Country Profile: Japan's securities finance market

Country Profile: Japan's securities finance market

Japan equity data supplied by IHS Markit
  • Japan is the largest market in Asia Pacific
  • Japanese equity had a very strong year and total revenue surged 50% to $305m
  • Fees rose by a third to 1% while average balances jumped 12% to $29bn
  • Cyberdyne generated $20m for lenders
  • Inventories held flat at $575bn

Japan’s equities earned more than 50% additional revenue in dollar terms than the total recorded for 2015, according to IHS Markit data. This bumper surge means Japan was responsible for one-third of the region’s equities revenue – a sharp increase from the 22% share seen in 2015. It was the single largest force behind the 10% jump in Asian securities lending revenues registered last year.

“The revenue momentum has continued into the New Year as Japanese equities have generated 45% more revenues in local terms for beneficial owners in the opening six weeks of 2017 than they did over the same period in 2016,” said IHS Markit analyst Simon Colvin.

This jump is even more significant in dollar terms as the rising value of the yen means that the $40m generated by Japanese equities lending year-to-date is 50% ahead of the $26.5m generated at the same point in 2016.

“This will come as welcome news for the industry considering that the rest of the Asian region is has so far failed to match the revenues generated at this point last year,” said Colvin. “In fact, Asian equity securities lending revenues are trailing the $112m earned in the opening six weeks of 2016 by 3%.” 

Fees are by far and away the single largest contributing factor behind Japan’s rosy revenue figure. The weighted fee commanded by Japanese equities ranged between 75bps and 80bps from 2013 to 2015, however that number went on to surge to 100bps last year. The increase in fees is showing no sign of slowing down in 2017 as the weighted-average fee charged to borrow Japanese equities so far this year is 124bps, far above the 80bps weighted average fees generated in the opening six weeks of 2016. 

“This massive 57% increase in the fees commanded by Japanese loans has so far failed to scare off investors as the average balances were JPY3trn in the first six weeks of 2017 – roughly on par with the JPY3.2trn seen over the start of 2016,” says Colvin.

The minority of Japanese stocks that trade special have played an outsized role in the surge in fees as their proportion has doubled over the last two years. Japanese stocks now have a 12% chance trading special (using a threshold of 100bps for fees). “This proportion is by far and away the highest out of any period registered over the last 24 months,” adds Colvin.

Furthermore, these specials are getting increasingly more expensive to borrow as the weighted average fee of all specials registered a 24-month high of 670bps in the opening weeks of the year. The Japanese specials fee has come in somewhat over the last month to 550bps; however the current rate is still materially higher than the 430bps needed to borrow Japanese specials over the middle of 2015.

“These specials are more than likely driven by short seller demand as technology and consumer discretionary firms, which have long been favorite targets of short sellers, make up over half of the current crop of Japanese specials,” says Colvin. Standout tech specials includes such firms as internet messaging portal Line Corp which now costs over 11% to borrow after a series of lackluster earnings took its shares below their IPO price and AI software provider Jig-Saw which commands an astronomical 33% in the securities lending market.

Highlights in the consumer discretionary sector, which includes retailers and automobiles firms, include electronics retailer Edion, which has 16% of its shares outstanding on loan, as well as airbag maker Takata whose shares cost more than 15% to borrow after the some of its products were found to be defective.

Unsurprisingly these resilient fees, and the ensuing revenues they generate, are increasing the attractiveness of Japanese equities for beneficial owners who are willing to lend these assets. Beneficial owners have earned two thirds of a basis point from the JPY68trn of Japanese equities in lending programmes; one third more than the year-to-date earnings figure registered at the same point last year.

 Bumper revenues generated from lending Japanese equities have so far failed to attract any significant new supply looking to grab a piece of the action. If anything the lendable pool has been getting shallower over the last 12 months as the value of Japanese equities in lending programmes only jumped by 25% in yen terms. While significant, at first glance it’s worth noting that the surge in lendableis 5% less than the 30% jump registered in the Nikkei 225 index over the same period.

 “Specials in Japanese equities were mainly found amongst the more illiquid names, small caps rather than large caps, and there is no indication that this will change anytime soon. 2016 has not been a great year from a specials perspective,” says Ariel Winiger, head of secured financing Asia Pacific, Societe Generale.

 Collateral management

A major theme from 2016 was that providing Japanese government bonds (JGBs) as collateral became very popular. Winiger adds: “JGB usage increased a lot over the last year or so. That was perhaps the standout trend in Japan – JGBs were one of the cheapest types of collateral to deliver last year, behind JPY cash. This is likely to to continue.”

 Davin Cheung, global funding and financing sales, APAC, Clearstream Banking says: “Japan was one of the earliest countries to implement initial margin segregation rules for OTC derivatives in September last year, so all the Japanese banks are grading tri-party accounts in order to post or receive initial margin collateral.”

 In phase one only the largest banks are affected and later phases will take in smaller and buy-side entities “so you are talking about quite significant amount of new collateral accounts to be opened in subsequent implementation waves,” predicts Cheung.

 Natalie Wallder, head of collateral management & segregation, Asia Pacific, BNY Mellon, says: “Given the increasing requirements to provide high quality liquid assets, the popularity of Japanese government securities within tri-party continues to rise as clients source alternative quality collateral, which for BNY Mellon specifically, now makes up a significant portion of our global book.”

 The market infrastructure in Japan continues to evolve. On 1 January 2016 Japanese and non-Japanese client assets were permitted, for the first time, to be comingled at Japanese depositaries providing opportunities to facilitate cross-border exchange of collateral within tri-party.

 Market settlement deadlines for JGB were also extended in 2016 to 9pm Tokyo time. “We hope to see further positive market developments as Bank of Japan’s consultation with market participants continue,” adds Wallder.

 ICBC Standard Bank: Expert eye on repo

Japan is becoming a more important jurisdiction for domestically based repo transactions. Everyone in the repo market is familiar with the activities of the megabanks, however there is a definite increase in the amount of business conducted offshore using local legal agreements. Daisuke Tanimoto from AMT Law, a premier law firm in Asian financing, highlights: “There are two types of repo transactions in Japan: Gentan repo transaction (i.e. a security lending transaction collateralised by cash) and Gensaki repo transaction (i.e. a sale of securities for cash with a commitment to repurchase).

 Although Gentan repo transactions are still prevalent in Japan, there is a shift towards a wider use of Gensaki repo transactions. In light of the introduction of a T+1 Japanese Government Bond (JGB) settlement cycle, which is expected in 2018, the Japan Securities Dealers Association (JSDA) has taken initiatives to introduce a new Gensaki repo transaction framework, designed to reflect the global standard. For such purpose, the JSDA revised its self-regulatory rules and published a new set of standard form contracts for new Gensaki transactions in July 2016.”

 This movement will see more offshore participants engaging with the local banking community providing diversity of funding. 

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