E m p ir ic a l R e s e a r c h o n S e c u r it i e s F in a n c e
Transactions using Distributed Ledger Technology

May 30, 2023

Japan Securities Finance Co., Ltd.
AndTanaka Laboratory, Graduate School of Engineering,
The University of Tokyo

Table of Contents
1. Background and Purpose of this Empirical Research ..................................................3(1) Distributed Ledger Technology and Security Tokens ..............................................3(2) Trends of Security Tokens and Issuance ..................................................................3(3) Purpose and Target of this Empirical Research .......................................................4
2. About Securities Finance Transactions ..........................................................................7(1) Outline of Securities Finance Transactions ..............................................................7(2) Market Size ....................................................................................................................8(3) Credit Risk Management .............................................................................................9(4) Settlement Risk Management ...................................................................................11(5) Structure of Securities Finance Transactions in this Empirical Research ..........12
3. Structure of Empirical Research and Blockchain Smart Contracts ..........................14(1) Structure of Securities Finance Transactions in this Empirical Research ..........14(2) Composition of Overall System ................................................................................16(3) Structure of Blockchain .............................................................................................17(4) Records on the Blockchain .......................................................................................19
4. Evaluation Results ..........................................................................................................27(1) Feasibility of Securities Finance Transactions Execution ....................................27(2) System Performance when Processing Transactions in Market-Wide Scale......32(3) Impact of Collateralized Securities Diversification and Threshold Setting for
Margin Call on Net Credit Amount and Necessary Liquidity, Including the Evaluation
upon Market Turmoil........................................................................................................37
5. Implications Obtained from This Empirical Research ................................................42(1) Transaction Feasibility...............................................................................................42(2) Reduction of Settlement Risks and Simultaneous Execution of Transactions
Denominated in Different Currencies ............................................................................42(3) Reduction of Credit Risk and Flexibility in Economizing Liquidity ......................42(4) Streamlining of Operation .........................................................................................43(5) Utilization of Assets with Low Liquidity ..................................................................43
Reference .............................................................................................................................45
Appendix ..............................................................................................................................49

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1. Background and Purpose of this Empirical Research(1) Distributed Ledger Technology and Security Tokens
Research is taking place on distributed ledger technology (below, “DLT”) in a
broad range of industrial fields and a number of trials are underway with regard
to its application in the securities field. In particular, these studies and trials focus
on the potential for building robust ledgers (here, this indicates ledgers
established on blockchain) in terms of robustness and operational continuity, as
DLT operates the system across a distributed number of locations compared tooperating the system with the central control mechanism located in one specificfacility. In addition, other benefits in the spotlight are risk reduction by means ofdelivery versus payment (DVP) settlements and streamlining of operations byconnecting smart contracts that automatically process this work.
The use of security tokens for utilization of DLT in securities industry is on
the rise. A security token is generally understood as securities in the form of atoken issued and administered electronically using DLT.
Security tokens make it possible for more advanced processing of
information that is ultimately managed on ledgers using smart contracts asmentioned above. For example, when exchanging securities and funds or
securities and securities, which will be discussed below, by tokenizing each andprocessing transaction conditions, such as period and rate, along with settlement
information, such as settlement time at the start and end of transactions using
smart contracts, it is possible to streamline and automate the operation required
until the final ledger entry and transfer of rights, and reduce operational risk, while
tokens can be exchanged at the same time to reduce settlement risk. In addition,
tokens are believed to reduce operational costs related to securities redemption
and dividend payments and offer potential for use in smaller trade sizes andsecuritization, for example. From these perspectives, trials are already underway
for the issuance of security tokens in such fields as securitization products related
to corporate bonds and real estate.
(2) Trends of Security Tokens and Issuance
The evaluation and issuance of security tokens is taking place actively both inJapan and abroad.
First, with regard to the issuance market, following revisions to Japan’s
Financial Instruments and Exchange Act implemented in May 2020, the new Act
3

contains the concept of “Electronically Recorded Transferable Rights to Be
Indicated on Securities, etc.” for security tokens, and following this impetus oflegislation development, initiatives are now underway to issue actual security
tokens. Specifically, with regard to Japanese government bonds (JGB) and listed
stocks, since there is already efficient and robust settlement infrastructure inplace, security tokens issuance is taking place centered on securities with low
liquidity compared to JGBs, such as corporate bonds and securitized real estate
products, among others.
Outside of Japan, research on issuance of tokenized securities is actively
underway centered around the main actors of international institutions, central
banks, securities exchanges, and major financial institutions.
Additionally, discussions are being held on the formation of a secondary
market as a venue to facilitate trading of security tokens.
In Japan, there is a movement for conceptualizing a digital securities market
and a secondary market for security tokens focused on those related to securities
exchanges. Outside of Japan, securities exchanges continue exploring ways tocommercialize secondary markets utilizing security tokens.
In addition, as an infrastructure for the issuance and distribution of security
tokens, a DVP settlement mechanism using DLT is being studied in various
countries through collaboration involving various institutions, mainly central
banks. Recently, discussions have also been taking place in relation to central
bank digital currencies.
(3) Purpose and Target of this Empirical Research
As described above, research on security tokens is actively underway in Japan
as well, but in this empirical research, we have decided to conduct testing focusedon repo transactions and securities lending and borrowing transactions (below,
collectively referred to as “Securities Finance Transactions” or “SFTs”), whichplay a key role in providing liquidity to the market in the distribution of securities,
for the following reasons.
i.

Through SFTs using bonds and stocks, market participants flexibly manage
their holdings and raise funds, and the securities and funds procured areused for settlement of trading in the secondary market, collateral offered toclearing institutions, etc., and daily cash flow. SFTs provide liquidity in thesecondary market for securities and have become essential to the market.
4ii. Looking at the actual scale of SFTs in Japan, there are about 56 trillion yen1
worth of transactions per day, and the balance of the amount outstanding isabout 295 trillion yen for bonds and about 18 trillion yen2 for stocks, making
it a large market.
iii. At present, there has been little research using DLT in Japan focusing on
SFTs.
In the field of SFTs, this empirical research, for example, explored thepotential benefits of utilizing DLT: (1) the transfer of securities and collateraldenominated in foreign currencies, which usually involves time differences, canbe executed simultaneously between parties, although not final, (2) advantages
such as expanded system availability and efficiency of operational processing
can be enjoyed, and (3) against the backdrop of these advantages, it is possible
to use various assets, including assets with low liquidity, as collateral.
Since the subject of this empirical research is a cutting-edge field, we
decided to take the following approach from the viewpoint of effective project
management:i.

This empirical research focused on bilateral relationships between
transaction parties, and did not aim to build exchanges or payment andsettlement systems used by large numbers of participants. Therefore, it did
not consider replacing the existing infrastructure for trading, clearing andsettling government bonds, stocks and other securities with a new systemusing DLT.

ii. This empirical research focused exclusively on practical feasibility, excluding
review of the related laws and regulations, specifically tokenization methods,
legal structures and methods of transfer of rights, and the necessity ofbusiness licenses and registrations.3
1

Bank of Japan, Statistics on Securities Financing Transactions in Japan, average for
December 2022
2
Japan Securities Dealers Association, Balance of Bond Transactions with Repurchase
Agreements (by investor type), Bond Margin Loans and Borrowing and Lending
Transactions for Share Certificates, etc., December 31, 2022
3
The execution of a STF involves both parties concluding a basic agreement and an
attached memorandum, etc. In Japan, the reference format of a basic agreement preparedby the Japan Security Dealers Association is widely used. In cross-border transactions, theinternational standard format of a Global Master Repurchase Agreement (GMRA) andGlobal Master Securities Lending Agreement (GMSLA) are used. In this basic agreement
and attached memorandum, the fundamental matters and shared matters related to the5

