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Introduction of "the Purchase/Sale of Japanese Government Securities with Repurchase Agreements"

September 18, 2002
Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to introduce a new type of market operation, "the Purchase/ Sale of Japanese Government Securities with Repurchase Agreements", with a view to facilitating the Bank's money market operations (regarding the terms and conditions of the new operation, see Attachment).

The new operation is designed to replace the two types of existing operations for Japanese government securities, namely, "the Purchase/Sale of TBs/FBs with Repurchase Agreements" and "the Borrowing of JGBs against Cash Collateral (JGB repo)".

As for the selection of counterparties, the Bank also established the selection procedure for the new operations (No English version available). This selection procedure is also applied to "the Outright Purchase/Sale of TBs/FBs".

The selection of counterparties in the new operation under the procedure mentioned above is scheduled to take place about eight months after the effective date of the new operation. Until then, as transitional measures, the existing counterparties in "the Purchase/ Sale of TBs/FBs with Repurchase Agreements" and "the Borrowing of JGBs against Cash Collateral (JGB repo)" are entitled to be those in the new operation on condition that they meet certain criteria the Bank requires.


Attachment

Principal Terms and Conditions for the Purchase/Sale of Japanese Government Securities with Repurchase Agreements

1. Purpose

These Principal Terms and Conditions prescribe the principles for the Bank of Japan's purchase/sale of Japanese government bonds with coupons, treasury bills <TBs> and financing bills <FBs> with repurchase agreements with the aim of facilitating money market operations.

2. Location of Purchases/Sales

At the Head Office (Operations Department) of the Bank.

3. Eligible Counterparties

Eligible counterparties shall, pursuant to the Bank's relevant rules, be selected from financial institutions (as defined in Article 37, Paragraph 1 of the Bank of Japan Law, Law No.89, 1997, excluding the Resolution and Collection Corporation and bridge banks <as defined in Article 2, Paragraph 13 of the Deposit Insurance Law, Law No.34, 1971>), domestic and foreign securities companies (Article 10, Paragraph 1, Clause 2 of the Bank of Japan Law Enforcement Order <Order No. 385, 1997> and Article 10, Paragraph 1, Clause 4 of the same Order, respectively), securities finance companies (Article 10, Paragraph 1, Clause 3 of the Order), and tanshi companies (Article 10, Paragraph 1, Clause 5 of the Order).

4. Securities to be Purchased/Sold

Japanese government securities (Japanese government bonds with coupons, TBs and FBs).

5. Repurchase Agreements

Securities purchased/sold shall be resold/repurchased within six months from the next day of the purchase/sale date.

6. Method for Auctions

  1. (1) Purchases with repurchase agreements
    A multiple-price competitive auction shall be conducted for each purchase where counterparties bid "purchasing yields" (yields for the period during which securities are held by the Bank).
  2. (2) Sales with repurchase agreements
    A multiple-price competitive auction shall be conducted for each sale where counterparties bid "selling yields" (yields for the period during which securities are held by counterparties).

7. Purchasing/Selling and Reselling/Repurchasing Price

(1) Purchasing/Selling Price

The purchasing/selling price for each issue is obtained by dividing "market price" (prevailing prices in financial markets) by margin ratios.

(2) Margin ratios

Margin ratios shall be as follows;

  1. (a) Securities purchased by the Bank
    A residual maturity of:
    1. (i) Up to 1 year…1.003
    2. (ii) more than 1 year and up to 5 years…1.006
    3. (iii) more than 5 years and up to 10 years…1.021
    4. (iv) more than 10 years and up to 20 years…1.039
    5. (v) more than 20 years…1.057
  2. (b) Securities sold by the Bank
    A residual maturity of:
    1. (i) Up to 1 year…0.997
    2. (ii) more than 1 year and up to 5 years…0.994
    3. (iii) more than 5 years and up to 10 years…0.980
    4. (iv) more than 10 years and up to 20 years…0.964
    5. (v) more than 20 years…0.948

(3) Reselling Price

The reselling price is calculated by adding the amount obtained by multiplying the purchasing price by purchasing yields to the purchasing price.

(4) Repurchasing Price

The repurchasing price is calculated by adding the amount obtained by multiplying the selling price by selling yields to the selling price.

8. Collateral and Margin Calls

(1) Net exposure

"Net exposure" is the amount by which the amount provided in (a) exceeds the amount provided in (b) on a certain business day, assuming that the securities are resold or repurchased on that day.

  1. (a) Total amount of (i) the amount obtained by multiplying the proceeds that the Bank or counterparties would receive when they resell or repurchase securities by margin ratios, (ii) the market value of the securities that the Bank or counterparties have sold, and (iii) the market value of the securities that the Bank or counterparties have supplied as collateral.
  2. (b) Total amount of (i) the amount obtained by multiplying the proceeds that the Bank or counterparties would pay when they resell or repurchase securities by margin ratios, (ii) the market value of the securities that the Bank or counterparties have purchased, and (iii) the market value of the securities that have been supplied to the Bank or counterparties as collateral.

(2) Margin calls by the Bank

When net exposure accrues to the Bank, the Bank shall exercise margin calls against the counterparties by requiring them either to supply additional collateral or return excess collateral.

(3) Margin calls by the counterparties

When net exposure accrues to the counterparties and the counterparties exercise margin calls against the Bank, the Bank shall either supply additional collateral or return excess collateral.

(4) Categories of collateral

Japanese government bonds with coupons, discount Japanese government bonds, TBs and FBs.

(5) Collateral prices

Collateral prices shall be as follows;

  1. (a) Securities supplied to the Bank
    A residual maturity of:
    1. (i) Up to 1 year…99.7% of market price
    2. (ii) more than 1 year and up to 5 years…99.4% of market price
    3. (iii) more than 5 years and up to 10 years…98.0% of market price
    4. (iv) more than 10 years and up to 20 years…96.3% of market price
    5. (v) more than 20 years…94.6% of market price
  2. (b) Securities supplied by the Bank
    A residual maturity of:
    1. (i) Up to 1 year…100.3% of market price
    2. (ii) more than 1 year and up to 5 years…100.6% of market price
    3. (iii) more than 5 years and up to 10 years…102.0% of market price
    4. (iv) more than 10 years and up to 20 years…103.7% of market price
    5. (v) more than 20 years…105.4% of market price

9. Substitution of the securities

The Bank, if appropriate, shall allow the counterparties to substitute securities that have been sold to the Bank. The Bank may, subject to the counterparties' approval, substitute securities that have been sold to the counterparties.

Miscellaneous

  1. (1) Dates for Purchase/Sale, Amount of Securities to be Purchased/Sold, etc.
    Taking into account the conditions of financial markets, the Bank shall determine specifications necessary for purchases/sales, including dates, amount of securities to be purchased/sold, counterparties, and issues to be purchased/sold, for each purchase/sale.
  2. (2) Interests of the securities
    When interests of the securities that have been sold or supplied as collateral to the Bank accrue, the Bank shall pay the amount equal to the accrued interests to the counterparties. When the interests of the securities that the Bank have sold or supplied as collateral accrue, the Bank shall receive the amount equal to the accrued interests from the counterparties.

(Supplementary Provision)

These terms and conditions shall become effective on a day designated by the Governor, which shall be no later than November 30, 2002.