SECURITIES SETTLEMENT REVOLUTION: JGB T+1 & the Dawn of a New Repo Market

  (Source: Wikipedia, Bank of Japan Head Office)

This series of reports on the so-called “securities settlement revolution” will focus on key trends and changes in Japan‘s securities settlement market while exploring legacy systems and ecosystem migration, as well as the related possibilities of innovation and emerging technologies in this context.

The first effort in the securities settlement revolution involves shortening the settlement cycle for JGBs, planned for the spring of 2018. In April 2012, the market successfully introduced a settlement cycle that was shortened to two business days (T+2) for outright JGB transactions and special collateral (SC) repurchase transactions (repos) and one business day (T+1) for general collateral (GC) repos (together collectively regarded as T+2). The upcoming “revolution” hopes to shorten this settlement cycle to T+1, one business day after a trade.

Market participants should take this event as an opportunity to modernize their business processes and systems:

  1. Initiatives to shorten the settlement cycle for JGBs and securities.
  2. Efforts to enhance the functions, and expand the use, linkages, and integration of the CCP.
  3. Enhanced functions of the central securities depository (CSD).
  4. Accelerated adoption and use of straight-through processing by market participants.
  5. Facilitating smoother cross-border securities settlement. The revolution in the works will go beyond mere cosmetic reforms to the market system.

This new market, envisioned to reach a scale of 20 trillion to 30 trillion yen, could cause structural change.

  1. The coming watershed in repo trading is an opportunity to create a new repo market.
    This is because of the shift from Japan’s unique “gentan” repo (securities-lending
    approach) to the “gensaki” approach, which is the international norm.
  2. With the advent of this new system, a same-day settlement market will emerge in
    Japan’s money market. 

Technology continues to evolve. It advances without waiting for the financial industry or its players to come to grips with it or to develop pertinent applications. The securities settlement revolution in Japan has unfolded slowly, requiring more than 15 years all told. The coming financial infrastructure revolution should not take place at such a glacial pace.

Financial institutions find themselves at a point where they should reconsider their approaches to financial infrastructure management. System reform will need to be tackled. Loosely coupling (or unbundling) connections with the financial infrastructure (exchanges, clearing houses, and settlement infrastructure) can increase the available options in business and IT sourcing models, contributing to strategic flexibility.

To be continued – Click here

 

Related release:

Securities Settlement Revolution: JGB T+1 & the Dawn of a New Repo Market

 

Electronic and cross-border trading in Asia

I recently participated as a moderator in two panel discussions on the South East Asian markets in the SunGard City Day held in Singapore on 14th July, the topics being electronic trading and cross-border trading respectively. An important point that came out of the discussions was that Asia-Pacific cannot be seen as one market, unlike the European Union. It comprises of various national markets at different stages of development. Japan, Australia, Singapore and Hong Kong are the leading markets in the region. By comparison, markets such as Indonesia, Malaysia and China are lagging behind. The difference can be seen in terms of infrastructure, e.g., the differences in the latency of the exchanges, as well as the number of products that can be traded on them. In the leading markets, the circumstances are becoming more conducive to high-frequency trading and the operation of alternative trading systems, including dark pools. Co-location services are being provided by the exchanges and the regulators are reducing the barriers on off-exchange transactions, such as the limits on the size of transactions and the time limit within which a transaction has to be reported. A crucial factor in the adoption of greater electronic and algorithmic trading will be the willingness of the buy-side to develop the infrastructure for the same. An interesting example that was quoted in the event was that a buy-side trading desk took three months just to fine-tune the latency of their connectivity to the exchange. What this highlights is the fact that while many in the local sell-side and increasingly the buy-side are convinced of the need to have algorithmic trading, it will take time to put the necessary systems in place. Also, the local players are not sure about whether they can afford the level of investment (and the time taken) required to create the trading infrastructure. Hence, the barriers to adoption of technology are more practical than theoretical, unlike earlier. In fact, most of the panelists stressed that there has been a sea-change in the mindset of the domestic market participants in the last 2-3 years and they are much more open to having algorithmic trading and dark pools now. It is further expected that once ADR/GDRs can be traded in these exchanges, the level of algorithmic trading will go up, with the greater presence of exchange-traded funds also playing a similar role. However, the level of off-exchange trading in the next 3-4 years is expected to go up to 5% at the most, up from the current 1% but much below the 30% levels seen in Europe. Cross-border trading in the ASEAN region has picked up in the last few years. Regulation has also paved the way for this, e.g., in Malaysia, regulation has recently allowed up to 30% of the NAV of a firm to be used in trading assets abroad. Even before the recent ASEAN linkage between six countries was announced, cross-border trading was a prevalent phenomenon. The linkage is expected to increase the level of electronic trading and also make it cheaper and more efficient. The next step should be to develop the post-trading infrastructure and linkages between the central securities depositories.