iii. When using tokens for SFTs, it is first necessary to issue tokens, and various
schemes have been proposed and researched including their legal structure.
Therefore, this empirical research excluded review of token issuanceschemes and instead focused on transactions using tokens already issued.4
iv. In this empirical research, “settlement of SFTs using tokens” refers to theexchange of tokens, and does not refer to the transfer of underlying assets
such as funds and securities. In order for the underlying assets to betransferred, final settlement must be made in the securities settlement
system of the central securities depository and the funds settlement systemof the central bank, but the time lag and settlement risk cannot be eliminated
due to the time difference in these settlement locations. Here, it is assumed
that the transaction party is limited to "face-to-face" participants alreadyknown each other in advance and the settlement has been completed byexchanging tokens between the parties, on the premise that underlying
assets are managed robustly by the token administrator under trust, etc.
contract. Then, exchanging tokens is treated as “settlement of SFTs.”
Based on this awareness, Japan Securities Finance Co., Ltd. (hereinafter,"JSF ") and Tanaka Laboratory of the Graduate School of Engineering, The
University of Tokyo (hereinafter, "Tanaka Laboratory") agreed in April 2021 to
conduct empirical research on whether the use of DLT can facilitate trading of
tokenized securities and collateral in SFTs. The two parties have been conducting
joint research since then. Specifically, JSF was mainly in charge of formulating
experimental concepts and structures, investigating related market practices, andcompiling this report, and Tanaka Laboratory was responsible for examining basic
technical and system aspects related to data analysis and DLT. In addition, thedevelopment of DLT and smart contracts was outsourced to USD Co., Ltd.
(hereinafter, "USD")5
STF are set out, such as ways of calculating market value or lending fee and handling incase of a collateral shortfall, etc.
This empirical research excludes any evaluation of key points regarding these contractual
matters from the scope of consideration.
4
There are several options for tokenizing currencies or securities, such as using a trustwith certificates of beneficial interest, for example, but the tokenization method, the methodof transferring and managing underlying assets, and the necessity of business licensing
and registration are also excluded from consideration. In addition, in this empiricalresearch, currencies or securities that are the underlying assets are not placed in trusts.
5
See the Attachment for the members of each organization who participated in thisempirical research.
62. About Securities Finance Transactions
This chapter provides an overview of the SFTs subject to this empirical research.
While SFTs involve an extremely wide range of economic, legal and practicalissues, this chapter covers only those subject to this empirical research.
(1) Outline of Securities Finance Transactions
SFTs generally involve the exchange of funds and securities with another party,
which are then returned after a predetermined period (Figure 2-1), but in recent
years, this has evolved into the exchange of securities and securities (Figure 22), which is also actively taking place. Therefore, for the purposes of this research
SFTs shall include both.
SFTs have both the qualities of lending funds and lending securities, andthey can be leveraged for investing or procuring funds or they could focus on
investing or procuring securities. In recent years, countries around the world havetightened financial regulations and strengthened management of settlement risks,
while also pursuing monetary easing for many years, and as part of this, asset
purchases driven by monetary policy have become the norm worldwide, causing
elevated rarity of securities with high credit ratings such as government bonds,
etc., which has given rise to transactions focused on the investment andprocurement needs of securities. Against this backdrop, transactions involving
the exchange of securities and securities are being conducted with the purposeof exchanging, for example, stocks with government bonds for fundraising or
posting of collateral to a Central Counter Party (so-called upgraded repo
transactions).
When executing transactions using securities as collateral for theinvestment or procurement of funds, transactions involving the lending andborrowing of funds are referred to as general collateral (GC) transactions. On theother hand, when executing transactions using funds as collateral for theinvestment or procurement focused on specific securities, these transactions
involving the lending and borrowing of securities are referred to as special
collateral (SC) transactions.

7

(Figure 2-1) Exchange of Securities and Funds(Figure 2-2) Exchange of Securities and Securities(2) Market Size
The size of the SFTs market continues to grow worldwide. In terms of fundraising,the volume of GC transactions is growing because it is possible to procure stable
funds at low interest rates since these transactions are secured by collateral, andat the end of 2022, the balance of GC transactions in Japan had reached 126
trillion yen. Additionally, SC transactions with the purpose of procuring securities,
including the aforementioned collateral demand, etc., are also increasing
remarkably, as the balance of SC transactions in Japan stood at 76 trillion yen at
the end of 2022. In this manner, the SFTs market represents an extremely
important market in size for the securities and financial markets of each country.

8

(Figure 2-3) Trend in the Balance of Securities Finance Transactions inJapan6
Bonds

Stocks(Figure 2-4) Trend in the Balance of Securities Finance Transactions in
European Countries7(3) Credit Risk Management
Since SFTs are secured transactions, credit risk is limited, but since the collateralvalue fluctuates according to market value, the difference between thetransaction target amount and the collateral value becomes the net credit amount,
6

Bank of Japan, Trends in the Money Market in Japan – Results of Tokyo Money Market
Survey (August 2022)
7
BIS, BIS Quarterly Review, December 2019, Euro repo market functioning: collateral isking
9and credit risk management is required. There are two main credit risk
management methods as follows:i.

Haircut

In SFTs, the term haircut refers to the fact that the valuation amount iscalculated by multiplying the value of the securities by a certain weighting inconsideration of the price fluctuation risk of the securities and the credit risk ofthe transaction counterparty, and the rate used to calculate this weighting iscalled the haircut rate.
Since GC transactions have a character of funds lending and borrowing
with securities as collateral, the haircut rate is used to prepare for the risk of adecrease in value when collateral is liquidated in the event of a default by theborrower of funds. Since SC transactions have a character of securities lending
and borrowing with funds as collateral, the haircut rate can be viewed as
preparation for an increase in the cost of repurchasing securities in the eventof a default by the borrower of the securities, and as a result, the haircut rate of
SC transactions is smaller than GC transactions, and in some cases, it may be
negative (exceed the transaction amount).
ii. Margin callAt the start of a SFT, funds or other securities are exchanged for the value ofthe securities considering the above haircut, but due to price fluctuations during
the transaction period, there is a discrepancy between the value of the funds or
securities initially offered to the counterparty and the value of the funds or
securities received from the counterparty (calculating this discrepancy known
as marking to market). At this time, credit risk management is carried out by
charging the other party for the surplus or shortfall and reducing the net credit
amount as much as possible. This is called a margin call.
Marking to market is generally based on the closing price of the securities
on the day. A margin call is made for the surplus or shortfall found as a result ofmarking to market, but if a certain threshold is set and this amount is within that
range, an agreement not to make a margin call may be made between thetransaction parties. In the event of a margin call, the counterparty confirms thedetails and pledges additional funds or securities.
For standard transactions, margin calls are also standardized; forexample, as for JGB repo transactions, the counterparty pledges the necessary
10

funds on the day of the margin call in the case of conditional repurchase andresale transactions (transactions with repurchase agreement; “Gensaki
transactions”) and on the next day of the margin call in the case of cash-backed
bond lending and borrowing transactions (“Gentan transactions”).
On the other hand, in cross-border transactions, due to the exchange offunds and securities through local custodians8 and the time difference, it may
take several days, including intermediate confirmation with the counterparty,
from the time of the margin call to the actual delivery of funds or securities. In
order to mitigate this burden, in a tri-party repo, a tri-party agent9 manages
transactions and collateral on behalf of the parties to the transaction.
The margin call structure used in this empirical research assumes abilateral structure between the transaction parties as described above, but for
SFTs of which obligations are assumed by a Central Counter Party, the margin
call is also made collectively by the Central Counter Party between all thetransaction parties.10(4) Settlement Risk Management
With regard to standard transactions, settlement risks associated with SFTs are
8

The custodian stores, administers and settles securities based on requests from customers. In
addition to these basic services, the custodian often provides additional services such as receipt
of interest and dividends, exercising of voting rights, and response to corporate actions.
In cross-border transactions, funds and securities are settled by the Central Counter Party withlegal jurisdiction; thus, settlements of securities in foreign currencies or in foreign countries
requires an account be setup at a local Central Counter Party. As a result, settlements are
entrusted to a custodian with an account at the local Central Counter Party. The custodian
settles funds and securities as a proxy of the customer.
On occasion a global custodian may enter between a customer and custodians located in eachcountry. A global custodian has an established network with custodians located in each country
and handles the storage and settlement of customer securities in bulk. By using a global
custodian, customers do not need to conclude deals with individual custodians in each country
because the global custodian can manage all securities they have invested in around the world.
9
In SFTs, there are cases where a third party enters between the transaction parties to carryout the transaction and manage collateral (typically this third party is a custodian). This format is
known as a tri-party repo. This third party is referred to as a tri-party agent. The tri-party agent
automatically receives necessary collateral between the account of the collateral provider
opened within the company and the account of the collateral recipient according to various
conditions instructed. In this manner, the custodian plays a roll in mitigating the burden related
to collateral management of the transaction parties.
10 A Central Counter Party stands between transaction parties to acquire and receive both
receivables and payables becoming the settlement counterparty. By having the Central Counter
Party as a go between, participants can reduce risk related to delivery with transaction
counterparties and can perform netting where positions of receivables/payables are offset tosettle only the difference of net owing, which can reduce the number of settlements and canlower settlement costs.

11

addressed using settlement institutions and clearing institutions, whiletransactions that are not necessarily standardized, such as cross-bordertransactions, are addressed using tri-party agents to mitigate such risks.
In addition, if there is a lag in the timing of receipt due to time differences,
etc. in the settlement of the exchange of funds and securities, there is a risk that
one of the transaction parties delivered the securities but the other party did notreceive the funds for the consideration. In order to reduce such risks, it isimportant to have a mechanism that simultaneously settles funds and securities(delivery versus payment, or DVP). Such mechanisms have been established in
major countries, including Japan, and in some cases, they are connected acrossborders.
In contrast, in cross-border transactions where such standardization has
not been established, it is necessary to settle funds and securities through Central
Counter Parties around the world with different settlement times. Thus, there aremany cases where these transactions are strictly accompanied by timedifferences.
(5) Structure of Securities Finance Transactions in this Empirical Research
Based on the above, the basic workflow of SFTs considered in this empiricalresearch is as follows:
i.

