(Tentative translation)

Book-Entry Transfer Guidelines for“Corporate Bonds”

June 2022 Version（Enforced on December 1, 2022）

Japan Securities Dealers Association

Table of Contents
I. General ................................................................................................................................... 1
1. Purpose .............................................................................................................................. 1
2. Effective Date of the Amended Guidelines ....................................................................... 1
II. Guidelines for Ensuring Smooth Settlements ....................................................................... 2
1. Limitation on Size of Settlements...................................................................................... 2(1) Upper limit on size of settlements through the Book-Entry Transfer System ............ 2(2) How to handle transactions with face value exceeding the upper limit ...................... 2(3) Exceptions to the upper limit on size of settlements ................................................... 2
2. Establishment of Cut-off Time and Reversal Time ........................................................... 2(1) Establishment of Cut-off Time .................................................................................... 2(2) Establishment of Reversal Time.................................................................................. 2(3) Guidelines for Cut-off Time in the case where the closing time for DVP settlementtransfer messages on the Book-Entry Transfer System is extended. .......................... 3
3. Guidelines for Settlement Activities of Market Participants ............................................. 3(1) Settlement method for “Corporate Bonds” ................................................................. 3(2) Guidelines for activities up to the previous business day before the settlement day .. 4(3) Guidelines for activities from 9 a.m. to 12:00 noon on the settlement day ................ 4(4) Guidelines for activities from 12:00 noon to Cut-off Time on the settlement day ..... 4(5) Guidelines for activities after Cut-off Time on the settlement day ............................. 4
4. Points to Consider in Ensuring Smooth Settlements ......................................................... 5
III.

Guidelines concerning Fails ........................................................................................ 6

1. Definition of a Fail............................................................................................................. 6
2. Good-faith Efforts to Resolve Fails ................................................................................... 6
3. Premises for the Guidelines concerning Fails ................................................................... 6
4. Policy regarding Costs incurred under Fails ...................................................................... 7
5. Handling of Fails Charges ................................................................................................. 7
6. Applications to Fails based on Cut-off Time ..................................................................... 8
7. Guidelines for Payments and Receipts in the case where Coupon Payment and/or
Redemption have Occurred Prior to Resolution of Fails ................................................... 8

IV. Guidelines concerning Bilateral Netting ........................................................................... 10[Reference] .............................................................................................................................. 11
Guidelines for ensuring smooth settlements through customers’ accounts of the BOJ NETJGB Services System etc. (Framework) .................................................................................. 11
IV. Guidelines concerning Bilateral Netting ........................................................................... 11
1. Standard Netting Scheme ................................................................................................ 11(1) Netting structure ......................................................................................................... 11(2) Volume to be netted .................................................................................................... 11(3) Settlement methods that can be covered by netting ................................................... 11(4) Deadline for trade matching for netting ..................................................................... 11(5) Types of transactions eligible for netting .................................................................... 11(6) Form of holding securities .......................................................................................... 12(7) Transaction accounts eligible for netting .................................................................... 12(8) Pairing method ............................................................................................................ 12(9) Entry into effect of netting for contracts with the same delivery amount .................. 12(10) Designation of the account used for fund settlement ............................................... 12
2. Alternative Netting based on the Standard Netting Scheme ............................................ 12
3. Operational Procedures in Netting................................................................................... 14(1) Instructions for pairing and sorting ............................................................................ 14(2) Pre-settlement matching notice for netting ................................................................. 14(3) Deadline for pre-settlement matching ........................................................................ 14(4) How to send pre-settlement matching notices ............................................................ 14(5) Principle of cross-checking pre-settlement matching notices .................................... 15(6) Objection notice .......................................................................................................... 15(7) Departments responsible for pre-settlement matching ............................................... 15
4. Pre-settlement Confirmation, Pre-settlement Notice, and their Relation with
Pre-settlement Matching Notice ...................................................................................... 15
5. Netting other than Bilateral Payments Netting ................................................................ 16

