outstanding volume (source JSDA)

  5. Over view (continued) • Static of REPO Transaction volume (source JSDA)

  6. Over view (continued) • Outstanding of Market Operation by BOJ

  7. Over view(continued) • BOJ Financial Market Operation • Month end outstanding (as of June/2000)

  8. Over view(continued) • JGB Issue ＆ Outstanding volume of Repo + Buy/Sell Back • Month end outstanding trend (January, 1997 ~ May, 2000)

  9. The Importance of REPO for Government Bond • Definition of REPO • REPO/REVERSE Transaction • Buy/Sell Back Transaction • Securities Lending versus Cash Collateral Market which enables to exchange Securities (Government Bond etc. ) and Cash for certain term

  10. The Importance of REPO for Government Bond (continued) • REPO = Repurchase Transaction based on agreement (include Buy/Sell back) • TMBA MASTER REPURCHASE AGREEMENT TBMA= The Bond Market Association • TBMA/ISMA GLOBAL MASTER REPURCHASE AGREEMENT ISMA = International Securities Market Association • JSDA Master Agreement JSDA= Japan Securities Dealers Association

  11. Japanese REPOSecurities Lending versus cash collateral Effective (Start) Date Bond (JGB) Lender (Seller) Borrower (Buyer) Collateral (Cash) Settlement (End of) Date Bond (JGB) Lender (Seller) Borrower (Buyer) Fee Collateral (Cash) Interest rate cash

  12. The Importance of REPO for Government Bond (continued) • Market Perspective • Provide liquidity in the market • Enable to short sale • Provide Funding facility for inventory • Offer major money market • Supply market operation utility

  13. The Importance of REPO for Government Bond (continued) • Risk Management perspective • Master agreement • Close out netting at events of default • Marked to Market • Margin maintenance

  14. Change of Government Bond Market in Japan • G-30 Recommendation 1989 Mar. • Revise of Short Sale rule 1989 May. • TB T+3 Rolling Settlement 1990 Oct. • JGB DVP Start 1994 Apr. • Japanese REPO Start 1996 Apr. • JGB T+7 Rolling Settlement 1996 Oct. • JGB T+3 Rolling Settlement 1997 May. • JGB RTGS 2001 Jan.

  15. JGB RTGS (January, 2001) JGB T+3 Rolling Settlement (May, 1997) JGB T+7 Rolling Settlement (Oct., 1996) Japanese REPO Start (Apr., 1996) JGB DVP Start (Apr., 1994) TB T+3 Rolling Settlement (Oct., 1990) Revise of Short Sale rule (May, 1989) G-30 Recommendation (March, 1989) Change of Government Bond Market in Japan (Sample) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

  16. Introduction of RTGS • Current = Designate Time Net Settlement • Every transactions are settled on time at PM 3:00 on a multiple net settlement basis. • Settlement instructions can be entered for forward date. • RTGS = Real Time Gross Settlement • Individual transactions are settled real time basis. • Settlement instructions can be only entered on settlement date.

  17. Towards RTGS • New Market Practices (JSDA Guide Line) • Accepting “ Fail “ ( Cut- Off Time / Buy -In Rule ) • Minimizing settlement ammounts for each transaction • Netting Procedure

  18. Towards RTGS (continued) • “Fail to deliver secuirites” practice • Accepting “Fail” • Avoid to admit trade cancellation by “ fail” • Avoid to charge special penal regulation ( avoid to claim for damages by delay) • Establish “Cut-Off Time” • The time for recognizing “ Fail” at PM 3:00 • “Buy-In” Rule • After “Fail” happens, it takes 24days till JGB delivery through buy-in , at least

  19. Towards RTGS (continued) • “Minimizing settlement amounts for each tranzaction” • Maximum deal of one JGB transaction should be JPY 5Billon at the time of trade execution. • “Netting” Procedure • Bilatteral pair-off netting ( In case of “ Fail”, netted transaction is rewound back to the original contract. • Able to do other types of “ Netting” by mutual agreement.

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