JSF JAPAN SECURITIES FINANCE CO., LTD.

Outline of Empirical Research on Securities FinanceTransactions using Distributed Ledger Technology

May 30, 2023
Japan Securities Finance Co., Ltd.
AndTanaka Laboratory, Graduate School of Engineering, The University of Tokyo
Copyright (C) JAPAN SECURITIES FINANCE CO., LTD. All Rights Reserved.

1. Background and Purpose of this Empirical Research
Advancements in the usage ofdistributed ledger technology inthe securities field
Reducesettlement risk

Streamline
operational
processing

Smaller tradesizes andliquidation

Importance of securities financetransactions in Japan
Essential toliquidity
supplyBalanceexceeds 300
trillion yen

Limitedexistingresearch

Conducted joint empirical research on thepotential of securities finance transactions
using distributed ledger technology• Conceptualization and scheme•
planning•• Research of related market practices• Compilation of reports

JSF JAPAN SECURITIES FINANCE CO., LTD.

Data analysis
Review of basic technologies andsystems concerning distributed
ledger technology• Development of system and smart
contracts using distributed leger
technology

21. Background and Purpose of this Empirical Research

Conceptual Diagram of Empirical Research

Tokenized Collateral
Tokenized Securities Lending
CompanyA

Simultaneous Execution

CompanyB

Daily Mark-to-Market
Collateral Exchange

JSF JAPAN SECURITIES FINANCE CO., LTD.

3

1. Approach to this Empirical ResearchThe following approaches were taken from the viewpoint of effective project
management in cutting-edge field.
1. The research did not consider replacing the existing trading andsettlement infrastructure but focused on the bilateral relationships between
transaction parties.
2. The research focused on practical feasibility excluding review of therelated laws and regulations.
3. The research excluded review of token issuance schemes and instead
focused on transactions using tokens already issued.
4. Transaction settlements in the research refers to the exchange of tokens
and does not indicate the transfer of assets underlying the tokens such ascash or securities.
JSF JAPAN SECURITIES FINANCE CO., LTD.

4

2. About Securities Finance Transactions• Securities finance transactions involve the exchange of securities and funds orsecurities and securities, with redemption after a predetermined period. There are
general collateral (GC) transactions in which securities are collateralized for funds
management and procurement needs, and special collateral (SC) transactions inwhich funds are collateralized for specific securities management andprocurement needs. These transactions are growing around the world.
• Trends in the balance of securities finance transactions in Japan
Bonds

Stocks

Source: Trend in the Money Market in Japan – Results of Tokyo Money Market Survey (August 2022) published by the Bank of JapanJSF JAPAN SECURITIES FINANCE CO., LTD.

5

3. Structure of Empirical Research and Blockchain SmartContracts(1) Structure of securities finance transactions in empirical research・Subject of tokenization
TypeTokenization

Estimation of market value

Security token (ST)Government bonds and listed stocks of Japan, USand Germany

Closing price of each market

Cash token (CT)

Currencies such as Japanese yen, US dollar, EuroSame as each currency

・Calculation of net credit amount
Based on the above market value, in the case of transactions of tokens denominated in different
currencies, the net credit amount of all securities finance transactions was calculated by using theexchange rate after the close of the US market on the day. The exchange rate is acquired andcurrency conversion is conducted before the start of trading on the Japan market the next day. If
there was any excess or shortage, margin call was implemented.

・Transaction workflow
Tokens granted
to eachcompany fromtoken
administrator

JSF JAPAN SECURITIES FINANCE CO., LTD.

Contract
between parties
andregistration/app
roval oftransaction info

Automatic
settlement on
start date

Automated
mark-to-market
and margin
calls followingchanges inmarket value

Automatic
settlement on
end date

6

3. Structure of Empirical Research and Blockchain SmartContracts(2) System composition

・ Overview of each actor
Name
Token administrator
Transaction party

Blockchain administrator

JSF JAPAN SECURITIES FINANCE CO., LTD.

Overview
・Based on the request of the transaction parties, instructs the blockchain administrator
to issue tokens and then issues the tokens
・Following token issuance, registers and approves transaction information in the systemand executes the transaction for exchanging tokens
・Receives information sent from the token administrator or transaction parties andadministers the service server that sends the transaction to blockchain・Manages the blockchain for processing transactions, forming blocks and recordingtransactions
7

4. Evaluation Results(1) Feasibility of securities finance transactions execution (individual bilateraltransactions)
・Evaluated transaction types
TypeSpecific examples

Exchange of ST and CT of the same currency

Procurement of JPY CT collateralized by Japanese stock ST or JGB
ST

Exchange of ST and CT of different currency

Procurement of USD CT collateralized by JGB ST

Exchange of ST and ST of the same currency

Procurement of US Treasury Bond ST collateralized by US stock ST

Exchange of ST and ST of different currency

Procurement of German Bunds ST collateralized by US stock ST*Evaluated various trading periods, such as intraday, overnight, 1 or 3-weeks (carrying over to the next month), etc.
・Sample transaction
19 April 2023 (start of transaction)

20 April 2023 (after margin call)

B borrows

A accepts

B borrows

A accepts

ST (German Bunds)

ST (US Stock)

ST (German Bunds)

ST (US Stock)Unit

50,000,000

335,240

50,000,000

333,450

Price

98.8110161.0198.7590

162.53

EURUSD

1.09253−

1.09753−

53,976,991

53,976,992

54,195,483

54,195,629

Market value (USD)

1,790 shares
automatically
returned from
Company A toCompany B※German Bunds price is per 100 Euro face value⇒Each transaction was settled automatically from the start of transactions through margin
calls to the end of the contract period after registration and approval of the contract.
JSF JAPAN SECURITIES FINANCE CO., LTD.