Deal

After negotiations and coordination between the front office departments of thetransaction parties regarding transaction conditions such as amount, securities
issue, transaction rate, and period, a deal is concluded. Negotiations widely
use chat tools of information vendors, and may also be conducted by telephoneor e-mail.
ii. Reconciliation
After the deal is concluded, the middle and back office departments of thetransaction parties reconcile to confirm the matters agreed at the deal stage.
Reconciliation may be carried out individually using e-mail or fax, or centralized
settlement reconciliation systems provided by Central Counter Parties orcentral securities depositories (CSDs)11 may be used.

11

CSD operates a system for storing, managing and settling securities. CSD concentrates on

12

iii. Settlement at transaction start
For transactions that have been reconciled, settlement is made by exchanging
and delivering funds and securities on the agreed date. Since government
bonds and listed stocks are centrally managed by the CSD, the transaction
parties instruct the CSD to transfer the securities.
iv. Margin calls
During the transaction period, due to fluctuations in the price of securities andexchange rates, the value of funds or securities initially offered to thecounterparty and the value of funds or securities received from the counterparty
will experience a surplus or shortfall. As a result, mark to market and margin
calls are made to eliminate such surplus or shortfall.
v. Settlement at transaction end
On the business day before the transaction ends, the middle and back office
departments of the transaction parties reconcile the settlement details, and on
the end date, funds and securities are received (settled) between thetransaction parties. The settlement practice is the same as in (3).

management of securities and provides settlements of securities (transfer settlements) usingbook entry. Transaction parties open an account at CSD each to manage securities and transfer
securities as well as entrust settlements to the custodian with an account at CSD.
In addition to basic services such as storage, management and settlement of securities, CSD
often provides additional services such as system provision related to reconciliation andsettlements, provision of securities lending and borrowing services, and cross-border
settlements by links with other CSD.

13

3. Structure of Empirical Research and Blockchain Smart Contracts
In this chapter, we first set out the structure of SFTs in this empirical researchwhen tokenizing securities or funds for the SFTs subject to this empirical researchas examined in the previous chapter. On top of this, we explain about thecomposition of the blockchain and smart contracts in order to execute thesetransactions.
(1) Structure of Securities Finance Transactions in this Empirical Research
The structure for executing SFTs subject to this empirical research indicated in
section (5) of the previous chapter are assumed to be the following when using
tokens for execution.
i.

Subject of tokenization

Security token (ST): government bonds and listed stocks of Japan, the UnitedStates, and Germany
Cash token (CT): denominated in each currency including Japanese yen, US
dollars and Euroii. Calculation method of token’s market value
ST: Calculation of market value in the currency of each country after acquiring
the closing price of each market on daily basis.
CT: Same for the currency of each country.
iii. Calculation of net credit amount
Based on the market value of each ST and CT calculated above, in the case oftransactions of tokens denominated in different currencies, the net credit
amount of all SFTs was calculated by using the exchange rate of those currency
to the base currency (specified by the counterparties in advance) after the closeof the US market on the day. The exchange rate is acquired and currency
conversion is conducted before the start of trading on the Japan market thenext day. If there was any excess or shortage, a margin call was made (however,in case a threshold for a margin call is set in advance, the margin call is only
made after this threshold is exceeded).
iv. Transaction workflow
The workflow of executing the transactions described in section (5) of the14

previous chapter using tokens is comprised of the following. Details regarding
blockchain records in the transaction process are discussed in section (4) of
this chapter.
Transaction parties receive issuance of tokens from the token
administrator (the issuance process is excluded from this system as
discussed above).



After a deal is made between the transaction parties (the matching function
is out of scope), one transaction party enters the transaction information(issue, quantity, rate, transaction period, etc.) into the system, and theother party approves it (equivalent to the current reconciliation). It is also
possible to bundle different STs and CTs into a pool for both legs of thetransaction.



For transactions that have been approved, when the transaction start time(including immediate) recorded above arrives, the information is includedin the initiation transaction processing12 that the service server periodicallyrequests the blockchain to execute, the smart contract is activated, and thesettlement, i.e. the transfer of tokens, is recorded in the ledger. At this time,
if a transaction party does not hold the number of tokens required forsettlement, the settlement itself is not made and the other party's tokens
are not transferred.

During the trading period, mark to market and margin calls are made every
business day following fluctuations in the market price of ST and CT. For
margin calls, a certain threshold (amount) can be set, thereby margin calls
could be made only when the threshold is exceeded. In addition to CT,
margin calls could also be made by multiple ST pools.

Upon the transaction end date, the transaction is automatically terminated,
and the smart contract automatically delivers the token borrowed from one
party to the other party, returns the loaned token, and records the result inthe ledger. Even in this case, if either of the transaction parties does nothave the tokens to be repaid, the settlement related to the repayment is
not executed.



Furthermore, although it is systematically possible to receive loan fees andcollateral interest by CT using smart contracts, it was excluded from the12

Transaction processing refers to the indivisible series of information processing forexecuting transactions within the system. It is processed in the blockchain in this case.
15

scope of this empirical research from the viewpoint of simplifying system
requirements.
(2) Composition of Overall System
To conduct tests based on the above structure, we developed a systemcomposed of a structure as shown in Figure 3-1. Each actor comprising thissystem is responsible for the following functions.
(Figure 3-1) System Composition(The distinction between Fullnode and Authority within the blockchain is
discussed below.)i.

Token administrator

The token administrator instructs the blockchain administrator to issue thetokens (ST or CT) based on the request of the transaction parties(Company A and Company B) and the token is issued.13



After token issuance, the token administrator obtains market value
information of the token’s underlying assets on a daily basis and gives
instructions to update the price of the tokens in the blockchain.

ii. Transaction parties (Company A and Company B)

13

Conventionally, there is a need to manage the linkage of tokens and the underlying
assets of the token, but this process was excluded from the scope of development as
discussed above.
16



Following the token issuance from the token administrator, the transaction
parties enter transaction information and their approval in the system, andthen execute the transaction involving the token exchange.

iii. Blockchain administrator
・ The blockchain administrator manages both the service server andblockchain.
・ The service server receives the information sent from the token
administrator and transaction parties, and processes the transaction on theblockchain. In addition, it informs the token administrator and thetransaction parties of the results of processing on the blockchain. The
token administrator and transaction parties are unable to directly accessthe blockchain and must do so via the service server.
・ The blockchain uses smart contracts based on the instructions received
from the service server to process the transaction, form blocks and record
the transaction.
(3) Structure of Blockchaini.

Blockchain functions

The blockchain builds smart contracts on the blockchain. The smart contract
records the market value of the token, the balance of the quantity and amountby owner, and transaction information (information on borrower, lender,
collateral [issues, quantities, etc.,] and transaction conditions [period, haircuts,
rates, etc.,]).
This information is updated in a way that maintains the history when there
is a transaction processing (i.e., instructions on the price of a new token) fromthe token administrator or transaction party via the service server. In turn, thecollateral value is recalculated and margin calls are performed.
ii.

Blockchain platform

Ethereum was used as the blockchain platform. Ethereum is the most widelyused blockchain platform in the world at the time of empirical research on
blockchain on which smart contracts can be implemented, and Tanaka
Laboratory at The University of Tokyo has experience using it in past empiricalresearch.

17

iii.

Node assignment

For this empirical research, we built a blockchain network as shown in Figure3-2. The University of Tokyo, USD, and JSF built a server and set up nodes tosynchronize the blockchain that recorded the contents, balance, market value,etc. of tokens.
The reasons for using three nodes are based on a comprehensive
consideration of the following: 1. from the viewpoint of fault tolerance, it is betterto have a large number of nodes, 2. a project management perspective is also
necessary, 3. an odd number is desirable when dealing with the majority rule
problem (when the blockchain branches out, the long chain takes precedence,but if a chain of the same length occurs, it is difficult to decide which one toprioritize if there is an even number).
In building nodes, in order to distribute the load, the blockchain nodes are
divided into two parts: Fullnode and Authority. The former performs transaction
processing related to deals received from the service server, mark to market,
etc., and the latter creates blocks and writes data. Of these, Fullnode wasinstalled only in USD, and Authority was installed in all three parties.
Furthermore, block creation was performed every five seconds, which isthe default in OpenEthereum.
(Figure 3-2) Blockchain Network18

(4) Records on the Blockchain
Records on the blockchain are made as follows based on the basic workflow of
the transaction described in (1) above.
i.

