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Part 2: Financial Markets

Interbank market
The“interbank market”is a market where banks and other financial institutions conduct money lending andborrowing transactions (non-financial institutions cannot participate※9). The“interbank market”is a market inwhich“Bank of Japan current accounts”where financial institutions lend and borrow funds to invest surplus
funds or procure insufficient funds.
Two typical transactions in the interbank market are as follows
Call Transactions (Significant Markets)

Bill transaction（１） Call transaction
It is a short-term fund lending transaction between financial institutions, and is most commonly used by banks
and other financial institutions with insufficient current account balances at the Bank of Japan to raise funds forthe time being. The word“call”means“to call and have it returned immediately.”
The transaction type is either a“secured call”in which the borrower pledges collateral to the lender, or an“unsecured call”in which no collateral is pledged. Both secured and unsecured calls can be made for various
lengths of time, up to one year. The types can be divided into three categories.
Overnight

Open-end item

Fixed term item

An open-end item starts out as a one-day loan, but if the loan is not repaid, it automatically rolls over (continues).
Fixed term item is loans other than overnight loans that have a clearly defined repayment date.
Particularly large numbers of transactions are in overnight contracts that start on the same day. The majority ofthese transactions are for the purpose of "adding cash flow to financial institutions". Financial institutions can havesurpluses or shortfalls in their cash holdings due to a variety of factors, the main ones being.

※930

The Bank of Japan, brokers for short-term money transactions, etc. can participate.

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Chapter 2 Short-term financial markets

Funds Settlement
Receipt and disbursement of deposits, lending, bill clearing, domestic and foreign exchange, etc.

Investment and financing in financial instruments
Buying and selling stocks and bonds, buying and selling foreign exchange, etc.

Funds supplied to the call market from the perspective of the originator (trust banks, regional banks, insurancecompanies, etc.) are call loans, and funds raised in the call market from the perspective of the receiver (city banks,etc.) are call money.
The call market also functions largely as a place to coordinate the uneven distribution of funds※10 in the market
among financial institutions.

（２） Bill transaction
There is a financing method called“bill discounting”in which a company passes a bill it holds to a bank andreceives a loan at a discount of the face value of the bill. The bill transactions referred to here are also transactions
in which a financial institution raises funds by passing a bill it holds to another financial institution.
Currently, however, bill transactions are rarely used as a means of lending and borrowing funds between private
financial institutions. They are only used as a means of open market operations conducted by the Bank of Japan.

※10

A surplus of funds where the amount received (borrowed from financial institutions, deposits, etc.) exceeds

the amount of credit (invested, i.e., loans and investments in securities) is called a loan position, and the opposite
is called a money position.

31

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Part 2: Financial Markets

Open market
A short-term financial market in which participants are open to a wide range of people other than financial
institutions is an open market. Typical examples are as follows①

T-Bill market②

CD market③

CP market④

Bond Repo market⑤

Offshore market（１） T-Bill marketUntil January 2009, TBs and FBs were classified as short-term government bonds as follows, but they were
integrated into the T-bill (Treasury Discount Bill) market in February 2009.
TB (Treasury Bills)
Discounted Treasury Bills. There are two types of TBs with redemption (maturity) periods of 6 months
and 1 year. TBs are issued to refinance long-term JGBs and other government bonds.

FB (Financing Bills)
Financing Bills. In principle, the term is 13 weeks.
FBs are issued to meet a temporary shortage of funds of the government.

The T-bills are issued for short-term cash management and have maturities of 2 months, 3 months, 6 months,
and 1 year.
Since they are government debt certificates, they are naturally highly creditworthy and the size of the issue islarge, so they have a high share in the short-term money market as bonds with sufficient liquidity. Until around
June 2013, the 3-month yield was around 0.1%, but the yield has been“negative”since 2015 due to the monetaryeasing policy.

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Chapter 2 Short-term financial markets（２） CD market
A CD (Negotiable Certificate of Deposit) is a transferable deposit. In principle, a depositor cannot transfer
the right to receive reimbursement to a third party in a general deposit, but in a CD, the right can be transferred toa third party, i.e., the deposit can be sold, if certain procedures are followed.
In addition, CDs are not simply applied for over the counter like ordinary deposits, but are issued on their own
terms and conditions through individual negotiations between banks and investors who manage large funds.
Transactions using the“repurchase agreement”method, which will be discussed later, are also actively conducted.
Note that CDs are often classified as short-term financial transactions because they are generally issued for aperiod of one year or less, but there are also instruments with a term longer than one year.
The market size is around 36 trillion yen (at the end of December 2021) according to BOJ statistics (domesticbanks).

（３） CP market
CP (Commercial Paper) is a promissory note issued by general companies to borrow unsecured funds, and its
issuance began in 1987.
There are other means for companies to raise funds other than bank loans, such as“bond issuance”and“newstock issuance (equity finance),”but these are long-term fundraising methods and incur large administrative costs.
On the other hand, CP is a relatively simple form of short-term financing. In the past, there were various restrictions
on issuance periods, amounts, and companies that could issue CP, but these have all been eliminated. However,
CP is usually issued after obtaining a rating from a rating agency.
Most CP issues are underwritten by banks and securities firms, and the amount of CP issued has decreased fromover 20 trillion yen to less than 20 trillion yen since the 2008 Global Financial Crisis. However, the environment
has improved and CP issuance has recovered to the 20 trillion level by 2021.

