1.STP and Settlement Risk Reduction for Securities Settlement Environment in Japan
As long as the institutional transactions are concerned, it is quite common that the institutions that perform investments and the institutions that perform settlement are different entities not only in Japan but also in other countries. However, typical in Japan is that trust banks retain the rights and obligations for the confirmation of investment of a specified money trust. For this reason, PSMS was developed to realize the straight-through processing (STP) suitable to the specifics of the securities settlement environment in Japan.
Furthermore, JASDEC continues to make efforts for improvements, responding to the new environment; PSMS has realized DVP settlement for stock lending and borrowing transactions since January 2014, in response to the local and global trends to further reduce settlement risk, notably required after the Lehman Shock on 2008.
2.Establishment and Application of Japanese Standards in Conformity with Global Standards
Securities markets have been globalized so quickly. Until the launch of PSMS, securities settlement systems used to be constructed on the vernacular architecture of data syntax, network and codes, which can be only used in the domestic market, but now settlement systems must be created, incorporating the factor of connectivity to overseas counterparts. To achieve this, PSMS was developed based on the following standard data syntax, network and codes:
Data Syntax: ISO20022ISO15022 is the data syntax which had been originally developed for SWIFT (Society for Worldwide Interbank Financial Telecommunication) network for securities and cash settlement data, and then was registered with ISO (International Organization for Standardization) in the autumn of 2002. Added to this, ISO20022 was issued in 2004, as a new international standard with regard to the registration procedure of data syntax used in financial industry. Since then, as a successor of ISO15022, it is becoming a global trend to adopt the next-generation data syntax which conforms to ISO20022.
PSMS, from its very beginning, has adopted data syntax which is based on ISO15022. From January 2014 on, PSMS supports new syntax, which is in full conformity with ISO20022. The use of these data syntax will make it possible, for example, that Japanese sub-custodians easily transmit settlement instructions to PSMS, which are sent from global custodians.
Since ISO20022 has the scalable architecture, it is also expected to assure the scalability of PSMS to meet future increase of the scope of securities to be handled and diversification of types of trades.
Securities Identification Number: ISINISIN (International Securities Identification Number) is the standard code allocated by Securities Identification Code Committee in conformity with International Securities Identification Code Standard (ISO6166), and all Japanese domestic shares (and all bonds issued by public offering in Japan as well) are allocated with JP+ basic code+ check digit (12 digits in total). ISIN is the only globally common code, since it is allocated by the securities identification code organization of each country in accordance with International Identification Code Standard. The adoption of ISIN will assure the same effect as the adoption of ISO20022 mentioned above.
Business Identifier Code: BICIt is necessary to identify various participating parties, such as counterparties of trading and counterparties of settlement, in PSMS by code numbers. BIC is being used as standard identifier code of business entities in ISO20022 and is registered with ISO as ISO9362. In order to utilize PSMS, it is basically necessary for all users such as banks, securities companies, investment trust companies and investment advisory companies to obtain BIC. In case it is not possible to obtain BIC for some reasons, other identifier such as Uniform Bank Code or Standard Code for Securities Company will be supplementary used for identification in PSMS.
3.Matching on Trade Date (T + 0 Matching)
While PSMS was implemented under the T+ 3 environment (indicating a trade will be settled three business days after the trade date), this aims to complete the matching of the trades on the trade date, T+ 0, to keep pace with the movement of securities industry to shorter settlement cycle, T+ 1/T+2. Now more than 99 percent of domestic equity transactions finish the trade matching process on the trade date.
We believe that completion of trade matching on T+ 0 helps increase the convenience for the investment trust management services. To be precise, open-end investment trust is required to calculate and announce the Net Asset Value (NAV) every day, which should be done accurately and promptly. The PSMS provides facilities to match the investment instruction data sent by investment trust companies and trade report data sent by securities companies on a real time basis, and then sends matched data to trust banks. This enables trust banks to smoothly and accurately calculate the NAV and match it with the NAV calculated by investment trust companies more quickly and accurately.
4.Connecting to Central Counterparty (CCP) and Securities Settlement Systems
Clearing and DVP settlement play a vital role in mitigating settlement risk. To realize these post-trade processes smoothly, it is essential for concerned parties to reconcile trade/settlement details in advance. From this perspective, the trade matching and settlement matching conducted in PSMS are considered to be fundamental. Furthermore, automated and electronic exchange of information is necessary in order to realize STP in a series of processes from matching through clearing to settlement. This should be applied not just between users and PSMS, but among market infrastructures for matching, clearing and settlement. Based on these backgrounds, PSMS has realized the automatic linkages to CCP and Securities Settlement Systems.
Shares, etc.On May 17, 2004, with the implementation of the DVP settlement system for NETDs (non-exchange transaction deliveries,) PSMS started providing a linkage to the Book-Entry Transfer System (BETS) for Shares, etc. The matched settlement instruction data of shares, etc. with the linkage instruction to the BETS, is automatically transmitted from PSMS to the BETS, thereby completing the settlement process without any manual interventions. The participation to PSMS is requisite for putting the DVP settlement into practice under DVP settlement system for NETDs.
Corporate Bonds and Commercial Paper (CP)From January 2006 on, PSMS covers corporate bonds and CP, and provides the link to BETS for Corporate Bonds and CP. Same as shares, etc. and CB noted above, the matched settlement instruction data of corporate bonds and CP, with the linkage instruction to the BETS, is automatically transmitted from PSMS to the BETS, thereby enabling DVP settlement.
Japanese Government Bonds (JGB)While JGB transactions are settled in Bank of Japan (BOJ), PSMS started providing trade matching and settlement matching functions for JGB outright transactions in May 2003. Added to this, from February 2005, trade matching function for JGB "Repo" (lending and borrowing) and "Gensaki" (repurchase agreement) transactions are covered, preceding the initiation of the JGB clearing business by Japan Securities Clearing Corporation (JSCC), which was called Japanese Government Bond Clearing Corporation (JGBCC) in May 2005. And in accordance with the launch, PSMS began to link data to the JSCC System. The matched trade report data of JGB, with the linkage instruction to the JSCC , is automatically transmitted from PSMS to the JSCC System. As long as the trades are recognized as the target of obligation assumption, PSMS receives data generated by the JSCC System such as netting result and forwards these data to the JSCC participants.