Token issuance・ The token administrator orders the issuance of tokens with indicating thetarget token, recipient, and issuance amount on the blockchain based on
the request from the transaction party (Company A).
・ The token name and quantity are recorded on the blockchain as thebalance of Company A.
Workflow of Token IssuanceCompany A

Company B

Requests
for token
issuanceTokenadministrator
Instructs
token
issuance

Token
grantedBlockchain administrator/
Record on blockchain ledger
Issues tokens
Token
CT@1 yen
Tokens owned
Company A: CT, g units

ii. Transaction deal, recording and approval・ The transaction parties conclude a deal for a transaction to exchange
tokens on the blockchain after they receive the tokens issued from thetoken administrator.
・ Based on the details of the transaction deal, one of the transaction parties(Company A) records the transaction information on the blockchain(including deliverables, quantity, receivables, and transaction conditions[deal start date, deal end date, haircut, currency, threshold for margin call]).
・ Transaction information recorded by Company A on the blockchain isrecorded in the “recorded” status. At this stage, the tokens owned byCompany A and Company B are not transferred.
・ After Company A enters the above transaction information, the othertransaction party (Company B) checks the transaction information
recorded on the blockchain through the service server and then approves
the transaction.
・ Once Company B approves, the status of the transaction changes to19

“active” in the blockchain and then the transaction settlement (transfer oftokens) takes place.
iii. Transaction settlement
Upon transaction approval and the designated transaction start date,following the transaction details, the tokens owned by Company A aretransferred to Company B and the tokens owned by Company B aretransferred to Company A on the blockchain.

Since the blockchain itself does not have a function to automaticallyprocess transactions at a specific time, the blockchain administrator
automatically and regularly verifies on the service server the presence ofa transaction for which the transaction start date has arrived, andprocesses transactions for settlements of transactions that have begun,
automatically starting the transaction.



Although the transaction is recorded and approved, if one transaction
party’s (Company A) token has an insufficient balance at the start of thetransaction, transaction settlement is not carried out. In this case, thetokens of Company B are not delivered to Company A.

For transactions that are not settled, the shortfall of tokens by Company A
is remedied by requesting new issuance from the token administrator, andonce the balance required for settlement is fulfilled, a smart contract is
activated and the transaction is settled automatically including theinformation for transaction processing at the start of the transaction sent
regularly by the service server to the blockchain.



If Company A’s balance insufficiency is not remedied, all transactions with
Company A as a transaction party are stopped. Thereafter, it is believedthat depending on the situation, proceedings move on to damage claims
or preservation procedures. However, this is outside the scope of thisempirical research.

20

Workflow from Transaction Recording to Settlement
Company A

Company B

Tokenadministrator

Blockchain administrator/
Record on blockchain ledger
Tokens owned
Company A: CT, g units
Company B: STx, f units

Recordstransaction

Confirms/C
ommunicat
es enteredinformation

Records transaction
data
Transaction 001
Borrower: A、Lender: B
Tokens provided by borrower: CT, g units
Tokens provided by lender: STx, f units
Status: Recorded

Confirms/A
pprovesenteredinformation

Processes transaction
Sends tokens
Tokens owned
Company A: STx, f units
Company B: CT, g units
Transaction 001
Borrower: A、Lender: B
Tokens provided by borrower: CT, g units
Tokens provided by lender: STx, f units
Status: Active

Delivered: CT
Received: STx
Delivered: STx
Received: CT

iv. Token transaction denominated in different currencies
・ As described above, an environment was established where transactions
can be executed involving the exchange of tokens whose underlying assets
are from different jurisdictions assuming that these underlying assets could
be currencies, government bonds and listed stocks of not only Japan, butalso the United States and Germany. For example, a transaction of tokens
whose underlying assets are US Treasury bonds and Japanese yen will betransferred simultaneously after automatic settlement on the designatedtransaction start date.
・ The token administrator acquires the market value and foreign exchange
rate of the underlying securities of each country on a daily basis and records
it on the blockchain, including the value converted into the base currency(Japanese yen, US dollar or Euro).
・ The transaction parties, when executing transactions involving assets
21

denominated in different currencies, designate a base currency (Japaneseyen, US dollar or Euro) for each transaction. The collateral price is converted
to the base currency based on the foreign exchange rate updated daily, andduring the transaction period, mark to market and margin calls are performedin the base currency.
v. Updating of token price・ The token administrator obtains the closing price of the stock price,
securities price or foreign exchange rate for each type of underlying asset
and instructs the blockchain to update the price of the token.
・ The token price recorded in the smart contract is updated in the blockchain
based on the price of the underlying asset instructed from the token
administrator.
vi. Mark to market and margin calls
・ Once per day (prior to the market opening in Tokyo time), the smart contract
is automatically activated so that the transaction is marked to market andmargin calls are made.
・ Within the blockchain, the price of the token of each transaction isrecalculated (marked to market) based on the token price updated in the“Updating of Token Price” process in (5) above, and after marked to market,
the token price of both transaction parties is compared.
・ The smart contact automatically performs the operation to cancel out any
difference in token price once detected. At the start of the transaction, it isagreed which tokens of the transaction party to make the margin call, and if
a margin call is made with the token provided by Company A and the valueof the token provided by Company A is large compared to the value of thetoken provided by Company B, the surplus tokens of Company A are
withdrawn from Company B.
・ In this example, if Company A pledges multiple tokens, considerations are
made to flexibly establish collateral as to which token surplus or shortfall toadjust. For example, when procuring a certain value of CT as collateral for
multiple ST (using a GC transaction), adjustment can be made using these
multiple ST, and alternatively, when procuring specific ST for collateral of CT(using a SC transaction), adjustment can be made using CT. Additionally,
when procuring multiple ST using multiple ST as collateral, adjustment can
22be made using multiple ST of either side of the designated ST for thecollateral or transaction.
・ If a threshold is set for margin calls, no margin call is made when the
difference between the price of the ST or CT of the lender and borrower aftermarking to market does not exceed the threshold.
・ The handling when the balance is insufficient at the time of a margin call is
the same as settlement in (3) above.

23

Workflow for Token Price Update, Mark to Market and Margin Call
Company A

Company B

Tokenadministrator

Blockchain administrator/
Record on blockchain ledger

Obtains
token priceEnters token price
Token
STx@a yenCalculates pricedifference
Token shortfall
Transaction: 001
Party in shortfall: Company A
Token in shortfall: CT, h units

Sends tokens
Tokens owned
Company A: STx, f units
Company B: CT, g + h units
Transaction 001
Borrower: A、Lender: B
Tokens provided by borrower:
CT, g+h units
Tokens provided by lender: STx,f units
Status: Active

Tokenreceived
Token
received

Enters event at timeof token shortfall
Issuesadditional
tokensConfirms shortfall
Notify shortfall

Requeststoken
issuance

Instructs
token
issuance

Issues token
Tokens owned
Company A: CT, h units

Token
grantedSends token
Tokens owned
Company A: STx、f units
Company B: CT, g+h units
Transaction 001
Borrower: A、Lender: B
Tokens provided by borrower:
CT, g+h units
Tokens provided by lender: STx,f units
Status: Active

Tokenreceived
Token
received

24

vii. End of transaction
・ Upon the transaction end date, the transaction in the smart contract changes
in status to “completed,” the borrowed tokens are delivered to the other party,
and the lended tokens are automatically returned. The handling in case of
shortfall is the same as (3) above.
Workflow at Transaction End
Company A

Company B

Tokenadministrator

Blockchain administrator/
Record on blockchain ledger
Determines maturity
arrivalProcesses transaction end
Send tokens
Tokens owned
Company A: CT, g + h units
Company B: STx, f units
Transaction 001
Borrower: A、Lender: B
Tokens provided by borrower:
CT, g+h units
Tokens provided by lender: STx,f units
Status: Completed

Delivered: STx
Received: CT
Delivered: CT
Received: STxviii. Cancellation of tokens
・ The token administrator instructs the blockchain to cancel the tokens (target
token, cancelling party, number issued) based on the request from thetransaction party (Company A).14
・ The name of the token and quantity canceled is reduced from the balanceof Company A on the blockchain.

14

Token cancellation assumes that tokens are cancelled in exchange for the underlying

currency or securities deposited at the time of token issuance.
25

Workflow of Token Cancellation
Company A
Requests
token
cancellation

Company B

Tokenadministrator

Blockchain administrator/
Record on blockchain ledger

Instructs
token
cancellation

Cancels token

Tokencancellation

Token(Cancellation)
Tokens held
Company A: (Cancellation)

26

4. Evaluation Results(1) Feasibility of Securities Finance Transactions Execution
First, we evaluated whether it is possible to execute each token-based SFTs
using blockchain. The results of this evaluation are as follows:i.