I. General
1. Purpose
In Japan, since January 10, 2006, the Japan Securities Depository Center Inc. (JASDEC)
has been operating a Book-Entry Transfer System for “Corporate Bonds”, which enablesdelivery versus payment (DVP) settlement if processed through JASDEC’s Pre-Settlement
Matching System (hereinafter the Book-Entry Transfer System for “Corporate Bonds” andPre-Settlement Matching Systems together are referred to as the “Book-Entry Transfer
System”).
In view of the introduction of the book-entry transfer system by JASDEC, the Japan
Securities Dealers Association (hereinafter referred to as the “Association”), produced these“Corporate Bonds” Book-Entry Transfer Guidelines. Their purpose is to lay out thepractices that market participants should follow when trading corporate and municipal
bonds etc. to reduce settlement risk and facilitate smooth settlement under JASDEC’s
book-entry transfer system.
The Association hopes that all market participants will achieve smoother “Corporate
Bonds” transactions on the basis of the Guidelines.
It should be noted that the Guidelines do not inhibit, in anyway whatsoever, market
participants’ rights as guaranteed by law.
2. Effective Date of the Amended Guidelines
These Guidelines as amended (June 2022 Version) will take effect on December 1, 2022.

1II. Guidelines for Ensuring Smooth Settlements
1. Limitation on Size of Settlements(1) Upper limit on size of settlements through the Book-Entry Transfer System
Each market participant should set an upper limit on size of settlements processed
through the Book-Entry Transfer System at five billion yen in face value, in order tocurb the daytime accumulation of settlements outstanding and to resolve the delay ofsettlements, by reducing the amounts of bonds and funds necessary per settlement.
It should be noted that this provision does not hamper transactions with face value
exceeding the said upper limit.
(2) How to handle transactions with face value exceeding the upper limit(i) Market participants who have made bond transactions with face value exceeding
the 5 billion yen limit should input processing data via the Book-Entry Transfer
System by splitting the transactions in such a way that each size does not exceed 5billion yen.
(ii) For the purpose of preventing confusion arising from the discrepancy between
contract amount and settlement amount after splitting the transaction into smaller
sizes, market participants concerned should split agreement slips into units each ofwhich does not exceed 5 billion yen in face value.
(3) Exceptions to the upper limit on size of settlements
The upper limit on size of settlements does not apply to the following transactions inlight of their character:(i) New issue records (new issues) and removals (redemptions and buybacks, etc.);(ii) Transactions relating to the pledge and release of collateral.
2. Establishment of Cut-off Time and Reversal Time
(1) Establishment of Cut-off Time(i) For the purpose of recognizing Fails1 etc. aimed at completing all settlements in
one day, the Cut-off Time shall be the deadline, which market participants decided
in bond settlements, prior to the closing time of the Book-Entry Transfer System.
(ii) Market participants should complete sending all transfer messages by the Cut-offTime.
(iii) The Cut-off Time shall be 2:00 p.m.
(2) Establishment of Reversal Time
1

Refer to III. 1 regarding “Fails.”

2

(i) Reversal Time is the period of which parties executing the relevant transaction canresolve Fails if they have agreed to extend the delivery deadline over Cut-off Time,and correct errors in case of any errors in settlement procedures.
(ii) Reversal Time shall be the period from Cut-off Time to the closing time for DVP
settlement transfer messages on the Book-Entry Transfer System2.
(3) Guidelines for Cut-off Time in the case where the closing time for DVP settlementtransfer messages on the Book-Entry Transfer System is extended.
(i) Cut-off Time shall be automatically moved backward to the moment 1 hour prior
to the extended closing time for DVP settlement transfer messages on theBook-Entry Transfer System in the case where JASDEC has sent a notice ofextension to its participants with the coordination with the Bank of Japan at least
15 minutes prior to the original Cut-off Time.
(ii) To avoid confusion, Cut-off Time shall not be changed in the case where JASDEC

has sent a notice of extension to its participants less than 15 minutes prior to theoriginal Cut-off Time.
(iii) In the case where the original Cut-off Time has been extended, Cut-off Time shallbe renewed pursuant to above (a) and (b) if JASDEC sends another notice ofextension of the closing time for DVP settlement transfer messages on theBook-Entry Transfer System.
3.

