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Outline of Transactions for the ETF Lending Facility

日本語

As of August 1, 2024
Financial Markets Department
Bank of Japan

I. Introduction

This document is an outline of the ETF lending facility, which the Bank of Japan operates based on the "Special Rules for Lending of ETFs". Please note that the following information may change in the future.

II. Principles

A. Location of lending

The Bank's Head Office (Operations Department)

B. ETFs to be lent

ETFs to be lent shall, pursuant to the Bank's relevant rules, be selected from ETFs held by the Bank.

C. Duration of lending

The duration of lending shall not exceed one year from the start day. Termination dates will not be specified in the contract and the borrower or the Bank may request to terminate the lending at any time.

D. Method of lending

The trustee, which manages ETFs held by the Bank as the trust property, shall lend the ETFs.

E. Lending rates

Lending rates shall be determined by one of the following methods.

  1. (a) Variable-rate method
    Lending rates shall be determined by multiple-rate competitive auctions under the conventional method.
  2. (b) Fixed-rate method
    Lending rates shall be determined by the Bank in advance, taking into account conditions of ETF markets.

F. Cash collateral

The borrower (those who receive notifications from the trustee as described in subsection III. C.) shall submit cash collateral to the trustee; the amount of such collateral shall be calculated by multiplying market prices of ETFs to be lent by the margins specified by the Bank based on historical market price fluctuations.

G. Interest rate on cash collateral

The interest rate on cash collateral shall be determined by the Bank, taking account of the level of the uncollateralized overnight call rate.

III. Auction

A. Notification of auction guidelines (offer)

When operating the ETF lending facility, the Bank selects auction participants from eligible counterparties. The trustee notifies auction participants of the following matters, pursuant to the Bank's decision.

  1. (a) Method for determining lending rates (variable-rate method or fixed-rate method)
  2. (b) ETFs for offer (the ETFs requested for offer by one or more auction participants among the ETFs to be lent; the same shall apply hereinafter)
  3. (c) Amount of offer per ETF
  4. (d) Lending rate (only applicable for the fixed-rate method)
  5. (e) Interest rate on cash collateral
  6. (f) Start day
  7. (g) Cut-off date and time for bid submission
  8. (h) Other matters deemed necessary by the Bank

B. Submission of bids

By the cut-off date and time for bid-submission notified in subsection A, auction participants notify the trustee (a) for multiple-rate competitive auctions, their desired borrowing rate and amount per ETF; and (b) for the fixed-rate method, their desired borrowing amount per ETF.

C. Acceptance of bids (notification of respective results to auction participants)

The trustee, after receiving bids as described in subsection B, accepts bids per ETF by (a) for multiple-rate competitive auctions, starting with the highest desired borrowing rate and continuing down until the total amount of bids accepted reaches the amount offered; and (b) for the fixed-rate method, the desired amount of borrowing. However, the Bank reserves the right to reject all or some of the bids that counterparties submit, when deemed appropriate.

For example, for the fixed-rate method, if, per ETF, the total borrowing amount desired by auction participants is greater than the total amount of offer, the lending amount will be allocated on a pro rata basis.

When accepting the bids, the trustee notifies auction participants who submitted bids as described in B, (a) for multiple-rate competitive auctions, the ETFs the trustee will lend, the lending rate per ETF and the lending amount per ETF; and (b) for the fixed-rate method, the ETFs the trustee will lend and the lending amount per ETF.

IV. Delivery and Return of ETFs

A. Delivery of ETFs

On the start day notified in subsection III. A., the trustee delivers the ETFs to the borrower simultaneously with the borrower's submission of cash collateral to the trustee.

B. Return of ETFs

On request of either party, the borrower returns the ETFs simultaneously with the trustee's return of cash collateral.

V. Marking to market of ETFs

In case there is a shortage or surplus of cash collateral as a result of daily marking to market of the ETFs that have been lent, the trustee shall accept or return cash collateral.

VI. Collection and payment of lending fee and cash collateral interest

The borrower and the trustee pay lending fee and cash collateral interest respectively on a monthly basis; such fee and interest shall be calculated based on the lending rate notified in subsection III.A. and the interest rate described in subsection II.G. respectively.