Types of Transactions Evaluated

The following types of transactions (samples) were executed between
Company A and Company B.
a. Transactions involving the exchange of securities and funds of the same
currencyTransactions

involvingtheprocurementofJapaneseyenCTcollateralized by Japanese stock ST or Japanese Government Bond ST
and the inverse transaction (transactions involving procurement of ST
collateralized by CT).
Transactions involving the procurement of US dollar CT collateralized by
US stock ST or US Treasury Bond ST and the inverse transactionTransactions involving the procurement of Euro CT collateralized byGerman stock ST or German Bund ST and the inverse transaction

b. Transactions involving the exchange of securities and funds of different
currencyTransactions involving the procurement of US dollar CT collateralized by
Japanese Government Bond ST

Transactions involving the procurement of Euro CT collateralized by US
stock STTransactions

involvingtheprocurementofJapaneseyenCTcollateralized by German Bund ST
c. Transactions involving the exchange of securities and securities of thesame currencyTransactions involving the procurement of Japanese Government Bond
ST collateralized by Japanese stock STTransactions involving the procurement of US Treasury Bond ST
collateralized by US stock STTransactions

involvingtheprocurementofGermanBund

STcollateralized by German stock ST
d. Transactions involving the exchange of securities and securities of different
currency27

Transactions involving the procurement of US Treasury Bond ST
collateralized by Japanese stock STTransactions

involvingtheprocurementofGermanBund

STcollateralized by US stock STTransactions involving the procurement of Japanese Government Bond
ST collateralized by German stock ST

ii. Transaction Period
The above types of transactions involving margin calls were executed
according to the following period from start to end dates.
Intraday, overnight, three days, one week, two weeks, and three weeks(carrying over to the next month)iii. Evaluation Resultsa. Start of transaction
At the start of the transaction, when Company A first registered the transaction,
the transaction information was recorded on the blockchain, and the sametransaction information was displayed on the screen of the other party(Company B), and Company B confirmed that it can be approved. Recording
and approval were completed in about a few seconds.
b. Margin calls during the transaction period
By obtaining the price of the token's underlying asset from the outside andrecording it on the blockchain, the smart contract could link it with the prerecorded transaction information, calculate the collateral value of both parties
for each transaction, and automatically transfer tokens to adjust the difference
between the two.
Specifically, in the case of a transaction between Company A andCompany B to procure ST (German bund) using the aforementioned ST (USstock) as collateral started on Wednesday, April 19, 2023 under the conditionsin Figure 4-1, the price of ST (German bund) is automatically acquired andrecorded on the blockchain when the closing price on April 19 was available.
The closing price of 98.811 on April 18 was changed to the closing price of
98.759 on April 19. After that, the price of ST (US stock) was automaticallyacquired and recorded on the blockchain when the closing price was available,
and the closing price of 161.01 on April 18 was changed to the closing priceof 162.53 on April 19.
28

The exchange rate (EUR/USD in the case of this transaction) was
automatically acquired and recorded on the blockchain after the close of the
US market, changing the closing price of 1.09253 on April 18 to the closing
price of 1.09753 on April 19.
Thereafter, the market value of tokens held by both counterparties wascalculated once a day (before the start of trading on the next business day
Tokyo time) to eliminate the difference in transaction value. In the example in
Figure 4-1, before the start of trading on Thursday, April 20, the number ofshares of ST (US stock) as collateral was automatically calculated to be
333,450 shares to match the market value of ST (German bund) based on
the closing price on Wednesday, April 19 (EUR 50,000,000 x 98.7590 EUR ÷
100 x 1.09753 = 54,195,483 USD). The difference between the number ofshares currently accepted as collateral (335 240 shares - 333,450 shares =1,790 units) was automatically returned from Company A to Company B.
Figure 4-1 Transaction Examples Involving ST (US Stocks) and ST (German
Bunds)
19 April 2023 (start of transaction)

20 April 2023 (after margin call)

B borrows

A accepts

B borrows

A accepts

ST (German Bund)

ST (US Stock)

ST (German Bund)

ST (US Stock)Unit

50,000,000

335,240

Price

98.8110EURUSD

1.09253
53,976,991

Market value (USD)

50,000,000

333,450161.0198.7590

162.53−

1.09753−

53,976,992

54,195,483

54,195,629※German Bund price is per 100 Euro face valuec. End of transaction
Regarding the end of the transaction, no additional operation was required
according to the transaction information recorded in the smart contract, andthe end settlement (exchange of the transaction subject and collateral) could
be automatically executed upon the transaction start date and time.
iv. Simultaneous execution of token exchange
In repo and securities transactions, if there is a time lag in the receipt of funds
or securities of both parties, there is a risk that one party does not receive theconsideration even though it has been delivered.
In this empirical research, when the deal, registration, and approval were29completed, the settlement was automatically performed by the smart contract,
and the tokens of both transaction parties were automatically transferred to theother party's account. At this time, if one of the transaction parties could notprepare a token to be delivered to the other party, the settlement would not be
carried out and the other party's token would not be delivered as well.
For example, if there was a shortfall of CT at the start of a transaction
between ST of Japanese stocks and CT of Japanese yen, neither ST nor CT
was settled, and Company A requested the token administrator to issue thenecessary CT, and ST and CT were settled promptly after this issuance. In
addition, the settlement itself was carried out without problem in about a few
seconds in various cases, such as not only ST and CT transactions, but also
ST and ST transactions and transactions between tokens denominated indifferent currencies.
v. Collateral management using multiple types of tokens
We evaluated whether it was possible to use the function of smart contracts to
conduct multiple types of token transactions and collateral management.
Specifically, in a transaction where Company B pledges multiple ST pools
as collateral and borrows ST or CT from Company A, if a margin call becomes
necessary due to fluctuations in the value of ST including foreign exchange
rates, Company B attempted to implement a margin call by adding or returning
one or more types of ST from among the multiple types of ST pools that
Company B had pledged. For example, when it borrowed US dollar CT from
Company A, Company B began the transaction on Thursday, April 20, 2023 inwhich it pledged ST of Japanese stocks and ST of Japanese government bonds
as collateral and made a margin call on these stocks shown as in Figure 4-2.
After that, on Thursday, April 20, the closing price was 4,125.0 yen for ST(Japanese stock), 97.32 yen for ST (Japanese government bonds), and 134.70
yen for USD/JPY. Based on these data, at 8 a.m. on Friday, April 21, thecollateral ST (Japanese stock) was automatically calculated to be 1,000,000
shares and ST (Japanese government bonds) 2,682,079,223 units so that itmatched the market value of CT (US dollar) (50,000,000 units x 134.70 =6,735,199,500). The difference between the number of units currently accepted
as collateral for ST (Japanese government bonds) of 2,633,730,485 units 2,682,079,223 units = 48,348,738 units was automatically pledged from
Company B to Company A.
30

Figure 4-2 Transaction Examples Involving CT (US dollar) and ST (Japanesestocks or Japanese government bonds)
20 April 2023 (start of transaction)
B borrows
CT(USD)

ST(JP Stock)Unit

50,000,000

Price

1

USDJPY
Market value(JPY)

21 April 2023 (after margin call)

A accepts
ST(JGB)

A accepts

CT(USD)

1,000,000 2,633,730,485

ST(JP Stock)50,000,000

4,138.0

97.36

1

−

−

134.70134.04
6,702,200,000

B borrows

4,138,000,000 2,564,200,000
6,702,200,000

6,735,199,500

ST(JGB)

1,000,000 2,682,079,223
4,125.0

97.32

−

−

4,125,000,000 2,610,199,500
6,735,199,500※JGB price is per 100 Yen face value

In this case, Company A registered the ST that may be offered in the
future in addition to the STs to be actually offered at the start of the transaction.
If there was a shortage of collateral during the transaction period, the smart
contract automatically secured additional collateral from the ST registered inadvance. For ST as collateral, an algorithm was set up that automaticallyselects the securities, accepts the securities with the lowest market value
among the collateral already in the collateral pool. The contents of the collateralpool were set so that the collateral securities and their market value arediversified as much as possible.
The borrowing of other assets using such a pool of multiple ST as
collateral references the fund raising mechanism by utilizing a deposit receipt
scheme, which is used to raise funds in the short-term money market by the
securities finance company in Japan (JSF). The securities finance company
deposits various stocks it holds to the stock exchange (TSE), receives deposit
receipts from the stock exchange, and use these as collateral when raising callmoney in the money market.
vi. Suspension of transaction
This empirical research was designed so that all transactions executed by aspecific party can be suspended under the authority of the blockchain
administrator.
In this case, new transactions, transaction repayment, and margin calls,
etc. are not implemented for transactions executed by a specific party.
In addition, for transactions conducted by specific parties, the transaction
amount and collateral value could be calculated promptly for each transaction
31

party.
In SFTs, if one party defaults, liquidation procedures are carried out suchas canceling individual transactions and consolidating receivables andpayables through bulk liquidation netting. With this handling in mind, thisfunction systematically suspends transactions of specific parties and calculates
the transaction amount in case of an emergency.
In the environment of this empirical research, we attempted to suspend
the above transactions and calculate the transaction amount in a situation
where 80,000 transactions were executed in the performance evaluation of (2)below, and it was confirmed that it functioned correctly.
(2) System Performance when Processing Transactions in Market-WideScale
In the test in (1) above, the feasibility of individual bilateral transactions wasevaluated, but in this section, after estimating the market-wide scale of SFTs
based on certain assumptions, transactions that occur in the entire market were
input into the system and their performance was evaluated.
This evaluation was carried out from the following two perspectives.
First, transactions may be concentrated for a short period of time, such as
during market stress or when a system that has stopped due to a failure isrestored. This evaluated how resilient the developed system is in case of highconcentration of transactions during market stress or recovery from systeminterruptions.
Second, while individual transactions are not concentrated in a short periodof time under normal circumstances, in the case of SFTs, marking to market every
business day and margin calls based on the results were always generated for
all transactions during the transaction period, and the processing burden on thesystem is heavy. Therefore, this evaluated how resilient it is to the anticipatedlarge system workload when marking to market and implementing margin calls
every business day.
Furthermore, an external cloud service with specifications of virtual CPU
cores: 2 and memory: 8 GB was used as the machine.
i.

