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Establishment of "Guidelines on Eligible Collateral"

October 13, 2000
Bank of Japan

At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan made the following decisions with the aim of facilitating money market operations and enhancing transparency in the Bank's treatment of eligible collateral.

The eligibility standard of debt obligations issued by affiliates of counterpart financial institutions, in paragraph 5. (2) of "Guidelines on Eligible Collateral" was established in response to the decision at the Monetary Policy Meeting of the Policy Board on September 21, 1999, where the Bank announced that it would continue to examine the eligibility of such debt obligations and come to a decision around one year after.

  1. The Bank established "Guidelines on Eligible Collateral" as shown in Attachment 1.
  2. The Bank established "Guidelines on Credit Ratings of Corporations" as shown in Attachment 2.
  3. Currently, the basic discount rate in relation to the discounting of bills pursuant to Article 33, Paragraph 1, Section (1) of the Bank of Japan Law (hereinafter referred to as the "Basic Discount Rate"), and the basic loan rate in relation to the loans made pursuant to Article 33, Paragraph 1, Section (2) of the Law (hereinafter referred to as the "Basic Loan Rate") are prescribed under two separate categories, namely, "Discount Rate of Commercial Bills and Interest Rates on Loans Secured by Government Bonds, Specially Designated Securities and Bills Corresponding to Commercial Bills" and "Interest Rates on Loans Secured by Other Collateral."
    These categories shall be abolished and combined into "the Basic Discount Rate and Basic Loan Rate," which shall be set at the current rate of "Discount Rate of Commercial Bills and Interest Rates on Loans Secured by Government Bonds, Specially Designated Securities and Bills Corresponding to Commercial Bills."
    The basic loan rates for loans secured by loans on deeds shall be set at the same rate as above.
    These shall become effective on the day of the introduction of the RTGS for fund transfers among current accounts held at the Bank of Japan.
  4. The loan schemes which favor bills based on specific types of transactions, such as "bills corresponding to commercial bills," should be reconsidered and might be abolished in light of their diminishing significance in the conduct of monetary policy.

Attachment 1

Guidelines on Eligible Collateral

1. Purpose

These Guidelines prescribe the principles concerning collateral eligible for the Bank's provision of credit related to currency and monetary control. They are intended to ensure the appropriateness and to enhance the efficiency in the treatment of eligible collateral and the transparency of the Bank's business operations,by setting forth the standard categories and prices of collateral as well as eligibility standards thereof, which currently vary depending on the type of credit.

2. Principles Concerning Eligible Collateral

Eligibility of collateral shall be based on the following principles.

  1. (1) Maintaining the Soundness of the Bank's AssetsWith a view to maintaining the soundness of the Bank's assets, the Bank shall only accept collateral with sufficient creditworthiness and marketability. Moreover, there should be no obstacles to Bank's exercising of its rights including the security interest.
  2. (2) Ensuring Smooth Business Operations of the Bank and Efficient Use of CollateralThe Bank shall give proper consideration to smooth operations of its business and efficient use of collateral.
  3. (3) Utilizing Market InformationTo utilize market mechanism, the Bank shall make effective use of market information, such as ratings by rating agencies in assessing the eligibility of collateral, market prices in calculating collateral prices, and public information in evaluating the creditworthiness of corporate bonds, bills (including commercial paper), loans on deeds (hereinafter collectively referred to as "corporate debt obligations") and asset-backed securities.

3. Categories and Prices of Collateral

The categories and prices of eligible collateral shall be as set forth in Table 1.

4. Eligibility Standards for Collateral and Procedures for Eligibility Assessment

  1. (1) General Eligibility Standards for Collateral
    General eligibility standards for collateral shall be as follows:
    1. (a) Creditworthiness
      Repayment of principal and interest should be judged as certain by the Bank in light of various factors concerning the obligor, including its financial conditions and ratings by rating agencies, if any.
    2. (b) Marketability
      In light of transaction practices and other factors in financial markets, the realization of collateral should be conducted without difficulty.
    3. (c) Other Eligibility Standards
      1. i) Collateral should be denominated in the Japanese Yen.
      2. ii) Collateral should be issued in Japan.
      3. iii) Collateral should be governed by Japanese law.
      4. iv) In addition to i), ii), and iii), there should be no obstacles to Bank's exercising of its rights including the security interest.
  2. (2) Eligible Standards for Each Category of Collateral
    Eligible standards concerning creditworthiness and marketability of each category of collateral shall be as set forth in Table 2.
  3. (3) Procedures for Eligibility Assessment
    As for collateral other than government bonds, financing bills, government-guaranteed bonds, and municipal bonds issued through public offering, the Bank shall assess the eligibility upon request of a financial institution that maintains a current account with the Bank (such institution hereinafter referred to as the "counterpart financial institution"). In the case of corporate debt obligations, the creditworthiness of obligors shall be evaluated in accordance with "Guidelines on Credit Ratings of Corporations" (Attachment 2).

