for non-exchange transaction deliveries non-exchange transaction deliveries (project outline) ......
TRANSCRIPT
D V P for
Non-Exchange Transaction Deliveries(Project Outline)
July 2003 Japan Securities Depository Center (JASDEC)
JASDEC DVP Clearing Corporation (JDCC)
Key points of documents distributed at the joint explanatory presentation meetingby JASDEC and JDCC in July 2003
[Japan Securities Depository Center (JASDEC)]- JASDEC is the only central securities depository in Japan designated under the Law concerning Central Securities Depository and Book-Entry Transfer of Stock Certificates and Other Securities (CSD Law). JASDEC provides depository and book-entry delivery services for marketable securities.
[JASDEC DVP Clearing Corporation (JDCC)]- JDCC, a wholly-owned subsidiary of JASDEC, was established to provide clearing services as a central counterparty when the DVP for non-exchange transaction deliveries is implemented in 2004.
Notes: - The JASDEC DVP project is subject to the approval of the Ministry of Justice, the Financial Services Agency, and the Bank of Japan (BOJ).
References: The Committee on Payment and Settlement Systems (CPSS) of the Central Banks of the Group of Ten Countries (1992)“DELIVERY VERSUS PAYMENT IN SECURITIES SETTLEMENT SYSTEMS”
CPSS-IOSCO Joint Task Force on Securities Settlement Systems (2001)”RECOMMENDATIONS FOR SECURITIES SETTLEMENT SYSTEMS”
Overall View: Current System
Participant A
Participant B
Participant C Participant Z
Participant Y
Participant X
JASDEC (Securities Settlement)
Shares
Shares
Shares
Shares
1
[Current system]- Currently, JASDEC holds securities deposited by participants in its vault and makes book-entry deliveries according to instructions by participants.
- Payments are made elsewhere according to the arrangements between participants.
Overall View: Proposed DVP System
JDCC
Participant A
Participant B
Participant C Participant Z
Participant Y
Participant X
JDCC
Sett. Bk QAcct.
Part. ZAcct.
Part. BAcct.
Sett. Bk PAcct.
Part. AA Acct.
Y Acct. Part. Y
C Acct.
X Acct.Part. X
Part. C
JASDEC (Sec. Settl.)
BOJ (Fund Settl.)
Settling Bank QSettling Bank P
36
73
2
5
7
1
Netting
22
77
55
33
2
* Figures in the chart above stand for either settlement amount of a delivery, participant settlement amount, or settling bank settlement amount.
[Purpose of the proposed DVP system]- JASDEC DVP plan is designed to establish strong linkages between securities settlements and payments of funds.- The proposed DVP system is a principal measure for mitigating settlement risks as well as an essential step for completing straight through processing (STP).
[DVP system run by JDCC]- JASDEC set up JDCC, a wholly-owned subsidiary, to provide a solid legal basis for the proposed netting scheme by utilizing the clearing organization system introduced through the amendment to the Securities and Exchange Law in January 2003.
- A legal entity separate from JASDEC also fits to run the proposed gross-net DVP system since a central securities depository (CSD) and a clearing organization have different priorities with regard to their risk management. As a CSD, JASDEC is primarily concerned with operational risks. The credit risk associated with the default by a participant of the proposed netting scheme will be taken care of by JDCC, a clearing organization.
JSCCM/P
M/P
M/P
M/P
INVNM/P
NM/P INV
INV
Types of Deliveries :For Exchange Trades / For Non-Exchange Transactions
M/P: Stock Exchange Members & JASDEC Participants (Securities firms)NM/P: Non-Member s& JASDEC Participants (Banks, etc.)INV: Investors (Institutions, Foreigners, etc.)
: Deliveries for Exchange Trades: Deliveries for Non-Exchange Transactions: Other Instructions 3
(JDCC)
* This chart illustrates an example of deliveries of securities of an issue.
[Coverage of DVP for NETD]- DVP for NETD covers deliveries for non-exchange transactions which include:
a) Deliveries between a member participant and a non-member participante.g. 1) Deliveries between a trust bank and a broker for institutional investors
2) Deliveries between a custody bank and a broker for foreign investors b) Deliveries between a member participant and a member participant* c) Deliveries between a non-member participant and a non-member participant*
* Not shown in the slide above.
[Function of JDCC]- When DVP for NETD is implemented, JDCC will act as a central counterparty (CCP) of the deliveries for non-exchange transactions.