Evaluation details and method

As for the details of the evaluation, the performance was measured in two
points: new transaction recording/approval as well as mark to market and32margin call processing.
Performance was measured by processing time. The processing time
was measured as the difference between the time when a transaction order
was sent and the time when the processing related to the transaction order was
executed and the result was recorded in a block. Since a block was createdevery five seconds, the processing time was up to a five-second error.15
Furthermore, assuming that 20 companies execute these transactions as
the main participants in SFTs in Japan, we evaluated that each company was
granted sufficient tokens so that there would be no shortfall.
ii. Evaluation of transaction recording and approval
Regarding recording and approval at the start of transactions, we divided thedegree of concentration of transactions into three stages, and experimented
with the processing time required for transaction recording and approval for
each. The number of transactions was set with reference to the market-wide
scale of SFTs in Japan (see reference for details of settings).
The measured time was the difference between the data input start time
and the completion time of recording on the blockchain for the transaction
recording and approval process of data input every minute.
The evaluation results were as follows:
Figure 4-3 Processing Time and Calculation Amounts for Transaction
Recording and Approval
Transactions/minute

Processing time

Calculation amount(seconds)(Mgas)

RecordingApproval

RecordingApproval

400

4.09

7.86

358

285

200

5.86

7.98

149

113

100

5.85

3.10

87

76

Here, 200 transactions per minute is assumed to be the number of daily
market-wide transactions in the Japan are concentrated in one hour, with 400
transactions assumed to be twice that number during market stress. As the15This is because, for example, when sent immediately after Block T creation or when sent
immediately prior to the following Block T+1, the transaction is deemed as recorded in
Block T+1 at the same time irrespective of the upwards of five second difference.
33

number of transactions increased, the number of transactions recorded in theblock increased, so the calculation amount in the blockchain increased inproportion to the increase in the number of transactions.
On the other hand, in terms of processing time, regardless of the numberof transactions, transaction recording and approval were completed within
about 8 seconds. The reason why it is not necessarily proportional to thecomputational complexity is that the system developed in this empiricalresearch has a specification that creates blocks every five seconds, so ameasurement error of up to five seconds occurred when recording transactions
on the blockchain. Taking this into account, there was no significant differencein the actual processing time for any of the transactions within 400 transactions.
Both are the results of evaluation in this empirical research environment.
These are considered to be greatly influenced by the specifications of themachine.
iii. Evaluation of mark-to-market and margin call processing
Regarding mark-to-market and margin call processing, the transaction volume(number of transactions) during the transaction period (end yet to arrive) was
divided into three stages, and the processing time when mark-to-market andmargin call processing were performed for all these transactions was evaluated.
The number of transactions was set based on the actual (partially estimated)market size of SFTs in Japan (see reference for details of the setting method).
The measured time was the difference between the time when the markto market of the collateral value of each transaction was started based on the
updated market value and exchange rate of the underlying asset, and the time
when the transfer of necessary tokens (margin call settlement) was recordedon the blockchain.
The evaluation results were as follows:34

Figure 4-4 Processing Time and Calculation Amount of Mark-to-market andMargin Call Processing
Transactions

Processing time

Calculation amount(seconds)(Mgas)

80,0002,628

21,02540,000362

10,48520,000151

5,246

Here, “80,000 transactions” in the top-left cell is the number of margin
calls processed assuming that one-third of market-wide active SFTs in Japanare concentrated in one blockchain administrator.
It took 151 seconds to process 20,000 transactions, 362 seconds (about
6 minutes) to process 40,000 transactions, and 2,628 seconds (about 44
minutes) to process 80,000 transactions. Although the processing of 80,000
transactions case took a certain amount of time (although this is consideredshorter than the time expected for normal batch processing), the processing
itself was able to be carried out to the end.
The smart contract for marking to market and margin calls, (1) searches
for transactions to be marked to market from the transaction list during thetransaction period, (2) searches the token information used in the acquired
transaction from the token list, (3) calculates the market value of the tokens ofboth parties, and (4) performs settlement processing to compensate for the
surplus or shortfall resulted from these calculations. In this empirical research,
this workflow was implemented for each transaction, but in addition to thisrather complicated calculation process, the search process increased as thenumber of outstanding transactions increased, especially in (1), and it took ahigh system load and time to find the corresponding transactions. Again,
performance is considered to depend largely on the specifications of themachine.
iv. Summary of performance evaluation results
In summary, the following results were obtained by performance evaluation.
With regard to the start of transactions, the recording and approval process
was carried out smoothly even in times of market stress when the daily
market-wide transactions were concentrated in one hour or doubled.
35Mark-to-market and margin call processing were possible to process
although it took a certain period of time even when assuming that one-thirdof outstanding transactions (end yet to arrive) that exist in the entire market
are concentrated in a single blockchain administrator.

While the processing of start or end of transactions did not cause
concentration in normal times other than market stress, marking to market
and margin calls always present a heavy workload to process because
they occur every business day during the transaction period. This point is
considered to depend on the specification of the machine.

36

(3) Impact of Collateralized Securities Diversification and Threshold Settingfor Margin Call on Net Credit Amount and Necessary Liquidity, Including the
Evaluation upon Market Turmoil
We conducted the following simulations to determine how the number of tokens
for collateral and whether or not to set a threshold when making a margin callwould affect the net credit amount and necessary liquidity.16
i.

Models established

We assumed that CT of currencies and ST of stock as collateral were
exchanged, and collateral adjustment (margin call) was carried out by the STof stock. Evaluation was conducted about the following six models for four
scenarios using the actual stock price data before and after the collapse of
Lehman Brothers (October 2008 to August 2009).
・Scenarios
Scenario 1. No material change in collateralized asset value (normal times)(62-day period from July 1, 2009 to August 31, 2009)
Scenario 2. Rapid decline in collateralized asset value (62-day period from
October 1, 2008 to December 1, 2008)
Scenario 3. Rapid increase in collateralized asset value (62-day period fromMarch 1, 2009 to May 1, 2009)
Scenario 4. High volatility of collateralized asset value (62-day period from
November 1, 2008 to January 1, 2009)
・Models
Model 1-1. Transactions involving the exchange of a single ST and CT
Model 2-1. Transactions involving the exchange of multiple (five securities)
ST and CT (margin calls made for one of five securities)
Model 3-1. Transactions involving the exchange of multiple (five securities)
ST and CT (margin calls made to ensure that the five securities of ST
always maintained the same value)
Models 1 to 3-2. The threshold for margin call in each of the above models

16

The following analysis is based on Blockchain Platform Research for Automation ofCollateral Value Adjustments in Securities Lending and Borrowing Transactions by Kento
Maruoka (March 2023).
37was set at 2%
Based on the above models and scenarios, the following items were evaluated.
・Daily net credit amount before margin call・Number of margin calls
・Margin call amount・Number of tokens replaced
ii. Evaluation Results
The evaluation results were as follows. The figures for each scenario wereindexed with the results of Model 1-1 set at 1.000.
Scenario 1. Normal times