8

4. Evaluation Results(2) System performance when processing transactions in market-wide scale• Input transactions occurring in the entire market and evaluated performance after
estimating market-wide scale of securities finance transactions.
• How resilient the developed system is in case of high concentration oftransactions during market stress or recovery from system interruptions, and how
resilient it is to the anticipated large system workload when marking to market andimplementing margin calls every business day though it is anticipated to havelarge system workload .
‣ Evaluation results• Regarding the start of transactions, registration and approval processing was
executed smoothly even during times of market stress when daily market-wide
transactions concentrated in one hour.
• Regarding mark to market and margin calls, generally they were able to beprocessed even based on the scenario when one-third of market-wide active
transactions (before redemption) concentrated at the blockchain administrator.
*However, this is considered to depend on the machine specifications, etc.
JSF JAPAN SECURITIES FINANCE CO., LTD.

9

4. Evaluation Results(3) Impacts of collateralized securities diversification and threshold setting for margin call on
net credit amount and necessary liquidity, including the evaluation upon market turmoil• Simulations were conducted for each market scenario (during normal times and market turmoil
such as sharp increases, sharp decrease, and high volatility) depending on the number of tokens
to be collateralized and whether or not a threshold is set when implementing a margin call
‣ Evaluation results (indexed with one collateralized securities and no threshold set at 1.00)
Normal times
1 collateral

Market turmoil

5 collaterals

1 collateral

5 collaterals

no threshold 2% threshold no threshold 2% threshold no threshold 2% threshold no threshold 2% threshold
Net credit amount

1.00

1.23

0.96

1.11

1.00 0.99〜1.06 0.81*〜0.94 0.90〜0.95

Number of margin calls

1.00

0.21

1.00

0.20

1.00 0.43〜0.49

Amount of margin calls

1.000.65

0.96

0.64

1.00 0.85〜0.91 0.81*〜0.94 0.70〜0.92

Number of tokens transferred

1.00

0.65

0.95

0.65

1.00 0.85〜0.91 0.78*〜0.93 0.67〜0.90

1.00〜1.00 0.39〜0.54*Declined particularly during market spikes‣ Considerations• From the perspective of the collateral receiving party in securities finance transactions, it isdesirable that the collateral securities are as diversified as possible from the viewpoint of
improving liquidity and reducing net credit. On the other hand, the larger the number of collateral
securities the greater the increase in operational burden of evaluation, management, andcollateral replacement in the current operational flow.
• In the case of tokens, these issues are avoided because all processes are automated, and theappropriate combination of securities diversification effects and threshold setting may create thepossibility of efficiently and effectively controlling net credit amount and liquidity requirements,especially in times of market turmoil.
JSF JAPAN SECURITIES FINANCE CO., LTD.

10

5. Implications obtained from the Empirical Research(1) Transaction feasibility•

Various types of securities finance transactions, including those involving the exchange of assets
denominated in different currencies and securities tokens to securities tokens, can be smoothly
implemented from the start of transactions through margin calls to the end of the transaction period.

(2) Reduction of settlement risks and simultaneous execution of transactions denominated indifferent currencies•

Token-to-token exchanges can be automatically conducted simultaneously without time difference,even if the underlying assets are denominated in different currencies. In addition, margin calls can beautomatically implemented without the need for operations by transaction parties.

(3) Reduced credit risk and economized liquidity•

Automation of margin calls reduces operational burden, making it easier to make margin calls, andcredit risk may be reduced. In addition, the appropriate combination of collateralized securities
diversification effect and margin call threshold setting can reduce credit risk and economize liquidity,
especially during market turmoil.

(4) Streamlining of operation•

Automation of settlement and margin call makes it possible for straight through processing (STP) and
improving the efficiency of securities finance transactions operation and managing operational risk. In
particular, this has the potential to significantly reduce the operation and its time required to exchangetransaction information and check status with counterparties located in foreign countries, thereby
improving the efficiency of transactions.

(5) Utilization of assets with low liquidity•

Since it will become easier to transfer rights of low-liquidity assets by tokenization, there is thepotential to not only hold these assets, but also utilize them as collateral for securities financetransactions (the valuation of the underlying asset itself may improve as the utilization valueincreases).

JSF JAPAN SECURITIES FINANCE CO., LTD.

11