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(Reference)Introduction of the Securities Lending Facility to Provide the Markets with a Secondary Source of Japanese Government Securities

April 9, 2004
Bank of Japan

The Bank decided to introduce a facility, with which the Bank sells Japanese government securities (JGSs) with repurchase agreements to provide a temporary and secondary source of JGSs to the markets, with a view to enhancing liquidity of JGS markets, maintaining the functioning of the markets, and contributing to smooth settlement of both JGSs and funds.

  • At the Monetary Policy Meeting (MPM) held today, the Bank established the Principal Terms and Conditions for the facility.
  • Today's decision is based on the Chairman's instruction at the MPM held on February 26, 2004 to study the introduction of a facility which provides JGSs held by the Bank to the markets and report back to the MPM.

1. Outline of the Facility

  1. (1) Type of transactions
    Sales of JGSs with repurchase agreements.
  2. (2) Eligible counterparties
    Counterparties eligible for the use of the facility shall be selected from applicants who are already counterparties to the Bank's other JGS-related market operations.
  3. (3) Securities to be sold
    Securities to be sold shall, pursuant to the Bank's relevant rules, be selected from the Bank's holdings of Japanese government bonds with coupons, treasury bills and financing bills.
  4. (4) Repurchase agreements
    In principle, securities sold shall be repurchased on the following business day of the date of sales.
    As a practical rule, sales by auction and their settlements shall be conducted on the same day (T+0 basis).
  5. (5) Decision on the use of the facility
    The Bank shall decide to sell specific issues when the Bank deems it appropriate based on the conditions of financial markets.
    As a practical rule, the Bank shall, in principle, have auctions of those issues that more than two counterparties request the Bank to sell. The Bank shall conduct auctions at its discretion, taking into account the conditions of financial markets.
  6. (6) Method for auctions
    A competitive auction shall be conducted for each sale where counterparties bid yields for the period during which securities are held by counterparties ("selling yields").
    The Bank shall set the upper limit to the selling yields.
    The upper limit to the selling yields shall be set sufficiently high so as to prevent counterparties from becoming overly dependent on this facility.
    As a practical rule, an auction shall be held in the afternoon.
  7. (7) Amount of sales
    The Bank shall set the upper limit to the amount of sales in total per day as well as per issue/counterparty.
    As practical rules, the upper limits shall be as follows.
    - The upper limit to the total amount of sales per day shall be about 100 billion yen.
    - The upper limit to the amount of sales of each issue per day shall be 50% of the amount outstanding of the Bank's holdings of the issue.
    - The upper limit to the amount of sales per counterparty shall be 50% of the total amount of sales per day.
    - The upper limit to the amount of sales of each issue per counterparty shall be 50% of the amount of sales of each issue per day.
  8. (8) Roll-overs
    At the request of the counterparties, the Bank may roll over sales transactions.
    The Bank shall set the limit to the number of roll-overs.
    As a practical rule, the Bank shall limit the number of roll-overs to twenty one in line with the relevant market practice.
    The selling yields for roll-over transactions shall not be higher than the selling yield applied to the initial sales.
    As a practical rule, the selling yields for roll-over transactions shall be lower of either the selling yields applied to the initial sales or zero percent.
  9. (9) Selling price
    The selling price for each issue is obtained by dividing "market price" (prevailing prices in financial markets on the date of sales) by margin ratios.

2. Aims of the Facility

  1. (1) Enhancing liquidity and maintaining the smooth functioning of JGS markets
    In JGS markets, liquidity may decline and pricing may be hampered occasionally when market participants experience difficulties in securing specific issues or face uncertainties over their availability.
    This facility aims to contribute to enhancing liquidity and maintaining the smooth functioning of JGS markets. Furthermore, the facility is expected to facilitate the Bank's market operations and to promote the permeation of the effects of the operations.
  2. (2) Contributing to the smooth settlement of JGSs and funds
    This facility is intended to contribute to preventing disruption in JGS markets due to chains of fails caused by unexpected events such as system malfunctions.

3. Schedule

The Bank plans to receive applications for eligible counterparties to this facility from April 12, 2004 and to make this facility available from the middle of May, 2004.