Model1-1 Model2-1 Model3-1 Model1-2 Model2-2 Model3-2

Net credit amount

1.00

0.96

0.96

1.23

1.11

1.14

Number of margin calls

1.00

1.00

1.00

0.21

0.20

0.20

Margin call amount

1.00

0.96

1.23

0.65

0.64

0.71

Number of tokens replaced

1.00

0.95

0.56

0.65

0.65

0.37

Scenario 2. Sharp decrease

Model1-1 Model2-1 Model3-1 Model1-2 Model2-2 Model3-2

Net credit amount

1.00

0.94

0.95

0.99

0.95

0.97

Number of margin calls

1.00

1.00

1.00

0.49

0.54

0.56

Margin call amount

1.00

0.94

1.02

0.91

0.92

0.98

Number of tokens replaced

1.00

0.93

0.61

0.91

0.90

0.60

Scenario 3. Sharp increase

Model1-1 Model2-1 Model3-1 Model1-2 Model2-2 Model3-2

Net credit amount

1.00

0.81

0.78

1.06

0.90

0.82

Number of margin calls

1.00

1.00

1.00

0.44

0.39

0.36

Margin call amount

1.00

0.81

0.99

0.90

0.70

0.72

Number of tokens replaced

1.00

0.78

0.49

0.91

0.67

0.38

Scenario 4. High volatility

Model1-1 Model2-1 Model3-1 Model1-2 Model2-2 Model3-2

Net credit amount

1.00

0.84

0.84

1.04

0.92

0.91

Number of margin calls

1.00

1.00

1.00

0.43

0.43

0.44

Margin call amount

1.00

0.84

0.96

0.85

0.78

0.86

Number of tokens replaced

1.00

0.84

0.56

0.85

0.77

0.52

a. Normal times
a-1 Cases without a threshold during normal times
First, looking at the case of Scenario 1, where no threshold is set for normal
times, the amount of net credit decreased by about 4% for Model 2-1 and 31, which have five securities as collateral, compared to Model 1-1, which had
38one security as collateral. This is believed to be attributed to the diversification
effect.
The number of margin calls was not different as each model basicallymade a margin call every business day because margin calls were madeimmediately when even a small net credit occurred.
The margin call amount in the case of collateral diversification should
theoretically decrease if the fluctuation of net credit amount is suppressed bycollateral diversification, and in fact, the margin call amount in Model 2-1 isabout 4% lower than in Model 1-1. In Model 3-1, however, the increase wasabout 20%, which is thought to be due to an increase in the executed amountof margin calls in gross because when margin calls are made so that multiple
collateral securities maintain the same amount, it is necessary to adjust eachsecurity individually because it is not possible to offset the securities that haverisen in market value and those that have fallen.
The number of tokens replaced decreased in Model 2-1, which has fivesecurities as collateral but adjusted collateral using only one of themcompared to Model 1-1, which has one security as collateral. This is believed
to be attributed to the diversification effect and the suppression of collateralprice fluctuations. Comparing Model 2-1, which adjusts collateral with a single
security, and Model 3-1, which adjusts collateral with multiple issues, the latterhas a smaller number of tokens replaced, but this is because the market valueof a single security used for collateral adjustment in Model 2-1 is small, and it
took a large number of tokens to adjust a certain amount. Model 3-1 wasadjusted to include securities with high market prices, so the number oftokens decreased.
a-2 Cases with a threshold during normal times
On the other hand, when a threshold was set, the net credit amount increasedby 10 to 20% compared to none, indicating that it took several days for the
net credit amount to reach the threshold and the margin call to be made.
The number of margin calls that occurred in Models 1-2, 2-2, and 3-2
was contained at about 20% compared to no threshold.
The margin call amount was lower for each model when a threshold
was set.
The number of tokens replaced also declined in every model when athreshold was set.
39

b. Market turmoil
The following analysis was carried out as to how findings changed during
times of market turmoil based on the diversification of collateralized securities
and the threshold set had the effects as noted above during normal times.
b-1 Cases without a threshold during market turmoil
Net credit amount decreased by about 5% by implementing margin calls evenwhen the value of collateral plummeted. It is naturally intuitive for net credit todecrease by about 20% when the value of collateral rises, and even in theevent of volatility, the net credit amount decreased relatively significantly.
The number of margin calls was the same for every model, which was
the same as normal times.
In the case of Model 2-1, the margin call amount was generally thesame as the net credit amount, with a decrease of about 5% in the case of a
sharp decline, about 20% in the case of a sharp rise, and about 16% in the
middle in the case of volatility. In the case where the collateral securities ofModel 3-1 were diversified, the reason for the increase in the executedamount of margin calls is believed to be the same as in normal times
described above.
In Model 2-1, the number of tokens replaced decreased slightly fromnormal times even in the case of a sharp decline, but decreased more clearlyin the case of rapid increases and volatility, which is considered to be almost
the same as the amount of net credit and the margin call amount. In addition,
Model 3-1 had a significant decrease, but the reason for was likely the sameas in normal times.
b-2 Cases with a threshold during market turmoil
When a threshold was set, the amount of net credit increased in normal times,
but decreased even when the collateral value plummeted. In particular, Model
2-2 showed a decrease of about 5% due to the securities diversification effect.
This is because of the fact that the amount of net credit exceeded thethreshold in a shorter time than in normal times due to sudden market
fluctuations, and margin calls were often implemented.
In fact, although the number of margin calls decreased, the number fell
to about 20% in normal times, but only to 50% in times of market turmoil.
40

In addition, the margin call amount also declined significantly in normal
times, but during sudden market changes, especially in the case of a sharp
decline, it was almost at the same level as in cases where no threshold wasset. The number of tokens replaced showed a similar trend.
In other words, in the event of a market turmoil, even if a threshold wasset, the credit risk management function of the margin call was exercised toreduce the net credit amount, and if the securities diversification effect is
added, the margin call amount, i.e., liquidity on the margin call provision side,
can be sufficiently saved.
iii. Observations
In SFTs, from the perspective of collateral receiving party, it is desirable that thecollateral securities are as diversified as possible from the viewpoint of
improving liquidity and reducing net credit amount. On the other hand, thelarger the number of collateral securities the greater the increase in operationalburden of evaluation, management, and collateral replacement increases in thecurrent operational flow.
In the case of tokens, these issues are avoided because all of theseprocesses are automated, and appropriate combination of securities
diversification effects and threshold setting as described above, may create thepossibility of efficiently and effectively controlling net credit amount and liquidity
requirements.
In addition, although these effects can be obtained during normal times
and market turmoil, the effects of combining thresholds and securities
diversification on reducing credit risk and economized liquidity can beespecially seen during market turmoil.

41

5. Implications Obtained from This Empirical Research
The implications obtained from this empirical research were as follows.
(1) Transaction Feasibility
We confirmed that various types of SFTs, including those involving the exchangeof assets denominated in different currencies and security tokens to security
tokens, can be smoothly implemented from the start of transactions throughmargin calls to the end of the transaction period with various transaction periods.
(2) Reduction of Settlement Risks and Simultaneous Execution ofTransactions Denominated in Different Currencies
Blockchain technology can be utilized to exchange tokens for tokens
simultaneously without time difference. In the case of exchanges involving foreign
currencies or foreign securities, the transfer of funds and securities must be
executed during local time at the local transfer institution. For this reason,
generally a time difference occurs until completion of transaction settlement orcompletion of margin call. For example, when a Japanese financial institution
borrows US Treasury bonds, after concluding a transaction agreement andreconciliation, settlement is carried out on the next business day United States
time or late at night Japan time; thus the Japanese financial institution is able toconfirm the settlement in the morning of the next business day after that. As for
margin calls, for example, when settlement takes place in a foreign currency,
settlement is carried out local time overseas, meaning the Japanese financial
institution is only able to confirm the settlement either at night or in the nextmorning Japan time.
In this empirical research, even if the underlying assets are denominated indifferent currencies, upon recording and approval of the transaction on theblockchain after deal, the exchange of tokens for tokens on the blockchain wasable to be executed simultaneously in real time. Also, margin calls can be
automatically implemented after updating the daily market value without the needfor operations by the transaction parties.
(3) Reduction of Credit Risk and Flexibility in Economizing Liquidity
We confirmed that automation of margin calls using blockchain technology
reduces operational burden, making it easier to make margin calls, and as a result,
this can also reduce credit risk.
42

It is also possible for automation to nearly eliminate operational burden on
diversification of collateralized securities tokens and adjusting multiple collaterals
in margin calls. As a result, this reduces fluctuations in not only collateral value
but also net credit amount, having a positive effect on credit risk management. In
cases where a threshold is set in order to reduce operational burden associatedwith margin calls, relief of operational burden itself is possible already by theautomation via blockchain and smart contracts; thus, it is believed that thresholdsetting also provides benefit of controlling system burden following an increasein the number of margin calls.
Since threshold setting allows the occurrence of net credit within that range,
the amount of net credit increases to that extent. We confirmed that this effectcan be mitigated or offset by diversifying the collateral securities and securities
used for collateral adjustment.
Furthermore, the credit risk reduction effect and liquidity economizing effectgained through such combination of threshold and collateralized securities
diversification effect proved to be particularly effective during market turmoil.
(4) Streamlining of Operation
Using blockchain in SFTs enables automated execution without manualintervention following the predetermined conditions in the smart contract withregard to settlements related to the start and end of the transaction and margin
calls during the transaction period upon recording and approval of the transaction
on the blockchain after deal.
These results suggest that the use of blockchain can make it possible forstraight through processing (STP), improving the efficiency of SFTs operation andmanaging operational risk. In particular, this has the potential to significantly
reduce the operation and its time required to exchange transaction informationand check status with counterparties located in foreign countries, thereby
improving the efficiency of transactions.
(5) Utilization of Assets with Low Liquidity
There are cases where the transfer of the rights of certain securities with low
liquidity, such as unlisted shares, require an operational burden and associatedtime as the actual certificate must be transferred or changes must be made to theregistry.
It will become easier to transfer rights of low-liquidity assets by tokenization.
43