Guidelines for Settlement Activities of Market Participants(1) Settlement method for “Corporate Bonds”(i) In terms of reducing settlement risks, market participants should settle bonds on a
DVP basis for both proprietary and customer accounts unless there is no otherseparate agreement between the two parties.
(ii) Market participants should promptly carry out matching after transactions are
made in order to facilitate smooth completion of settlements on the settlement day.
As a guide, this matching shall be completed by noon of the business day
immediately before the settlement date.
However, this does not preclude the transacting parties from otherwise setting amatching time limit upon mutual accord.
(iii) When market participants use the “transfer message suspension function”, theyshould understand that it is a measure to substantially control the timing of

2

As of the amendment of December 2019, the closing time for DVP settlement transfer messages on theBook-Entry Transfer System (closing time for the automatic processing from Pre-Settlement Matching System tothe Book-Entry Transfer System for “Corporate Bonds”) is 4:20 p.m. After this time corrections or reversals
cannot be made to the daily DVP settlement transfers. However, adjustments to non-DVP transfers being madethrough the Pre-Settlement Matching System may occur up to 4:50 p.m. and up to 5:00 p.m. for non-DVP
transfers not being made through that system.

3

sending transfer messages under the automatic processing from matching totransfer systems, and thus try to smoothen the settlements.
Moreover, if a balance remains when the “transfer message suspension function”
is utilized, participants shall cancel the function as soon as possible.
(iv) Ordinarily, the first priority for order of settlement should be placed on large-size
settlements to minimize the negative effects of Fails, and/or to enhance theprogress of operations. However, because there may be cases where operations aredelayed by giving priority to large-size settlements, the parties concerned should
be aware of actual conditions and execute settlement procedures accordingly.
(v) For settlements, market participants shall, in principle, use their quoting andoffsetting accounts with the Bank of Japan; provided that their home accounts
may be used subject to their mutual agreement.
(2) Guidelines for activities up to the previous business day before the settlement day
In the case that participants receiving or delivering bonds are using a fund clearing
company, the participants should promptly contact the clearing company with thesettlement information as soon as possible after the matching of issue or transfer iscompleted3.
(3) Guidelines for activities from 9 a.m. to 12:00 noon on the settlement day(i) Market participants should make every effort to finish all settlements by 12:00
noon in order to facilitate smooth completion of settlements on the day.
(ii) Market participants remitting funds for bond issuance should pay the issuanceprice as soon as possible after 9 a.m. in order to ensure smooth settlements in thesecondary market on the issuance day.
(4) Guidelines for activities from 12:00 noon to Cut-off Time on the settlement day(i) Parties who have settlements remaining unexecuted at 12:00 noon should contact
the other parties and require immediate transmission of bonds or funds transfer
messages, after making sure of the details of such transactions.
(ii) Where settlements have dragged on near to Cut-off Time, the parties delivering
bonds should inform the receiving parties of such matters in well advance toensuring smooth settlements, and make efforts not to transmit bonds transfer
messages without prior contact.
(iii) Market participants should observe Cut-off Time based on an understanding thatan appropriate period is essential as Reversal Time to finish all settlementssmoothly.
(5) Guidelines for activities after Cut-off Time on the settlement day3

As an option, JASDEC may contact the clearing company directly with the information.

4

Market participants should take necessary steps faithfully to complete all settlements
making good use of Reversal Time.
4. Points to Consider in Ensuring Smooth Settlements
It is recommended that market participants handling a large volume of transactions
establish their own internal organization to check settlement-related data in their computers,
and to input necessary data quickly.

5III. Guidelines concerning Fails
1. Definition of a FailA Fail means a situation whereby a party receiving “Corporate Bonds” has not received
delivery of the relevant securities from the delivering party after the end of the scheduled
settlement date.
2. Good-faith Efforts to Resolve Fails
Fails are not recommendable situations and the frequent occurrence thereof may hinder its
primary purpose that is to facilitate smooth transactions and secure market liquidity. Market
participants therefore should avoid Fails as much as they can. Upon the unavoidable
occurrence of Fails, parties to the relevant transaction will be required to deal with suchsituations in good faith to resolve the Fail as soon as possible.
If a receiving participant facing a Fail caused by a delivering participant asks for explanations
about situations leading to the Fail, the delivering participant shall endeavor to provide
sufficient explanations.
3. Premises for the Guidelines concerning Fails(1) In light of the policy on costs arising from Fails described below, market participants
must recognize that an approach using Fails is applicable only in the case where DVP
settlement is adopted (including such settlements whereby bonds are settled on thesame day under a contract executed by preserving both parties’ claims and obligations
in a reliable manner ).
DVP settlements referred to above include DVP settlements provided by Euroclear,
Clearstream or other foreign organizations.
(2) Transactions subject to the guidelines concerning Fails are purchase and saletransactions and repo transactions (meaning initial sale contracts and repurchase
contracts in conditional purchase and sale transactions and lending and returning in
lending transactions; hereinafter the same applies).
(3) Transactions that resolve Fails (excluding transactions that do not use the
Pre-Settlement Matching System of JASDEC) should be settled on a DVP basis by
re-inputting the transaction from the pre-settlement matching stage.
(4) Delivery in purchase and sale transactions and repo transactions shall be conducted by
the method specified in Article 4 of the “Rules Concerning Handling of Short Sale andBorrowing and Lending Transaction of Bonds”, in the case of short sale in purchaseand sale transactions, and by the method specified in Article 11 of the same Rules orArticle 13 of the “Rules Concerning Handling of Conditional Sale and Purchase of
Bonds, etc.”, in the case of repo transactions.
(5) Market participants shall not exercise the rights of cancellation on the ground of theoccurrence of Fails.
(6) It is not acceptable that parties receiving bonds leave settlements incomplete as aresult of a shortage of funds.

