SBL 

Historically, securities lending has been dominated by broker-dealers and major custodian banks. Recently, both onshore and offshore, there have been a lot more general collateral upgrade/ downgrade trades. 

This trend can be seen across Asia, but it is particularly pronounced in Japan, according to Emiko Ida, head of equity finance in Japan for Nomura Securities. This growth in demand has prompted some more local banks to enter the securities lending market to take advantage of the trend. 

Demand is driven by high frequency traders, institutions and increasingly individual retail investors. Retail investor account balances doubled during 2015 at some online brokers, says Ida. 

Lenders tend to be global custodians, corporate pension funds and insurers. Some public pension funds have traditionally tended to refrain from lending due to the politically sensitive nature of shorting. Recently, given the low-interest rate environment, yield enhancement through securities lending has become more common so there is more supply. 

There are no major difficulties in accessing the Japanese SBL market although cross-border agreements can be a little more complicated due to necessary legal arrangements. Almost all lending is done bilaterally. There is no specific CCP for securities lending in the Japanese market, although discussions about the possibility of starting one are in the early stages. 

“I would say the majority of securities lending trading is currently done bilaterally in the Japanese onshore market, but participants are also trying to move towards tri-party,” explains Ida. “Increasing need to utilise long positions and inventories is encouraging more efficient collateral utilisation. This might be easier to achieve through tri-party arrangements where people are more sensitive about balance sheet usage, leverage ratio and capital cost among other concerns.” 

Regulation is more or less in line with other developed markets. Japan revised its short selling rules in late 2013, making its ban on naked short selling, which was introduced during the financial crisis in 2008, permanent and also modifying its uptick rule. 

Before 2013, all short sales on the Japanese exchange were not permitted unless the order’s limit price is higher than the most recent execution on the exchange. It was modified so that the rule now only applies after a trigger price – a 10% or more drop from the previous day’s closing price on the primary exchange – is reached. 

Firms are also now required to report a short position once it reaches 0.2% (rather than 2.5%) of the issued shares of a security, and once the position reaches 0.5% make a public disclosure. 

Synthetics 

Onshore synthetic financing is limited; it represents much smaller proportion of the market than SBL. Regional banks have access to synthetic financing but tend to opt for other methods. Offshore there is more activity and Japan, along with Australia, tends to have one of the more active synthetic markets in Asia Pacific. 

Synthetic swaps, particularly funded swaps, are becoming more popular as a means to reduce balance sheet usage in the face of Basel III regulations. Basel III will have an impact on balance sheet usage and pure brokerage houses, facing small deposit sizes and demands for long-term hedged liquidity to meet the requirement, may find themselves pushed out of the market. 

“The broker-dealers will have to minimise the impact on their balance sheets. If, say, someone buys a position at ¥1bn and 85% of it needs to be hedged it would cause a lot of funding problems for broker-dealers. There will still be transactions where we will have capacity before 2018 but some smaller players in the market will disappear after that date,” explains Ida. 

Repo 

The Japanese repo market is very liquid both on and offshore. Its primary function is to serve the critical role of supplying liquidity to the primary and secondary markets. Total volumes took a hit after the default of Lehman Brothers in 2008, but they have since recovered. Although Standard & Poor’s downgraded JGBs by one notch to A+ in September 2015, JGBs are considered well rated and accepted globally by most cash investors. 

“There are restrictions on offshore entities marketing products and services to onshore entities under Article 47 of the Banking Act, but there is plenty of liquidity available to new entrants offshore when dealing with the international banks,” says Ed Donald, global head of repo at Standard Chartered. 

In Japan, there are three types of repo trade: Gentan, Old Gensaki and New Gensaki. Gentan, which are loan-type agreements, have been prevalent in the domestic market for a long time. These came about because a securities transaction tax, which has since been abolished, used to be levied on purchase and sale of securities.

“There is now a move from regulators and market participants to unify the different repo trade types,” explains Donald. “The transition to New Gensaki – a more globally accepted form of repurchase agreement – is expected to happen next year. This is because, currently, the GMRA that offshore entities use for JGB repo differs from the local master agreement used between onshore entities for ‘old Gensaki.’” 

Most deals settle domestically but it is possible to also settle offshore via Clearstream or Euroclear subject to relevant tax documentation being signed by the respective counterparties. 

Since 2008, there have been efforts from Japanese regulators to reduce settlement risk and increase market competitiveness. Market participants and infrastructure providers will soon agree a target date for migration to T+1 settlement for JGB trades and T+0 for GC repos, according to the Nomura Research Institute. In November 2014, the JSDA Working Group on Shortening of JGB Settlement Cycle released a design for the move.