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Measures for Enhancing Liquidity in JGB Markets and Transparency in JGB-Related Money Market Operations

May 29, 2001
Bank of Japan

The Bank of Japan ("the Bank"), in an effort to enhance liquidity in the JGB markets and transparency of its money market operations ("operations"), has decided as follows.

  1. Announcement of the Bank's issue-by-issue holdings of JGBs by amount outstanding
    In an effort to enhance information provided in the JGB markets and taking account of suggestions from market participants, the Bank will periodically publish amount outstanding of the Bank's issue-by-issue holdings of JGBs on its Web site. The Bank believes it should make it easier for market participants to estimate tradable amounts of JGBs, thereby contributing to enhancing market liquidity.
    See Annex I for more details on the publication.
  2. Release of procedures for delivery failure of JGBs in JGB-related operations
    In case that transactions for operations are not settled as intended, smooth functioning of operations by the Bank would be compromised. The Bank, therefore, believes that it is essential to avoid such a situation.
    Settlement of JGBs on real-time gross settlement basis ("RTGS basis") has started this January. Since then, the Bank has received requests from market participants that the Bank should release the procedures to be applied by the Bank, when counterparties of transactions in JGB-related operations cannot deliver JGBs as contracted.
    In view of these factors, the Bank, aiming at the smooth functioning of operations and enhancing their transparency, decided to announce the procedures applied in the event of delivery failure of JGBs in JGB-related operations.Annex II details the procedures.

(This translation is prepared by the Bank staff based on the Japanese original released on May 29, 2001.)


Annex I

ANNOUNCEMENT OF THE BANK'S ISSUE-BY-ISSUE HOLDINGS OF JGBs BY AMOUNT OUTSTANDING1

Data to be published

Amount outstanding of the Bank's issue-by-issue holdings of JGBs2 excluding TBs and FBs.

Frequency

Monthly.

Timing of release

The evening of the business day following the day of settlement of the first outright purchases of JGBs.

Appendix 1 shows amount outstanding as of May 1, 2001.

  1. See Appendix 2 for background information. Appendix 2 is an abridged translation of discussions held between counterparties to the Bank's operations and the Financial Markets Department of the Bank.More detailed information in Japanese regarding the discussions is available in Market Review 2000-J-2.
  2. JGBs held by the Bank consist of those purchased through the outright purchases and those rolled over for matured JGBs.

Appendix 1

Japanese Government Bonds Held by the Bank of Japan *(as of May 1, 2001)

Japanese Government Bonds Held by the Bank of Japan (as of May 1, 2001) 10-year 20-year(in 100 million yen)
10-year JGBs Face Value 20-year JGBs Face Value
#140 10,498 #2 3,706
#141 2,871 #3 1,718
#142 2,016 #4 600
#143 1,840 #5 1,580
#144 8,460 #6 1,820
#145 15,756 #7 1,861
#147 753 #8 1,449
#148 874 #9 1,090
#149 6,950 #10 1,220
#150 1,905 #11 2,765
#151 5,380 #13 438
#152 2,268 #14 1,106
#153 5,691 #15 768
#155 1,364 #16 1,160
#156 1,150 #17 582
#157 8,505 #18 830
#159 5,005 #19 1,340
#161 2,658 #20 1,117
#163 1,884 #21 1,520
#164 7,107 #22 2,055
#166 3,533 #23 1,365
#167 8,356 #24 730
#168 3,948 #25 103
#169 2,115 #26 1,102
#170 7,045 #27 3,961
#171 13,988 #28 1,064
#172 5,698 #29 1,372
#173 3,545 #30 3,675
#174 26,248 #31 2,236
#175 1,072 #32 1,395
#176 3,550 #33 3,948
#177 1,539 #34 1,415
#178 1,205 #35 1,275
#179 1,290 #36 1,349
#180 1,375 #37 1,590
#181 8,173 #38 1,675
#182 22,020 #39 3,636
#183 816 #40 1,256
#184 3,496 #41 666
#185 3,202 #42 1,865
#186 1,711 #43 606
#187 19,973 #44 559
#188 8,316 #45 307
#189 960    
#190 293    
#191 6,776    
#192 645    
#193 1,246    
#194 3,432    
#195 106    
#196 11    
#197 3    
#198 3,528    
#199 2,078    
#200 15,538    
#201 5,071    
#202 1,578    
#203 1,072    
#204 24,315    
#205 251    
#206 13,700    
#207 4,014    
#208 12,114    
#209 364    
#210 7,611    
#211 605    
#212 1,391    
#213 850    
#214 1,927    
#215 653    
#216 100    
#217 290    
#218 310    
#219 350    
#220 30    
  • The sum of JGBs purchased through outright purchases and those rolled over for matured JGBs.

Appendix 2

Abridged translation of Market Review 2000-J-2 "Information Infrastructure in JGB markets: Summary of Discussions with the Bank of Japan Market Operations Counterparties"

Purpose and Theme of the Meetings

The Financial Markets Department periodically holds meetings with the counterparties to the market operations, the aim of which is to develop a channel for exchanging views with market participants. Issues discussed at the meetings cover a wide range of subjects, including market infrastructure. The theme of the first series of meetings was about ways to enrich information in JGB markets, focusing on the cash and repo market. Based on the experience of market disruption from the summer of 1999 to the end of that year (see Market Review 2001-E-1 for more details), those attending the meetings discussed what kind of information should be provided for enhancing market functioning.