6(7) Market participants should mutually deal on their own with all settlements remaining
incomplete other than Fails prescribed in these Guidelines.4
4. Policy regarding Costs incurred under Fails(1) A party causing a Fail will, since it is unable to receive funds payable by the party
receiving bonds, have to incur some funding costs for holding the bonds and willfurther have to give up profit that could be earned by investing such funds. Moreover,accrued interest to be received by such failing party will only be for the period up to
the scheduled settlement date.
(2) A party suffering from a Fail will, contrary to the above, be able to receive interest
accrued from the scheduled settlement date to the date of actual receipt of the bonds
and will further also be entitled to invest funds in hand retained due to theuncompleted settlement.
(3) In a low interest rate environment, there is the possibility that the economic rationality
as described in paragraphs (1) and (2) may not work effectively, and Fails may occur
frequently. As such, the receiving participant facing a Fail is entitled to receive a Fails
Charge (meaning a certain monetary burden imposed on a delivering participant
responsible for a Fail; hereinafter the same applies) from the delivering participantcausing the Fail.
(4) Therefore, no specific penal provisions have been established for Fails, and nopayments of default interest, etc. will be required.
5. Handling of Fails Charges(1) Preparations before the introduction of Fails Charges, as well as practical operations forcalculation, claim for payment, payment and receipt and other handling of Fails Charges,
shall be governed by the Practical Guidelines for Handling of Fails Charges (hereinafterreferred to as the “Guidelines for Fails Charges”), as established separately.
(2) Market participants are entitled to claim Fails Charges in connection with all transactions
subject to DVP settlement.
(3) If market participants intend to introduce Fails Charges, an agreement shall be establishedin advance between the two parties intending to conduct or conducting mutualtransactions. Such an agreement shall be established by means of prior notice prescribedin the Guidelines for Fails Charges or by other methods.

4

While these Guidelines have been formulated under the premise that the transactions use the Pre-Settlement
Matching System, the principle of Fails for corporate bonds will apply to even those transactions that do not use
said System (i.e. “transactions whereby bonds are settled on the same day under a contract executed bypreserving both parties’ claims and obligations in a reliable manner” (so-called Against Settlement) andtransactions settled abroad), in a similar vein to that of JGBs. For more information regarding the principle
behind Fails for JGBs, see page 21 to 23 of the “Final Report of the Working Group concerning Review of Fails
Practice for Bond Trading”(https://www.jsda.or.jp/shiryoshitsu/houkokusyo/h22/files/failwg_final.pdf (Japanese only)).

7(4) Fails Charges shall be calculated by the following formula. (For the definitions of theterms used in the calculation formula and other details, see the Guidelines for Fails
Charges.)Σ 1/365 × max (3% - Reference rate,0) × Amount of funds delivered
Fail period

