Establishment of Requirements for Admission as a Participant in the JGB Book-Entry System

March 30, 2001
Bank of Japan

The Policy Board decided today the requirements for admission as a participant in the JGB book-entry system as attached, and herewith makes them public. The requirements include detailed criteria with regard to the applicant's financial condition.

The establishment and disclosure of the requirements are aimed at further enhancing the transparency of administration of the JGB book-entry system.

Attachment

Requirements for Admission as a Participant in the JGB Book-Entry System

1. An entity applying to the Bank of Japan (hereafter "the Bank")¹ to become a direct participant, an indirect participant,² or a foreign indirect participant³ in the JGB book-entry system (hereafter referred to as a "participant") --an "applicant"--shall meet the following two requirements to be approved by the Bank as a participant:

1. a. That participation of the applicant in the JGB book-entry system contributes to the achievement of the objectives of the system, which are to simplify the delivery of Japanese government securities arising from purchases/sales, and collateral and other transactions and to facilitate the sound development of a secondary market for Japanese government securities by streamlining custodial operations for them.
2. b. That participation of the applicant in the system does not threaten the reliability of the system or hinder its smooth operation and orderly administration.

1. The depository of Japanese government securities.
2. An indirect participant holds a depository account with a direct participant and is itself approved by the Bank to manage custody accounts of its clients.
3. A foreign indirect participant is a foreign financial institution or other institution that is approved by the Bank to manage custody accounts of its clients and accepts Japanese government securities from customers at its offices located outside Japan.

2. The Bank shall determine whether an applicant satisfies the above two requirements on the following criteria.

1. a. An applicant that engages in custody, settlement, or other equivalent business with regard to Japanese government securities is considered to satisfy requirement 1.a.
2. b. Two different criteria are set out for requirement 1.b., depending on whether the applicant is a "securities clearing and settlement system" as defined in 3.Even if the applicant satisfies the following requirements, participation in the system may not be approved in cases where the Bank considers that the applicant cannot comply with the rules and procedures of the system.
   1. (1) An applicant that is a "securities clearing and settlement system" as defined in 3. is considered to satisfy requirement 1.b. if (i) its clearing and/or settlement business is considered safe in view of its risk management procedures, the arrangements regarding allocation of losses arising from the clearing and/or settlement process, the operational reliability of computer systems provided for its users, and other relevant matters; and (ii) the applicant's financial condition is considered sound and its operational capability is considered adequate.
   2. (2) An applicant that is not a "securities clearing and settlement system" is considered to satisfy requirement 1.b. if the applicant's financial condition is considered sound and its operational capability is considered adequate.

3. A "securities clearing and settlement system" is defined as follows:

1. (a) an entity that engages in clearing of securities transactions between counterparties including three or more financial institutions based on common rules and procedures, for example, a central counterparty which interposes itself between the members in a system in their securities transactions and acts as the exclusive counterparty, or
2. (b) an entity that executes securities transfer instructions between its members including three or more financial institutions by means of book entries based on common rules and procedures.
   In addition to the above, the Bank takes the following into account in deciding whether an entity is a "securities clearing and settlement system":
   1. (1) the process of clearing and/or settlement of securities transactions and corresponding funds transfers, and
   2. (2) the existence and nature of arrangements regarding allocation of losses arising from the clearing and/or settlement process.

4. In relation to requirement 2.b., detailed criteria with regard to the applicant's financial condition are shown in the appendix.

5. Provisions 1. to 4. above shall be effective from April 2, 2001.

Appendix to Attachment

Detailed Criteria with Regard to the Applicant's Financial Condition

1. The financial condition of an applicant is considered sound if it satisfies the requirements in the table.Even in cases where an applicant satisfied these requirements at the time of application, the applicant is not considered sound if the Bank of Japan⁴ considers that, as a result of deterioration in the applicant's situation,⁵ the applicant would not be capable of fulfilling the requirements after joining the system.

1. 4 The depository of Japanese government securities.
2. 5 Including changes in the applicant's situation after the most recent end-of-term closing of the book.

2. The financial condition of an applicant is considered sound, irrespective of whether it satisfies the requirements in the table, if the applicant merges with an entity which is a participant or takes over its whole business and the Bank of Japan considers the applicant as succeeding to the entity's participant status.

3. Financial requirements for applicants that do not fall into any of the categories in the table will be decided individually upon request.

Table for Detailed Criteria with Regard to the Applicant's Financial Condition

1. 6 Calculated based on the method laid down in the home-country regulations to which the applicant is subject.
2. 7 The ratio stipulated in Article 52, Paragraph 1 of Japan's "Securities and Exchange Law."