This provides potential to not only hold these low-liquidity assets, but also utilize
them as collateral in SFTs.
For example, as with the evaluation of this research, ST to be exchanged
for CT can be issued after placing low-liquidity assets under the management oftoken administrators using trust scheme or other means.
In addition to ST, CT can be used for SFTs by using the following method
to fix the value of CT at 1 CT = 1 yen, etc., after using the asset pool including
low-liquidity assets as the underlying asset. By constantly managing the value ofthe pool of underlying assets, including low-liquidity assets, so that it always
exceeds 1 using a certain weighting, the value of CT can be fixed at 1 yen without
a one-to-one correspondence between the valuation of individual low-liquidity
assets and CT (the same structure as the above-mentioned deposit receipt
scheme).
Furthermore, it is believed that increasing the usage as collateral in thismanner has the potential to increase the valuation of the underlying asset.
In this empirical research, we found that there are various applications byutilizing blockchain to SFTs. Although many key points were left out of thisresearch from the perspective of project management, going forward we intend
to continue researching this area further while paying close attention to the latest
technological advancements in Japan and abroad.
END

44

Reference
The daily volume of SFTs, mark-to-market and margin call processing used in theperformance evaluation were estimated as follows based on publicly available
data and the Company’s transaction results.
1. Daily number of SFTs
(Stock)・The share of clearing and non-clearing transactions is 70% and 30%17
Unit: 100 million yen
Balance

Share

Centrally cleared transactions

67,98370%

Not centrally cleared transactions

29,31630%

Total

96,534100%※Equities vs Cash, Month end average of securities in (average of January 2019 to December 2021)

・Based on the number of cases of 3,726,272 and the share of centrally cleared
and not centrally cleared transactions in FY2021 in obligation assumption(stock lending) in JASDEC DVP clearing corporation, the number of cases of
not cleared transactions was estimated to be 1,606,863, and by dividing thisby business days and adding it up, the average number of cases transacted
per day was estimated to be 21,857.18
Yearly total
Number ofVolumecases(million shares)

Daily average

Value(100million

Number ofVolume(100million

yen)

cases

(million shares)

yen)

Value

Centrally cleared transactions FY2021

3,726,272

49,8581,236,846

15,272204

5,069

Not centrally cleared transactions FY2021 (estimation)

1,606,863

21,500533,359

6,586

88

2,186

Total (estimation)

5,333,135

71,3581,770,205

21,857292

7,255※Number of cases, volume and value relating to the “Execution of DVP Book-Entries” (book-entry transfer of securities from Delivering DVP participants to JDCC).

Business days：

・The ratio of GC and SC transactions is 48% and 52%19
Unit: 100 million yen
GC

SC

Total

Balance

47,46950,61598,084

Share

48%

52%

100%

※Equities vs Cash, Month end average of securities in (average of January 2019 to December 2021)

17

Bank of Japan, Quantitative Analysis of Haircuts: Evidence from the Japanese Repo and
Securities Lending Markets, Table VII
18
JASDEC, DVP Settlement Services for NETDs (3) Obligation assumption (stock lending)(1), FY2021
19
Bank of Japan, op. cit. (footnote 17), Table VII45244 The average number of issues per GC and SC transaction deal is 24.55 and4.05 based on JSF actual results (April 2022 to September 2022)
 The ratio of foreign currency and Japanese yen transactions is 2% and 98%20
 Based on these figures, we arrived at the following estimates:

The daily number of GC in stock SFTs = 21,857 securities x 48% ÷ 24.55
securities x (98% + 2%) ÷ 98% = 436

The daily number of SC in stock SFTs = 21,857 securities x 52% ÷ 4.05
securities x (98% + 2%) ÷ 98% = 2,864(Bonds) The daily number of Gensaki transactions (Japanese yen) is 5,23721
 The daily number of Gensaki transactions (foreign currency) is 5,237 x 12% ÷
88% = 714 when the share is 88% for Japanese yen and 12% for foreign
currencies22
 The ratio of Gensaki transactions and securities lending and borrowing
transactions is 70% and 30%23
 Securities lending and borrowing transactions (Japanese yen) total 5,237 x
30%/70% = 2,244
 Securities lending and borrowing transactions (foreign currencies) total 2,244
x 17%/83% = 460 when the share is 83% for Japanese yen and 17%24 forforeign currencies
 Combining the above, daily bond SFTs totals 5,237 + 714 + 2,244 + 460 =8,655
 Totaling stocks and bonds, the daily number of SFTs is estimated to total 436+ 2,864 + 8,655 = 11,955 (approximately 12,000)
 Assuming that these transactions are intensively executed over an hour, inwhich case the number of transactions executed per minute is 12,000 ÷ 60
minutes = 200. Based on these 200 cases, three patterns, including doubling

20

Ibid. Table VII.

21

Bank of Japan, Statistics on Securities Financing Transactions in Japan, the peak until
August 31, 2022.
22

Bank of Japan, op.cit. (footnote 17), Table IV and Table V.
Bank of Japan, op.cit. (footnote 21) .
24
Bank of Japan, op.cit. (footnote 17), Table IV and Table V.
46
23

to 400 during market stress and halving to 100, were established to evaluate
the performance of this empirical research.
2. Daily mark-to-market and margin call processing of SFTs
(Stocks)
・After calculating25 the distribution ratio of the loan period as follows, dividing
the 436 daily GC of stock SFTs based on the distribution of loan periods andmultiplying them by the average number of times of marking to market (= days)of each, the daily number of GC of stock SFTs subject to mark-to-market andmargin call processing was estimated to be 6,012.
Overnight
Share
Daily number oftransactions (A)Average number of timesof marking to market (B)(A)×(B)

2 daysMore than More than More thanor more1 week1 month

3 months

Open-end

1%

3%

7%

2%

5%

81%

5

13

32

10

22

353

0

4

19

60

180

2

0

50

609

623

4,023

706

Total

436

6,012

・ Similarly, if the 2,864 daily SC of stock SFTs are divided based on the
distribution of loan periods and multiplied by the average number of days for
each, the daily number of SC of stock SFTs subject to mark-to-market andmargin call processing was estimated to be 39,489.
Overnight
Share
Daily number oftransactions (A)Average number of timesof marking to market (B)(A)×(B)

2 daysMore than More than More thanor more1 week1 month

3 months

Open-end

1%

3%

7%

2%

5%

81%

36

82

210

68

147

2,320

0

4

19

60

180

2

0

330

3,998

4,093

26,428

4,641

Total

2,864

39,489(Bonds)・After calculating26 the distribution ratio of the loan period as follows, the daily
number of bond SFTs subject to mark-to-market and margin call processing
was estimated to be 189,563 when dividing the bond 8,655 SFTs by the
distribution of loan periods and multiplying by the average number of days for
25
26

Ibid. Table VII.
Ibid. Table IV, Table V and Table VI.
47

each.
Overnight
Share
Daily number oftransactions (A)Average number of timesof marking to market (B)(A)×(B)

2 daysMore than More than More thanor more1 week1 month

3 months

37%

15%

29%

15%

4%

3,201

1,300

2,505

1,336

315

0

4

19

60

180

0

5,198

47,58780,13956,639

Total

8,655

189,563

・Totaling these, the daily number of SFTs subject to mark-to-market and margin
call processing was estimated to be 6,012 + 39,489 + 189,563 = 235,064(approximately 240,000 transactions).
・Three patterns were used for the performance evaluation of this empiricalresearch: 1/3 (80,000 transactions), 1/6 (40,000 transactions), and 1/12
(20,000 transactions) of the approximately 240,000 transactions subject tomark-to-market and margin call processing per day.

48

Appendix
Members of Each Organization who Participated in this Empirical Research(Job titles are as of present or during their involvement in this empirical research)
1. Japan Securities Finance Co., Ltd.
Yutaka Okada (Senior Managing Executive Officer)
Morikuni Shimoyamada (Senior Managing Executive Officer; at the time:
Executive Officer and General Manager of Business Development
Department)
Yuji Yoshimoto (Corporate Officer, at the time: Corporate Officer and General
Manager of Business Development Department)
Kenji Ishiyama (General Manager of Business Development Department)
Tetsuya Onodera (Deputy General Manager of Institutional Sales Department, atthe time: Deputy General Manager of Business Development Department)
Yusuke Tamai (Deputy General Manager of Business Development Department)
Takumi Ishiyama (Settlement & Custody Department)
2. Tanaka Laboratory, Graduate School of Engineering, The University of
Tokyo
Kenji Tanaka (Associate Professor, Department of Technology Management for
Innovation, Graduate School of Engineering, The University of Tokyo)
Ryota Suzuki (Project Academic Specialist, Department of Technology
Management for Innovation, Graduate School of Engineering, The
University of Tokyo)
Kento Maruoka (Department of Technology Management for Innovation,
Graduate School of Engineering, The University of Tokyo)
Hirofumi Matsushita (Department of Systems Innovation, Graduate School ofEngineering, The University of Tokyo)
3. USD Co., Ltd.
Masashi Uehara (President)
Yuto Yamazaki (Engineer)
Hiromu Oki (Engineer)49