6. Applications to Fails based on Cut-off Time
(1) Any transactions that have not been registered in the transfer account by theBook-Entry Transfer System at the point of Cut-off Time shall be defined as a Failunless it is agreed in advance to extend the delivery deadline by the parties involved.
Market participants may recognize a Fail for any contract at the time of confirmingthat an application for delivery-versus-payment transfer bonds has not yet beentransmitted, even before the Cut-off Time, if it is agreed upon between both parties inadvance.
Additionally, market participants shall note that even in the case of making prioragreements for extended delivery, they have to treat transactions remaining unsettled
by the closing time for DVP settlement transfer messages on the Book-Entry Transfer
System as Fails.
(2) Market participants to whom the provision of (1) above applies should deal with suchsituations in good faith to avoid frequent occurrence of Fails.
7. Guidelines for Payments and Receipts in the case where Coupon Payment and/or
Redemption have Occurred Prior to Resolution of Fails(1) In the case where a coupon has been paid prior to resolution of a Fail5, the receiving
party shall claim against the delivering party for an amount equivalent to coupon
payment receivable by the receiving party. And the delivering party should pay theamount to the receiving party.
(2) Where the securities are redeemed prior to resolution of a Fail 6 (excluding (3) and (4)below), the receiving party shall claim against the delivering party for an amountequivalent to coupon payment and redemption amount receivable by the receiving
party. And the delivering party should then pay such amount to the receiving party on
behalf of receipt of the original contract amount for the relevant securities.
In the case where the securities are redeemed prior to resolution of Fails, market
participants should note that the contract between the parties is regarded as completed
by this payment.
(3) Where the securities are partially redeemed and the coupon is paid prior to resolution
5

This paragraph shall also apply to the case of a partial redemption where the partial redemption has not takenplace and only the coupon has been paid.
6This shall include a partial redemption that is a final payment, and apply to calls as well as scheduled
redemptions.

8

of a Fail (excluding final redemption payment) and where the parties have recognizedthat the outstanding balance (original contract amount less partial redemption amount)can still be delivered to the receiving party, the receiving party shall claim against thedelivering party for securities equivalent to the outstanding balance plus payment forthe partial redemption amount and an equivalent coupon amount (*1) originallycontracted for. And the delivering party should then deliver the securities equivalent to
the outstanding balance and pay the partial redemption amount and an equivalentcoupon amount to the receiving party on behalf of receipt of the original contract
amount for the relevant securities.
With this payment, the transaction between the two parties shall be deemed completed.
(*1) Amount equivalent to the coupon for the originally contracted amount (theamount before the partial redemption)(4) Where the securities are partially redeemed and the coupon is paid prior to resolutionof a Fail (excluding final redemption payment) and where the parties have recognizedthat the outstanding balance (original contract amount less partial redemption amount)cannot be delivered to the receiving party, the receiving party shall claim against thedelivering party for an amount equivalent to the partial redemption amount and an
equivalent coupon amount originally contracted for (*1 above). And the delivering
party should then pay such amount to the receiving party on behalf of receipt of theoriginal contract amount for the partial redemption amount of securities (*2).
(*2) Original transaction amount7 x (pre-redemption factor lesspost - redemption
factor) + accrued interest
With this payment, the remaining contractual obligations for the two parties shall be
the delivery of the outstanding balance of securities (original transaction amount lesspartial redemption) by the delivering party and the payment [original contract amountless original contract amount for the partial redemption (*2 above)] for those securities
by the receiving party.

7 The original contract amount is the selling price (bond price excluding accrued interest) x (face value /100)

9

IV. Guidelines concerning Bilateral Netting
Market participants shall use JASDEC’s Book-Entry Transfer System. In principle,“Corporate Bonds” shall be settled and cleared using the gross-gross method of coordinatedprocessing, with book-entry transfers being made by JASDEC and cash settlement made by
the Bank of Japan.
However, based on previous agreement by both parties, it is possible that netting between
two parties could be an effective method to use in terms of achieving smooth settlements. If
such netting is used, it is necessary for both parties involved to understand the function(process) of the contract and pre-settlement matching systems of the Book-Entry Transfer
System and to determine the feasibility of such a netting system.
The following are descriptions of possible netting schemes.
(1) In the case where the two parties can recognize that the frequency of netting between
them will be high, they will only use trade matching on the Book-Entry Transfer
System, and will carry out netting based on the Japanese Government Securities
Guidelines for Real Time Gross Settlement (IV. The Guidelines concerning bilateral
netting).
(2) In the case where it becomes necessary to carry out netting after the settlements
matching on the Book-Entry Transfer System, the two parties shall cancel thesettlement instructions on the Book-Entry Transfer System by the business day prior to
the settlement date after confirming the details with each other by telephone or othermeans of communication beforehand. The parties shall do so based on the Japanese
Government Securities Guidelines for Real Time Gross Settlement (IV. The Guidelines
concerning bilateral netting).
Established on April 27, 2005
Enforced on January 10, 2006
Amended on December 10, 2013
Enforced on October 13, 2015
Amended on December 18, 2019
Enforced on July 13, 2020
Amended on June 30, 2022
Enforced on December 1, 2022