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Part 2: Financial Markets

Figure 9

Issuance of CP（４） Bond repo market
A bond repo transaction is a form of funds lending transaction in which a bond is pledged as collateral to amoney lender, and is Securities firms often use this transaction to raise funds.

Figure 10

Bond repo market<Start>X Securities
CompanySecurities

Y Bank

Money

<End>
X Securities
CompanySecurities + rent
Y BankMoney + interest

Exchange of lent charge and interest rates at the end of the transaction
The borrower of the funds pays interest on the borrowed money to the originator of the funds.

The borrower of the bond pays the lender of the bond a lent charger for the bond.

Bond repo transactions are not always done to borrow money, but may be done to borrow certain bonds or othersecurities. In this case, if the bond is rare, the real interest rate paid by the borrower of the funds may be negative.
The transaction on the borrower side of the funds is called a“repo.”The transaction on the borrower side of thebond is called a“reverse repo.”In the above, the“interest rate – rent charge”is called the“repo rate.”34詳しくは、シグマインベストメントスクール HP で！
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The word“repo”is said to come from“repurchase agreement.”The repo market has a strong presence in theshort-term money market and is subject to the Bank of Japan's operations because of its particularly large impact
on bonds, and rates are published daily as the Tokyo Repo Rate by the Japan Securities Dealers Association. ※11
A very similar form of transaction to a bond repo is a“repurchase/resale agreements.”These days, repurchase/resale agreements are generally referred to as bond repo transaction. A repurchase/resale transaction is atransaction in which a financial institution that wishes to raise funds sells a bond or other instrument on a“repurchase”condition, or a financial institution that wishes to invest funds buys a bond or other instrument on
a“sell-back”condition. While repo transactions are bond lending transactions (“loan for consumption”underthe Civil Code), repurchase/resale transactions are conditional sales transactions (“sales contracts”under the CivilCode).

Figure 11 Examples of repurchase agreements<Start>X Securities
CompanySecurities

Y BankMoney 98 yen<End>
X Securities
CompanySecurities
Y BankMoney 100 yen

If we only look at the flow of money, X Securities is raising funds and Y Bank is investing funds. Comparing
the flow of bonds and money with repo transactions shows that economically they are the same transactions. Notethat repurchase/resale agreements are also made on CDs, CPs, etc.

※11

Tokyo Repo Rate (Japan Securities Dealers Association Website)

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Part 2: Financial Markets（５） Offshore market
The offshore market was established in 1986 as a place for non-residents of foreign governments andinternational organizations to raise and invest funds.
At the time, Japan's financial sector still had many regulations that were unique to the country, and there waspressure from other countries to abolish these regulations. Against this backdrop, the Offshore Market wasestablished to provide non-residents with a place where they can trade freely without being subject to domestic
regulations. However, this does not mean that there is an exchange as“offshore market,”but rather that rules havebeen established to allow non-residents to trade without having to comply with domestic regulations.
Domestic financial institutions can also set up special“offshore accounts”(managed separately from generaldomestic accounts) and participate in such accounts. However, with the current deregulation of the market, trading
conditions no longer differ significantly from those of domestic transactions.
１．What is Euro yen?
Loan transactions of yen funds traded in the offshore market are called“Euro yen”transactions.
Usually, the term Euro XX, such as Euro yen, Euro dollar, etc., refers to money traded outside the country where
the currency is originally created (i.e., Euro euro is the Euro that exists outside the Euro zone). Since offshore
markets are not subject to domestic regulations, they can be viewed as“foreign markets”within Japan. Therefore,
the yen traded in the offshore market is also called“Euro yen.”
２．LIBOR and TIBORLIBOR (London Interbank Offered Rate) is the level of short-term interest rates used for money lending andborrowing transactions such as“Euro yen”and“Eurodollar.”LIBOR is the average interest rate on the London
interbank market. In the past, the British Bankers Association (BBA) interviewed a predetermined number offinancial institutions and averaged the results for publication. However, due to the discovery of fraud※12 in theprocess of determining the rate, the Intercontinental Exchange (ICE), a major US exchange, began calculating andpublishing the rate on February, 2014.
TIBOR is Tokyo's version of LIBOR, and there are two types of TIBOR: Euro yen TIBOR, which reflects shortterm interest rates in the offshore market in Tokyo, and Japanese Yen TIBOR, which reflects rates in the unsecured
call market. However, there is a study underway to unify these two types of TIBOR into the“Japanese Yen TIBOR.”※1236

LIBOR rigging case in 2012

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Chapter 2 Short-term financial markets

３．Suspension of LIBOR
London has long been known as a less regulated international market, and LIBOR was customarily used forshort-term interest rates in international transactions and derivatives trading. However, LIBOR, the interbank
lending rate, was suspended at the end of 2021 (the suspension was extended to the end of June 2023 for the U.S.
dollar) because it was generally recognized that it was not a“risk-free rate (RFR).”The successor index toLIBOR will be the overnight interest rate of each currency, which is considered to be the RFR.

Figure 12 LIBOR successor indicator for each currency

Currency

LIBOR Successor Indicators

US dollar

SOFR (Secured Overnight Financing Rate)

Japanese Yen

TONA (Tokyo Overnight Average rate)

British pound

SONIA (Reformed Sterling Overnight Index Average)

EuroSwiss franc€STR (Euro Short-Term Rate)
SARON (Swiss Average Rate Overnight)

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