5. Debt Obligations Issued by Counterpart Financial Institutions and Their Affiliates

  1. (1) Debt Obligations Issued by Counterpart Financial Institutions
    Debt obligations issued by counterpart financial institutions (excluding government-guaranteed bonds) and those guaranteed bycounterpart financial institutions (excluding those deemed eligible without such guarantee) shall be ineligible; provided, however, that the foregoing shall not apply to debt obligations secured by eligible collateral in a manner the Bank deems appropriate, and to debt obligations for which the counterpart financial institution has become the obligor as the endorser of the bill.
  2. (2) Debt Obligations Issued by Affiliates of Counterpart Financial Institutions
    1. (a) Debt obligations of a company whose main business is to manage and effectively control other companies, including one or more counterpart financial institutions (hereinafter referred to as the "holding company") and those guaranteed by any holding company (excluding those deemed eligible without such guarantee) shall be ineligible.
    2. (b) Debt obligations issued or guaranteed by a company which the Bank considers as having a close relationship with one or more counterpart financial institutions in light of effective control and influence (excluding those deemed eligible without such guarantee) shall not be accepted as collateral for the Bank's credit extended to that counterpart financial institution.

6. Exception

When the Bank specifically deems it necessary for its business operations, it may make exceptions to the Guidelines set forth in paragraphs 3., 4., and 5.

(Supplementary Provisions)

  1. (1) These Guidelines shall become effective on the day of the introduction of the RTGS for fund transfers among current accounts held at the Bank of Japan; provided, however, that paragraph 5.(2)(b) shall become effective on October 1, 2001.
  2. (2) Items 12. and 13. in Table 1 shall become ineffective as of March 31, 2001, and item 14. shall become ineffective as of March 31, 2002, respectively.
  3. (3) Collateral deemed eligible at present (excluding those listed under items 12., 13., and 14. in Table 1) shall remain eligible until March 31, 2001, even when they become ineligible under these new Guidelines. Bills denominated in foreign currencies, which are currently eligible as collateral for the purchase of bills, shall remain eligible until March 31, 2001 as collateral for the provision of credits related to currency and monetary control (excluding loans on bills). The price of such collateral shall be calculated as 85% of the face value converted into the Japanese yen.

Table 1

Categories of Collateral and Collateral Prices

1. Government Bonds A residual maturity of:

(1) Up to 1 year
99% of market price
(2) more than 1 year and up to 5 years
98% of market price
(3) more than 5 years and up to 10 years
96% of market price
(4) more than 10 years and up to 20 years
94% of market price
(5) more than 20 years
90% of market price

2. Financing Bills

99% of market price

3. Government-guaranteed Bonds
A residual maturity of:

(1) Up to 5 year
97% of market price
(2) more than 5 years and up to 10 years
95% of market price
(3) more than 10 years and up to 20 years
90% of market price
(4) more than 20 years
85% of market price

4. Municipal Bonds A residual maturity of:

(1) Up to 5 year
97% of market price
(2) more than 5 years and up to 10 years
95% of market price
(3) more than 10 years and up to 20 years
90% of market price
(4) more than 20 years
85% of market price

5. Fiscal Investment and Loan Program (FILP) Agency Bonds A residual maturity of:

(1) Up to 5 year
96% of market price
(2) more than 5 years and up to 10 years
93% of market price
(3) more than 10 years and up to 20 years
85% of market price
(4) more than 20 years
80% of market price

6. Corporate Bonds
A residual maturity of:

(1) Up to 5 year
96% of market price
(2) more than 5 years and up to 10 years
93% of market price
(3) more than 10 years and up to 20 years
85% of market price
(4) more than 20 years
80% of market price

7. Asset-backed Securities A residual maturity of:

(1) Up to 5 year
96% of market price
(2) more than 5 years and up to 10 years
93% of market price
(3) more than 10 years and up to 20 years
85% of market price
(4) more than 20 years
80% of market price

8. Foreign Government Bonds A residual maturity of:

(1) Up to 5 year
96% of market price
(2) more than 5 years and up to 10 years
93% of market price
(3) more than 10 years and up to 20 years
85% of market price
(4) more than 20 years
80% of market price

9. International Financial Institution Bonds A residual maturity of:

(1) Up to 5 year
96% of market price
(2) more than 5 years and up to 10 years
93% of market price
(3) more than 10 years and up to 20 years
85% of market price
(4) more than 20 years
95% of face value

10. Bills(Including Commercial Paper)

95% of face value

11. Loans on Deeds

80% of outstanding principal balance

(Collateral eligible until March 31, 2001)

12. Interest-bearing Bank Debentures

96% of market price

13. Discount Bank Debentures

96% of market price

(Collateral eligible until 31 March, 2002)