10

[Reference]
Guidelines for ensuring smooth settlements through customers’ accounts of the BOJ
NET JGB Services System etc. (Framework)
IV. Guidelines concerning Bilateral Netting
1. Standard Netting Scheme
If market participants intend to use the netting scheme described below, an agreement toperform netting pursuant to these Guidelines shall be established in advance between the twoparties intending to conduct or conducting mutual transactions, which agreement is notnecessarily required to be in writing.8(1) Netting structure
If there are such outstanding obligations due on the same day between two market
participants that can pair with each other (whereby each participant is to deliver government
securities and pay funds to the other), the two market participants shall offset theirrespective delivery and payment obligations for each security or fund and then settle the netbalance between them. Unless and until such net balance is settled, the rights andobligations under the original contracts to be netted shall remain effective as they are. (This
netting method is hereinafter referred to as “bilateral payments netting.”)(2) Volume to be netted
Bilateral payments netting may be performed for two offsetting transactions for the same
issue of JGB with the same face value. (Netting for such paired transactions is hereinafterreferred to as a “pair off.”)(3) Settlement methods that can be covered by netting
Bilateral payments netting may be performed for transactions subject to DVP settlement.
(4) Deadline for trade matching for netting
To perform bilateral payments netting for certain contracts, exchange of the informationnecessary for trade matching shall be completed by 4:30 p.m. on the business day
immediately preceding the delivery date under those contracts, and their trade matching
shall be completed on the same day from 4:30 p.m. to 4:45 p.m..
(5) Types of transactions eligible for netting
Bilateral payments netting may be performed for a combination of purchase and saletransactions (including conditional purchase and sale), a combination of cash-collateralized
securities lending and borrowing transactions, and a combination of any of the foregoingtransactions9.
8

The Association has obtained a legal opinion that bilateral netting prescribed by these Guidelines is valid
under Japanese laws.
9
In this context, the term “conditional purchase and sale” refers to initial sale transactions and repurchasetransactions in conditional purchase and sale transactions, and the term "cash collateral securities borrowing andlending transactions" refers to borrowing and lending of relevant securities.

11(6) Form of holding securities
Securities eligible for bilateral payments netting shall be book-entry transfer government
securities.
(7) Transaction accounts eligible for netting
Bilateral payments netting shall be performed between the accounts of the same type andshall not be performed between different types of accounts.
(8) Pairing method
Pairing for bilateral payments netting shall be made in descending order of the amount to bedelivered.
If there are multiple contracts with the same delivery amount, how to select the contracts to
be paired shall be determined by the market participants concerned.
(9) Entry into effect of netting for contracts with the same delivery amountIf the delivery amounts to be netted for both contracts are equal to each other and bothparties therefore does not need to pay and receive any difference amount in the bilateral
payments netting operation, this netting shall take effect at 8:30 a.m. on the settlement date,
which is the start time for settlements through the BOJ-NET on the said settlement date (orat 7:30 a.m. if the period of the BOJ-NET JGB services on the said settlement date isextended).
(10) Designation of the account used for fund settlement
For fund settlement for bilateral payments netting, market participants shall, in principle,
designate their current accounts with the Bank of Japan.
2. Alternative Netting based on the Standard Netting Scheme(1) With a view to reducing the settlement volume across the entire market with the aim ofenhancing back-office efficiency and mitigating the burden of providing funds, market
participants may adopt an alternative netting scheme if both parties agree to do so, on
condition that priority is given to use of the standard netting scheme. The alternative
netting scheme in this context means a scheme for netting for contracts for the same issue
with different face values which is designed by adopting the scheme of “bilateral
payments netting” defined in Section IV.1 “Standard netting scheme” and then modifying
the conditions described in paragraphs (2) and (8) of Section IV.1 (hereinafter referred toas “bilateral payments netting between different face values”).
However, when using this alternative scheme, the conditions described in paragraphs (3)to (7), (9) and (10) of Section IV.1 shall be fulfilled in the same way as required under the
standard netting scheme, with a view to ensuring settlement efficiency.
(2) Bilateral payments netting between different face values pursuant to paragraph (1) shall be
performed by either one-to-one netting or consolidated netting described as follows, to be
adopted based on mutual agreement between the market participants concerned, rather
than following the condition of Section IV.1(8).