[Function of JSCC]- Japan Securities Clearing Corporation (JSCC) acts as a CCP of the trades at stock exchanges and JASDAQ.
STP Environment & DVP for NETD Trading
Matching
Automated transmission of orders and execution of contracts
Trade Matching
Settlement Matching
Automated matching of trade report data between contracting parties (Only for domestic transactions)
Automated matching of settlement instruction data between the settlement parties
Transmission of contracts
Delivery of Security
Entry of Settlement Price
Delivery execution / completion
Recording settlement price andnetting debit / credit
Confirmation of paymentsNetted settlement amount
Transfer of Funds Payment / receipt of settlement amount
Risk Control
▫ Executing conditions▪ Net debit cap▪ Assurance Assets (monitor)
▫ Completing conditions▪ Ensuring payments of funds
▫ Liquidity source▪ Participant fund▪ Credit line
DVP for NETDTransmission of settlement instruction (issue, number of shares,accounts, settlement amount, etc.)
JASDECPre-Settlement
Matching System
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[To Promote Straight Through Processing]- Upon launching of DVP for NETD, a direct linkage between the Pre-Settlement Matching System and the Book-Entry Transfer System will be established.
- Settlement instructions will be made up from settlement matching data by the pre-settlement matching system and transmitted to the DVP system directly.
.
Objectives: To Reduce Risk & Promote STP
Eligible transactions: NETD (Non-Exchange Transaction Deliveries)
Eligible Securities: Stocks, Convertible bonds, ETFs, etc.
Safeguards: • Liquidity • Assurance Assets
Process: • Book-Entry Delivery of Security [gross basis] • Transfer of Funds [net basis]• Default Procedure
Schedule: To be launched in May 20045
OUTLINE: DVP for NETD
[Risk Reduction]DVP for Non-Exchange Transaction Deliveries (NETD) will assures that:- A deliverer receives payment for the securities delivered.- A receiver pays only the price of the securities received.=> The principal risk associated with default by participants will be mitigated by JDCC acting as a CCP.
[BIS/CPSS DVP Model]Model 1: Gross, simultaneous settlements of securities and funds transfersModel 2: Gross settlement of securities transfers followed by net settlement of funds
transfersModel 3: Simultaneous net settlement of securities and funds transfers
- The JASDEC DVP project will be based on DVP Model 2.
Safeguards
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Assurance Assets(for each participant)
To mitigate principal risk▪ Participant Fund ▪ Securities-to-be-received▪ Pledged Securities
LiquidityTo mitigate liquidity risk▪ Participant Fund▪ Bank Credit Line
Net Debit CapTo confine a default
within manageable size
[Net Debit Cap] - Net debit is defined as the excess amount, if any, of the accumulated settlement amount of securities-to-be-received over the accumulated settlement amount of securities delivered. The maximum limit (i.e. Net Debit Cap) for a participant shall be determined based on the historical data of the settlement activity of the participant and reviewed daily.
[Participant Fund]- The required contribution amount to the participant fund for a participant is determined based on the historical data of the settlement activity of the participant. The amount is reviewed periodically.
[Securities-to-be-received] - Those securities for which a DVP delivery has been executed and held in the JDCC account. Securities-to-be-received shall be included in the deliverable balance and assurance assets of its receiver.
[Pledged Securities]- Securities pledged to JDCC. Securities deposited to JASDEC and Japanese Government Bonds held at the Bank of Japan book-entry system are eligible to be pledged.
Procedure 1: Delivery of Securities (Outline)
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JDCCDVP
Account
ReceivingParticipantAccount
DeliveringParticipantAccount
Execution Completion
TWO STEPS: Execution & Completion=> Certain conditions must be satisfied for each step.
[DVP Instruction]- A DVP instruction is a book-entry delivery instruction accompanied by information on the payment of its settlement price.
[Execution]- If a DVP instruction satisfies all conditions for executing DVP (executing conditions), securities subject to the delivery are delivered form the account of the delivering participant to the account of JDCC. - A DVP delivery instruction that fails to satisfy any of the executing conditions is put into a recycle cue.
[Completion]- If a receiving participant satisfies any condition for completing DVP (completing conditions), the securities subject to the delivery are delivered from the account of JDCC to the account of the receiving participant.
[JDCC DVP Account]- For the purpose of DVP delivery, the JDCC will open an account at JASDEC to hold securities until the payment for the securities is assured.