14. Bonds Corresponding to Corporate Bonds A residual maturity of:

(1) Up to 5 year
96% of market price
(2) more than 5 years and up to 10 years
93% of market price
(3) more than 10 years and up to 20 years
85% of market price
(4) more than 20 years
80% of market price

Table 2

Eligibility Standards for Each Category of Collateral

Table : Eligibility Standards for Each Category of Collateral
Collateral Category Eligibility Standard
Government Bonds Ordinary government bonds without restriction on transfer.
Financing Bills All financing bills are eligible.
Government-guaranteed Bonds
Municipal bonds
Publicly-offered bonds. Privately-placed bonds deemed to be as marketable as publicly-offered bonds can be eligible.
Fiscal Investment and Loan Program (FILP) Agency Bonds Publicly-offered bonds satisfying the following requirements:
  1. (1) Bonds (excluding government-guaranteed bonds) issued by FILP Agencies or other public corporations which are deemed to have similar characteristics;
  2. (2) Rated A or higher by at least two rating agencies which the Bank considers to be appropriate (hereinafter referred to as "eligible rating agencies").
Corporate Bonds Publicly-offered straight bonds which are deemed eligible in light of creditworthiness and other relevant factors such as being rated A or higher by an eligible rating agency.
Asset-backed Securities Publicly-offered securities satisfying the following requirements:
  1. (1) Creditworthiness of Specific Assets, etc.
    Receivables from specific assets (which constitute original sources for paying principal and interest of asset-backed securities) should be deemed sufficient to pay the principal and interest of asset-backed securities, in light of the creditworthiness of specific assets and any supplementary means to enhance their creditworthiness.
  2. (2) Structure of asset-backed securities
    The structure of asset-backed securities should be deemed sufficient to satisfy the relevant requirements including the followings.
    1. (a) True sale
      If specific assets are transferred from originators to such persons as special purpose companies (hereinafter referred to as "SPC"), such transfer should be one that is deemed valid even in insolvency proceedings such as bankruptcy proceedings of originators.
    2. (b) Bankruptcy-remoteness
      Necessary measures should be taken to prevent insolvency proceedings or the dissolution of SPCs, including measures to restrict the power of originators, etc, to file bankruptcy petitions against SPCs.
    3. (c) Alternative measures for the collection of receivables from specific assets
      If the collection of receivables from specific assets is conducted by those other than an SPC, alternative measures should be prepared for cases when collection cannot be conducted because of insolvency of proceedings such as bankruptcy proceedings against those conducting collection.
  3. (3) Rating of Asset-backed Securities
    Securities should be rated AAA by an eligible rating agency.
Foreign Government Bonds
International Financial Institution Bonds
Bonds satisfying the following requirements:
  1. (1) Publicly offered;
  2. (2) Rated AA or higher by at least two eligible rating agencies.
Bills (Including Commercial Paper) Bills satisfying the following requirements:
  1. (1) Bills deemed appropriate in light of relevant conditions including the creditworthiness of an obligor;
  2. (2) Bills with a residual maturity up to of 1 year.
Loans on Deeds Loans on deeds satisfying the following requirements:
  1. (1) Loans on deeds to be deemed appropriate in light of creditworthiness of the debtor corporation and other relevant factors, including the fact that the corporation is rated A or higher by an eligible rating agency.
  2. (2) Loans on deeds with an original maturity of up to 5 years. Where an original maturity is longer than 5 years but the maturity date comes within 60 months after the month of issuance, the loan is also considered to satisfy this requirement.

Attachment 2

Guidelines on Credit Ratings of Corporations

1. Purpose

These Guidelines prescribe the principles concerning the credit ratings conducted by the Bank of Japan to assess the creditworthiness of corporations which are obligors of corporate debt obligations posted as collateral for the Bank's provision of credit in accordance with "Guidelines on Eligible Collateral" (Policy Board Decision on October 13, 2000, Attachment 1).

2. Obligors Subject to the Credit Ratings

Bank's credit ratings are applicable to corporations, excluding financial institutions, whose head offices are located in Japan.

3.Relevant Factors to Be Considered

  1. (1) The Bank shall give the credit rating, upon request of a counterpart financial institution, taking into consideration the following factors and other information relevant for the assessment of the creditworthiness of the corporation.
    1. (a) Quantitative factors
      Mainly financial indicators of the corporation, including the net worth and stability of cash-flows.
    2. (b) Qualitative factors
      Profitability, soundness of assets, business history, position in the relevant industry, management policy, evaluation by financial institutions, information obtained through examinations of a financial institution by the Bank, and the ratings of the corporation by appropriate rating agencies, when available.
  2. (2) The credit ratings shall be accorded on the basis of consolidated financial statements, when available.

4. Frequency of Review of Credit Ratings

In principle, the credit ratings shall be reviewed once a year. However, the Bank might conduct irregular reviews, when judged necessary.

(Supplementary Provision)

These Guidelines shall become effective on the day of the introduction of the RTGS for fund transfers among current accounts held at the Bank of Japan.