12

i.

One-to-one netting between different face values
When pairing contracts to perform one-to-one netting between different face values,
the following steps shall be taken for the contracts that have not been covered by any
pair off under the standard netting scheme.
A) For the contracts not covered by any pair off, pairing is made in descendingorder of the face value.
B) If there are multiple contracts with the same face value, pairing is made indescending order of the amount to be delivered.
C) If there are multiple contracts bearing the same delivery amount and the same
face value, pairing is made in chronological order of the contract date.
D)

If there are multiple contracts bearing the same delivery amount, the same facevalue and the same contract date, how to select the contracts to be paired isdetermined by the market participants concerned.
ii. Consolidated netting between different face values
Consolidated netting between different face values is bilateral payments netting
between different face values performed by settling the difference obtained by
calculating the total amount to be settled for the contracts for the same issue thathave not been covered by any pair off under the standard netting scheme.
When pairing contracts to perform consolidated netting between different face values,
the following steps shall be taken.
A) For all the contracts not covered by any pair off, the total amount to bedelivered by the delivering participant and the total amount to be received by
the receiving participant are calculated for each issue10.
B) All the contracts constituting the total amount to be delivered or the total
amount to be received calculated under paragraph A), whichever is the greater,
are sorted in accordance with the following steps.
(a) Sorting in descending order of the face value(b) Sorting in descending order of the amount to be delivered, if there are
multiple contracts with the same face value(c) Sorting in chronological order of the contract date, if there are multiple
contracts bearing the same delivery amount and the same face value(d) Sorting by the method to be determined by the market participants
concerned, if there are multiple contracts bearing the same delivery amount,the same face value and the same contract dateC) The contracts sorted pursuant to paragraph B) are added up in the sorting orderspecified therein until the aggregate amount reaches the total amount to be

10

The total amount to be delivered and the total amount to be received are calculated based on the face values of
relevant securities.

13

delivered or the total amount to be received calculated under paragraph A),
whichever is the smaller.
D) The total amount to be delivered or the total amount to be received as calculated
under paragraph A), whichever is the smaller, and the total amount obtained
under C) are offset.
E) All other contracts not covered by consolidated netting between different facevalues under paragraph D) are settled on a gross basis.
(3) In order to further encourage market participants to adopt netting with a view to reducing
the settlement volume across the entire market, market participants may adopt anotheralternative netting scheme incorporating modifications of the conditions described in
Section IV.1(3) to (5), based on their mutual agreement, on condition that priority is given
to use of the pairing off procedure in bilateral payments netting under the standard netting
scheme.11
When using this alternative scheme, the conditions described in paragraphs (6) to (10) of
Section IV.1 shall be fulfilled in the same way as required under the standard netting
scheme, with a view to ensuring settlement efficiency.
(4) The legal validity of the alternative netting schemes specified in these Guidelines has been
confirmed, as is the case with the standard netting scheme.

3. Operational Procedures in Netting(1) Instructions for pairing and sorting
If the market participants concerned have mutually agreed to adopt the netting scheme,
paring off or pairing and sorting for bilateral payments netting between different face values
may be processed, without being required to give notice in each instance.
(2) Pre-settlement matching notice for netting
If a delivering participant and a receiving participant agree to perform netting for thecontracts selected by them, each of them shall issue a pre-settlement matching notice listing
the contracts to be netted and send this notice to the other party by 5:00 p.m. on thebusiness day immediately preceding the delivery date. The form of pre-settlement matching
notice is separately specified in the Practical Guidelines for Computerization andStandardization of Post-Trade Processing of JGB Transactions.
(3) Deadline for pre-settlement matching
Pre-settlement matching for netting shall be completed by 5:30 p.m. on the business day
immediately preceding the delivery date.
(4) How to send pre-settlement matching notices

11

For example, market participants may perform netting for pair offs in FOP settlements or uncollateralized
securities lending transactions.

