JSF was established in 1950 as a specialised institution supporting loans for margin transactions (LMTs). These margin transactions were introduced in Japan after World War II to increase the liquidity of its stock markets, recognising that Japanese securities companies did not have the same fundraising capabilities as they do today and the stock lending market was still undeveloped. Consequently, LMTs were introduced for securities companies in 1951, enabling securities or funds to be delivered for settling margin transactions.
JSF is licensed to engage in LMT operations and is currently the only securities finance company in Japan.
What are JSF’s primary business lines?
JSF’s core business continues to be LMTs and we serve as an important infrastructure for Japan’s securities and financial markets.
In addition, JSF is focusing on its lending business, lending securities such as Japanese government bonds (JGBs), government-guaranteed bonds and Japanese stocks, along with financing and collateral upgrade transactions.
In the funding and upgrade businesses, JSF accepts a range of assets and provides high-quality liquid assets (HQLA) such as cash and JGBs. Eligible assets include JGBs and Japanese stocks, as well as Asian equities such as Taiwanese stocks and Hong Kong stocks.
Asia’s stock markets continue to differ significantly in terms of their regulatory frameworks and market characteristics. We draw on our deep pool of knowledge across Asia’s markets — supporting trading in Asian assets and cooperating with a triparty collateral management service — to ensure that trades are compliant with these regulations.
By accepting Asian assets, including Japanese stocks, and providing HQLA, we are able to meet the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) regulatory compliance needs of financial institutions such as global systemically-important banks (G-SIBS).
What are the latest trends in the lending market for Japanese bonds? What role does JSF play in this market?
Short trading in JGBs, mainly implemented by hedge funds and other overseas firms, has been growing owing to speculation around changes to the Bank of Japan’s monetary policy. Supply and demand of JGBs has been extremely tight in recent market conditions, with the spread between domestic and overseas repo rates widening for both special collateral (SC) and general collateral (GC) transactions.
As one of the top brokers in the Japanese repo market, JSF plays an important role in mediating between the domestic and overseas repo markets. JSF has a high level of expertise in Japanese assets, maintains a strong credit rating, and brokers repo transactions with coverage reaching almost all financial institutions in Japan. JSF has an established reputation for speedy and accurate transactions from lenders and borrowers, supporting the needs of clients in Japan and abroad.
The balance of JSF’s bond repo transactions has grown rapidly, by about 2.5 times in the last three years. One reason for this has been a larger number of transactions with overseas clients.
As a professional with knowledge of Japanese stocks, what trends do you see in the lending market for Japanese stocks?
The Nikkei Stock Average has remained above 30,000 since mid-May 2023, its highest level in about 33 years. The performance of Japanese equities markets stands out among the major developed country stock markets and is attracting the attention of domestic and foreign investors.
Against this backdrop, lending of Japanese stocks is also strong. The rise in Japanese stock prices has strengthened demand from investors for all Japanese assets and JSF offers a range of flexible solutions to support this demand. Trading volume is substantial, particularly given that clients wish to increase their inventory of Japanese stocks, including small-caps.
Alongside demand for short-cover purposes, there has been a growing appetite to receive Japanese stocks as collateral when borrowing other assets. Japanese assets are in demand for use as collateral since they are widely eligible for transactions using triparty collateral management services and collateral deposits with a central counterparty (CCP). We have been able to meet the needs of a wide range of market participants by accepting not only Japanese yen, but also foreign currencies and domestic and foreign securities as collateral for Japanese stock lending transactions. As a result, the balance of our Japanese stock lending transactions has increased tenfold over the past decade.
In terms of SC transactions, lending in the past has typically been through callable loans. However, non-call lending is also becoming more common in line with efforts to expand suppliers. It is possible to lend a variety of Japanese stocks — including small-cap stocks listed on the Growth Market where lenders such as pension funds have limited holdings — to meet the borrowing needs of market participants.
Given this flexibility, the Japanese stock market continues to be a popular market both domestically and internationally and we expect further growth in the future.
What are some of JSF’s initiatives for the business globally outside of Japan?
JSF has focused its business on Japanese markets. However, it is also an important player in Asian markets and we have recently started funding with Asian stocks, including equities listed in Taiwan, Hong Kong and South Korea. We can accept these assets and offer JGBs, Japanese yen and US dollars in return. The demand to access HQLA is increasing — partly due to the impact of liquidity regulations imposed on major financial institutions — and the number of repo transactions handled by the JSF is also on the rise.
Japanese institutional investors and regional banks hold substantial portfolios of JGBs and we are well positioned to source this supply, given the strong relationships that we have with these organisations owing to our high credit rating and neutrality (we do not belong to any major Japanese financial group). As a broker, we can source JGBs from these organisations and meet demand from overseas investors.
Our business has grown in recent years as many global banks, broker-dealers and investors have entered the Japanese market. Alongside the depth of our expertise in Japan, we have strong knowledge of the international lending market, especially in Asia, and we do business with many overseas clients, including G-SIBs.
In addition, we are considering entering derivatives markets globally, including the total return swaps market, to support the growing demand for synthetic transactions using derivatives.
What are your latest initiatives?
We are focusing heavily on the IT field in response to the ongoing expansion of the fintech sector. As noted, we have been offering LMTs since 1951 and have a well established history in this sector. Consequently, we have a large amount of trading data for LMTs and margin transactions which provides valuable insights on trends in the Japanese equities markets, particularly the trading trends of individual investors. With this in mind, we offer a data provision business and sell data to domestic and overseas investors as well as information vendors.
Beyond this, we are looking to expand into distributed ledger technology (DLT). As a specialist in securities finance, we believe that the use of blockchain technology and digital tokens in securities finance is a valuable area to explore. Based on this idea — in collaboration with Associate Professor Kenji Tanaka and his research lab at the Graduate School of Engineering of The University of Tokyo — we have been conducting empirical research on whether DLT can be used to facilitate securities finance trades based on tokenised securities and collateral. JSF published a report based on this research in May 2023.
More broadly, Japanese margin transactions and LMTs are excellent mechanisms for providing liquidity to securities markets and represent a highly effective means of developing securities markets in emerging countries. JSF provides know-how on margin transactions and LMTs to China, South Korea, Thailand and other countries and this has encouraged the formation of securities finance companies in these locations. Most recently, JSF helped to establish PT Pendanaan Efek Indonesia, an Indonesian securities finance company, and we are a leading investor, alongside the Indonesian stock exchange group, holding a 10 per cent stake in this company.
We will continue to leverage the advantages of our unique business format to reinforce our presence as Asia's leading securities finance specialist, thereby providing a connection between Asia’s fast-growing securities finance sector and wider global markets.
Image: Yosuke Kobayashi 