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July 27, 2007
Financial Markets Department
Bank of Japan
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The Bank of Japan (BOJ) conducted a survey on the developments in the yen-denominated overnight index swap (JPY OIS) market in May 2007, with the cooperation of market participants.1 This report is a summary of the results.
OIS is a type of yen-yen interest rate swaps (IRS) that exchange floating against fixed interest rates using overnight rates as its floating rates. In Japan, OIS started to be traded around 1997, but the market had been sluggish for a long time under the zero interest rate policy and the quantitative easing policy. As market participants started to anticipate the termination of the quantitative easing policy around early 2006, the OIS transactions have grown substantially at a rapid pace.
Compared with the IRS market as a whole, however, OIS market participants are still limited in both numbers and scope. Several foreign financial institutions occupy a particularly large share of the transactions and domestic financial institutions' transactions constitute only a tiny portion. Market participants sometimes cite this as a main reason for low liquidity of the market in some situations.
According to the survey results on the overall yen money markets (Survey on the Functioning of Money Markets ), which was conducted by the BOJ in April 2007 prior to this survey, 31 institutions including 9 domestic institutions of all the institutions that have offices in Japan answered that they have started the OIS transactions. On the other hand, the number of institutions that answered that they are preparing to start the OIS transactions or have an interest in those transactions amounted to 100. These institutions emphasized the need of comprehensive information about the OIS market, transaction volume and market structure in particular, in considering the entry into the market.
The BOJ has been involved in a 6-month action program toward enhancing market functioning in money markets and places the activation of short-term derivatives as one of the central agenda items. We hope that this survey will help market participants better understand the JPY OIS market.
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Financial Markets Department, Bank of Japan
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