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The method agreed upon by both parties is used.12(5) Principle of cross-checking pre-settlement matching notices
Pre-settlement matching notices shall be cross-checked by both parties.
(6) Objection notice
If either party has any objection to the pre-settlement matching notice received from theother party, both parties shall complete their matching by 5:30 p.m. on the business day
immediately preceding the delivery date by sending a correct matching notice.
(7) Departments responsible for pre-settlement matching
In general, the duties of pre-settlement matching are assigned to departments engaged inback-office operations. However, market participants may appoint other departments tocontrol pre-settlement matching procedures and inform other relevant market participants
according to circumstances.
4. Pre-settlement Confirmation, Pre-settlement Notice, and their Relation with
Pre-settlement Matching NoticeMarket participants may exchange pre-settlement confirmations (cf. Model Form 1) andpre-settlement notices (cf. Model Form 2) at their option. Such correspondence may help
confirm the mutually agreed-upon conditions, descriptions of the account to be used for fundsettlement, contact persons, and other details of the scheme of standard netting or alternative
netting adopted by relevant market participants.
The points to note when exchanging pre-settlement confirmations or pre-settlement notices
are as follows.
(1) Pre-settlement confirmations and pre-settlement notices between two market participants
shall, in principle, be sent to each other. If there is any discrepancy between the content
mutually verified in advance and the confirmation or notice actually sent, the two parties
shall recheck the content.
(2) Each pre-settlement confirmation, pre-settlement notice or pre-settlement matching notice
is supposed to contain a statement, “Netting is based on ‘IV. Guidelines concerningbilateral netting’ of The Japanese Government Securities Guidelines for Real Time Gross
Settlement of JSDA.” Therefore, any of these documents allows the market participants
concerned to readily confirm their agreement to adopt the standard or alternative netting
scheme.
If pre-settlement matching notice is sent electronically, it may be difficult in practicaloperations to declare in the notice that netting is based on these Guidelines. It is therefore
determined appropriate that the market participants concerned make it a practice toexchange pre-settlement confirmations and pre-settlement notices in advance wherein the

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Examples of specific sending methods are given in the Practical Guidelines for Computerization andStandardization of Post-Trade Processing of JGB Transactions.

15method of sending pre-settlement matching notice and both parties’ adherence to these
Guidelines are confirmed. In addition, since it is practically difficult to affix signatures orseals on pre-settlement matching notices, exchanging pre-settlement confirmations or
pre-settlement notices is a recommendable solution for market participants who prefer torely on written instruments bearing the signatures or seals set by the parties concerned forthe purpose of confirming their agreement.
(3) The practice of exchanging pre-settlement confirmations or pre-settlement notices may
possibly cause discrepancies between the descriptions in such notice and those in a
pre-settlement matching notice to be subsequently exchanged. In this case, thepre-settlement matching notices shall prevail over the pre-settlement confirmations
because the former indicates the latest confirmation between the two parties just before
the intended settlement. If, however, the parties cannot reach agreement on the content of
the pre-settlement matching notices, the settlement shall be processed in accordance withthe pre-settlement confirmations.
5. Netting other than Bilateral Payments Netting
Some market participants may agree to perform netting under a non-standard netting schemeother than the standard netting scheme or alternative netting schemes specified in these
Guidelines when such non-standard scheme is expected to reduce settlement volumes andthus contribute to enhancing back-office efficiency and mitigating the burden of providing
funds.13 If market participants intend to introduce any non-standard netting scheme, thepoints listed below must be noted.
(1) When market participants perform netting, they need to assume the possibility of Fails or
failure to complete fund settlement. Therefore, market participants shall consider andestablish the procedure to identify the contracts to be treated under a Fail or fundsettlement failure which may occur and how to address the Fail or fund settlement failure.
(2) When market participants set a mutually agreeable netting scheme in place, due regard
shall be given to operational efficiency, as well as to reduction of settlement risks, which
the promotion of RTGS primarily aims for.
(3) If market participants intend to perform netting other than bilateral payments netting, theyshall ascertain and accurately recognize the legal validity of their netting scheme.

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For example, one conceivable method is obligations netting; in the case where multiple receivables andpayables may arise between two market participants that are supposed to be performed on the same day,whenever a new receivable is created, it is immediately offset against then outstanding payables without
awaiting the maturity date; in this way, a net amount finally payable and receivable between the two parties on
the maturity date is calculated by offsetting and consolidating all outstanding obligations due on the same day.

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