Discussion Summary

Information in the JGB cash market

Electronic trading could be a possible trigger for enhancing price information in the cash market. In the US, the widespread use of electronic trading has promoted more transparency in the markets. In this context, the pros and cons of introducing such an electronic system were discussed in light of the current situation in JGB markets (see Market Review 2001-E-2 for further information.). Many of the members expressed the view that accurate information regarding public sector JGB holdings should be disclosed. With such information, they argued, market participants would be able to easily estimate the tradable volume of individual issues and avoid unexpected problems, such as "squeeze" or "fail".

Also, some members noted disclosure might initially have an impact on market paricipants' behavior if they recognized a gap in volume between past estimations and disclosed data.

As an alternative to inputting public sector JGB holdings into the market mechanism, some noted it was worth considering introducing vehicles to feed JGBs back to the market, such as a securities lending facility, reverse repo operations, andoption for substitution in the repo operations.

End Remarks

Through the meetings, three areas were highlighted as issues that the Bank of Japan should study in cooperation with market participants.

  1. 1) The collection and publication of averaged repo rates based on reported repo rates of counterparties to the outright purchases/sales operations and repo operationsshould be enhanced.
  2. 2) More discussion on ways to qualitatively improve volume data on repo transactions should be held among those concerned.
  3. 3) The Bank of Japan should continue to examine how to lessen the impact on the price mechanism and market participants' behavior stemming from its JGB holdings.

References

Yosuke Shigemi, Sotaro Kato, Yutaka Soejima, and Tokiko Shimizu, Market Review 2001-E-1, "Pricing of Japanese Government Bonds: Influence of Futures Prices, Repo Rates, and Supply-Demand Conditions of Specific Issues."

Market Policies Group, Money and Capital Markets Division, Market Review 2001-E-2,"Increasing Use of Electronic Trading Systems and Its Implications on Japanese Financial Markets." (soon to be released)


Annex II

Procedures for delivery failure of JGBs in JGB-related operations

1. Scope of JGB-related operations

  1. a. Borrowing of JGBs against cash collateral (JGB repo operations)
  2. b. Outright purchases of JGBs
  3. c. Outright purchases of TBs/FBs
  4. d. Purchases of TBs/FBs under repurchase agreements
  5. e. Sales of TBs/FBs under repurchase agreements

Failure to deliver JGBs by a counterparty may occur at the start transactions of a., b., c., d. and end transactions of e.The first three transactions are settled by designated-time settlement (at 3:00 p.m.) and the others are settled on RTGS basis.

2. The Procedures

(1) In case of failure to deliver JGBs by the designated time

a. Operations settled by designated-time settlement (at 3:00 p.m.)

In case that a counterparty fails to deliver JGBs at 3:00 p.m. , the Bank will permit the counterparty to deliver the JGBs after 3:00 p.m., if the Bank deems that the counterparty has secured sufficient JGBs by the time listed below and can take necessary steps.

On regular business days : 3:30 p.m.

On days when only TBs/ FBs and discount JGBs are issued : 4:30 p.m.

On days when coupon-bearing JGBs are issued : 5:00 p.m.

b. Operations settled on RTGS basis

In case that a counterparty fails to deliver JGBs by the designated time, the Bank will permit the counterparty to deliver the JGBs after the designated time, if the Bank deems that the counterparty has secured sufficient JGBs by the time listed above and can take necessary steps.

(2) In case of failure to deliver JGBs by the end of the operating hours of BOJ-NET JGB Services

In case that a counterparty fails to deliver JGBs by the end of operating hours of BOJ-NET JGB Services shown below, the Bank will reduce the settlement volume for the operation concerned. (Transactions in which JGBs were not delivered will be annulled.)

On regular business days : 4:30 p.m.

On days when only TBs/ FBs and discount JGBs are issued : 5:30 p.m.

On days when coupon-bearing JGBs are issued : 6:00 p.m.

(3) Actions against counterparties failing to deliver

Each case of delivery failure in each type of operations will be scored according to the rules described below in a. and b. According to the aggregate score, the Bank will take actions described below in c.

  1. a. Scoring rule
    1. a) 0.5 point for failure to deliver JGBs on time but ultimately making delivery (i.e. not (2))
    2. b) 1.0 point for failure to ultimately deliver JGBs (i.e. both (1) and (2))
  2. b. Effective period of the score
    The score will stand for 3 months starting from the date of failure to deliver JGBs.
  3. c. Procedures
    1. a) From the day when a counterparty's total score reaches 1.5 points for each type of operation, offers to the counterparty will be suspended for a month.
    2. b) From the day when a counterparty's total score reaches 2.5 points for each type of operation, offers to the counterparty will be suspended for a month.
    3. c) If a counterparty's total score reaches 3.5 points for each type of operation, it loses the status as a counterparty in the operations.

3. Effective date

This procedure will be effective on May 30, 2001.

If the Bank recognizes that a failure to deliver JGBs is caused by factors, such as intentionally engaging in unfair trading practices or deterioration in a counterparty's creditworthiness, it may not follow the procedures above.

The Bank envisages that the procedures will be revisited as progress is made by all those concerned in the efforts for enhancing the smooth settlement of JGBs.