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Procedure 1-1: Execution of Deliveries
[Conditions for Execution]
A DVP settlement instruction shall NOT cause:1 ( Receiver’s net debit > Cap )2 ( Receiver’s assurance asset value < Net debit )3 ( Deliverer’s assurance asset value < Net debit )4 ( Deliverer’s balance of securities < 0 )
* Upon execution, the settlement amount is recorded to theFund Memorandum Ledger.
[Assurance Asset Value]a) The amount of cash a participant deposits to the participant fundb) The value of securities-to-be-received (Haircut shall be applied.)c) The value of pledged securities (Haircut shall be applied.)
[To Satisfy Requirements for Execution]a) Decrease net debit by making settlement progress payment
[Settlement Progress Payment (Credit)] Money wired by a participant to JDCC current account at BOJ.
b) Increase assurance assets by pledging securities to JDCC* Execution of a DVP instruction decreases the net debit of the delivering participant.
[Executing DVP Instruction]- If a DVP delivery instruction satisfies all the requirements for execution, JDCC / JASDEC carry out the following:a) Book-entry delivery of the securities from the account of delivering participant to
the JDCC DVP account.b) The following entries to the fund memorandum ledger.
x) Debit to the receiving participant and credit to JDCCy) Credit to the delivering participant and debit to JDCC
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Procedure 1-2: Completion of Deliveries
[Conditions for completion]
A DVP settlement instruction shall be completed if :(End-of-Day)1 The receiver has net credit.2 The receiver makes payment for its net debit.
(Intra-Day)3 The receiver makes an instruction that causes redelivery,
withdrawal, etc. of the securities-to-be-received and the instruction satisfies the conditions.
[Completion]- A DVP security delivery is completed, i.e. the relevant securities are booked to the intended receiver account, only after the risk associated with the default by the receiver is eliminated by one of the three ways.
[Illustration: Intraday completion by redelivery]
DVP Transaction 1: Participant A delivers to Participant B
Part. A = > JDCC ···> Part. B(Deliverer) (Receiver)
DVP Transaction 2: Participant B delivers to Participant C
JDCC = => Part. B => JDCC ···> Part. C(Deliverer) (Receiver)
= >: Executed= =>: Completed···>: To-be-completed
Procedure 2: Payment (Outline)
[1] Entry to Fund Memorandum Ledger (FML)
[2-1] Determination of Participant Settlement Amount
[2-2] Determination of Settling Bank Settlement Amount
[3] Funds Transfer Through Bank of Japan Financial Network System
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- Payments and receipts of the funds are made once a day after the cutoff time of the processing of DVP instructions.
- A participant may choose either to make settlements of funds by itself, or to designate a settling bank. A self-settling participant is required to have a direct access to the Bank of Japan Financial Network System.
Procedure 2-1: Payment (1)
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[1] Entry to Fund Memorandum Ledger (FML)
Upon Execution of Delivery: Two sets of entries
Deliverer FML JDCC FML Receiver FMLEntry 1) Credit Debit Entry 2) Credit Debit
[2-1] Determination of Participant Settlement Amount
A participant’s settlement amount is its end-of-day net debit or net credit
[Fund Memorandum Ledger (FML)]- Settlement amounts of DVP deliveries and settlement progress payments are recorded in the FML of each participant and JDCC. The balance of the FML represents either the amount payable or receivable for the participant and JDCC.
- Entries to the FML are made at the point of the execution of DVP instructions and the receipt/return of settlement progress payments by JDCC.
[2-2] Determination of Settling Bank Settlement Amount
A settling bank pays / receives the following amount.1) Net debit or credit of the settling bank2) Net debit or credit of the participants using the settling bank
* A settling bank may make payments / receipts for the total amountof the 1) and 2) above.
Procedure 2-1: Payment (2)
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[3] Fund Transfer Through Bank of Japan Network
Participants / settling banks pay to / receive from JDCC through JDCC’s current account at the Bank of Japan.
[Payment and Receipt of Funds Between a Participant and a Settling Bank]- A participant who uses a settling bank pays or receives funds in accordance with the arrangement between the participant and the settling bank.
- JDCC recognizes the payments or receipts of participant settlement amount through the payments or receipts between JDCC and the settling bank.
Default Procedure
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IN CASE OF A DEFAULT:
[1] Completing PaymentJDCC makes up the deficiency by applying:
a. Participant fundb. Borrowing from bank
[2] Recovery of the Applied LiquidityJDCC liquidates securities held as assurance assets of the defaulting participant.
=> Pay back the bank loan & recover the participant fund
- Systemic risk will be minimized by securing sufficient liquidity.