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Country Profile: Japan's securities finance market

15 March 2017

Japan was the largest force behind the 10% jump in Asian securities lending revenues registered last year

"These specials are more than likely driven by short seller demand as technology and consumer discretionary firms, which have long been favorite targets of short sellers, make up over half of the current crop of Japanese specials," says Colvin. Standout tech specials includes such firms as internet messaging portal Line Corp which now costs over 11% to borrow after a series of lackluster earnings took its shares below their IPO price and AI software provider Jig-Saw which commands an astronomical 33% in the securities lending market.

Highlights in the consumer discretionary sector, which includes retailers and automobiles firms, include electronics retailer Edion, which has 16% of its shares outstanding on loan, as well as airbag maker Takata whose shares cost more than 15% to borrow after the some of its products were found to be defective.

Unsurprisingly these resilient fees, and the ensuing revenues they generate, are increasing the  attractiveness of Japanese equities for beneficial owners who are willing to lend these assets. Beneficial  owners have earned two thirds of a basis point from the JPY68trn of Japanese equities in lending  programmes; one third more than the year-to-date earnings figure registered at the same point last year.

  Bumper revenues generated from lending Japanese equities have so far failed to attract any significant  new supply looking to grab a piece of the action. If anything the lendable pool has been getting shallower over the last 12 months as the value of Japanese equities in lending programmes only jumped by 25% in yen terms. While significant, at first glance it’s worth noting that the surge in lendableis 5% less than the 30% jump registered in the Nikkei 225 index over the same period.

  "Specials in Japanese equities were mainly found amongst the more illiquid names, small caps rather than large caps, and there is no indication that this will change anytime soon. 2016 has not been a great year from a specials perspective," says Ariel Winiger, head of secured financing Asia Pacific, Societe Generale.

  Collateral management

A major theme from 2016 was that providing Japanese government bonds (JGBs) as collateral became very popular. Winiger adds: "JGB usage increased a lot over the last year or so. That was perhaps the standout trend in Japan – JGBs were one of the cheapest types of collateral to deliver last year, behind JPY cash. This is likely to to continue."

  Davin Cheung, global funding and financing sales, APAC, Clearstream Banking says: "Japan was one of the earliest countries to implement initial margin segregation rules for OTC derivatives in September last year, so all the Japanese banks are grading tri-party accounts in order to post or receive initial margin collateral."

  In phase one only the largest banks are affected and later phases will take in smaller and buy-side entities "so you are talking about quite significant amount of new collateral accounts to be opened in subsequent implementation waves," predicts Cheung.

  Natalie Wallder, head of collateral management & segregation, Asia Pacific, BNY Mellon, says: "Given the increasing requirements to provide high quality liquid assets, the popularity of Japanese government securities within tri-party continues to rise as clients source alternative quality collateral, which for BNY Mellon specifically, now makes up a significant portion of our global book."

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