JSF Holds Lecture on “Financial and Securities Markets and Industry-AcademiaAlliance” at the Faculty of Engineering at the University of TokyoTOKYO, January 24, 2022 --- We are pleased to announce that on January 17, 2022, Yutaka Okada,Managing Executive Officer of Japan Securities Finance Co., Ltd. (JSF), delivered a lecture to studentsof the School of Engineering at the University of Tokyo on the topic of “Financial & Securities Marketsand Industry-Academia Alliance ― Blockchain: Case History ―” (for the lecture materials, please
see the attachment).
JSF and the Graduate School of Engineering of the University of Tokyo released “JSF and Universityof Tokyo Start Empirical Research on Securities Lending and Borrowing Using Distributed Ledger
Technology” on June 18, 2021 and have been conducting research with Associate Professor KenjiTanaka. This lecture mainly focused on (1) an overview of the financial and securities markets,particularly securities lending and borrowing, (2) trends in applied research on blockchain technology
in the financial and securities fields, (3) an overview of research between JSF and Associate Professor
Kenji Tanaka, and (4) the thoughts on industry-academia alliance.
All the students in attendance were keenly aware of recent trends in finance and securities as well as
the latest technologies such as blockchain and industry-academia alliance, and held lively discussions
not only on current issues but also on the future state of the industry and how it should ideally evolve.
As part of our ESG efforts to realize a sustainable society, JSF will continue to aggressively strive tocreate a foundation for industrial and technological innovation through industry-academia alliance toexpand innovation and solve social issues.
----- end ----<About JSF>
Japan Securities Finance Co., Ltd. (JSF) is the sole securities finance company in Japan incorporated
in 1950 with a license under the Financial Instruments and Exchange Act. Its main business is theprovision of funds and securities to securities companies for settlement of standardized margintransactions pursuant to the above law, and also provision of securities lending and financing. As aninstitution specializing in the securities finance business, JSF, with a keen awareness of this publicrole, has a mission of contributing to the development of the securities market by proactively meetingthe diverse needs of securities and financial circles and boosting the long-term interests of securities

market participants. JSF’s credit rating is AA- under both Rating and Investment Information, Inc. andJapan Credit Rating Agency, Ltd., and A under S&P Global Ratings. JSF’s stock is listed on the Tokyo
Stock Exchange.
For more information, visit https://www.jsf.co.jp/english/＜Related SDGs＞<Inquiries>
Japan Securities Finance Co., Ltd.
Business Development Department
Email: bddept@jsf.co.jp

JSF JAPAN SECURITIES FINANCE CO., LTD.

attachment

Financial & Securities Markets andIndustry-Academia Allianceー Blockchain: Case History ーLecture held at University of Tokyo,
Faculty of Engineering, Tanaka Laboratory
17 January 2022
Yutaka Okada
Managing Executive Officer
Japan Securities Finance

Copyright (C) JAPAN SECURITIES FINANCE CO., LTD. All Rights Reserved.

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Table of Contents

1. Financial & securities markets
2. Role of repo transactions
3. Repo market structure
4. Role of securities lending at JSF: Infrastructure
underpinning bond markets
5. Applied research on blockchain technology insecurities field
6. Tanaka Laboratory-JSF Project
7. Thoughts on industry-academia alliance
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Introduction: Lecture overview

I would like to discuss the following topics today on thealliance between industry and academia.
1. Financial & securities markets and securities lendingand borrowing
2. Applied research on blockchain technology in thefinancial & securities field
3. Tanaka Laboratory-JSF Project
4. Thoughts on industry-academia alliance
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Japan Securities Finance (JSF)• JSF was founded in 1950 to extend loan or lend stocks to securities
firms for settlement of margin transactions (loan for margintransactions). It is a limited company listed on the First Section of
the Tokyo Stock Exchange.
• It lends various types of stocks to a large number of securities firms,and procures stocks for this purpose from a broad range of financial
institutions and institutional investors.
• It is allowed to carry out settlement using the Central Counterparty
run by the Tokyo Stock Exchange pursuant to the law in order toreduce settlement risk and execute its work efficiently.
• As securities finance companies provide the infrastructure for publicmarkets, they must be licensed by the prime minister. JSF is theonly such securities finance company in Japan.
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Financial & securities markets (1)• Money markets− Banks and securities firms procure (demand) and invest (supply) funds forvarious activities− Institutional investors and businesses also participate in the markets in order toprocure/invest funds• Securities markets− Stock markets➢ Corporations issue stock to procure capital for capital expenditures (primarymarket)➢ Institutional and individual investors buy/sell stocks (secondary market)− Bond markets➢ Governments and corporations issue bonds to procure needed funds(primary market)➢ Institutional and individual investors buy/sell bonds (secondary market)

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Financial & securities markets (2)• Close link between capital markets and securities markets− Securities issuance and circulation involves settlement(payment/receipt) of funds via money markets.
➢ Example: Investor uses stock as collateral to procure funds(money market), which are then used to purchase newly issued
bonds (securities market).
− Securities are used as collateral required for procuring funds.
− Clearing houses and settlement institutions have been created toensure safe settlement of funds/securities. Users pledge theirfunds/securities as collateral.

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Role of repo transactions（1）Repo transactions are transactions in which securities areexchanged for funds or other securities.
(1) Exchange of securities and funds
Securities (stocks, bonds)

Securities lender(fund borrower)

Funds

Securities borrower（fund lender)

Interest
Borrowing fee• Securities firm procures funds to acquire securities as inventory(securities as collateral)• Institutional investor lends securities to utilize its securities
holdings (cash as collateral)• Securities and funds may be issued in different countries
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Role of repo transactions（2）(2) Exchange of securities and securities
Stock

Bond borrower(Stock lender)

Sovereign bond

Bond lender(Stock borrower)

Lending fee• The bond borrower (e.g., bank, securities firm) pledges stock tothe bond lender (e.g., institutional investor) as collateral andpays borrowing fee.
• The borrower acquires funds using the procured bond ascollateral or pledges the bond as collateral to the central bankor clearing/settlement house.
• Securities and funds may be issued in different countries

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Repo market structure（1）• Cash Borrowing Side
Amount Outstanding in theMoney Market

Changes in the balance of securities
financing transactions in Japan(*)

Source：Bank of Japan “Trends in the Money Market in Japan”

Source：Bank of Japan Review “New Initiatives to Improve
the Transparency of Securities Financing Markets in Japan”(*) Repos executed without designation of specific securities as collateral, similar to cash loans, are known as General Collateral (GC)repo transactions. Repos executed with designation of specific securities as collateral, similar to securities loans, are known as Special
Collateral (SC) repo transactions.

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Repo market structure (2)• Bond Lending Side
Amount Outstanding in theSC Repo Market by Investor Type

Source：Bank of Japan “Trends in the Money Market in Japan”

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Securities Lending Transactions
with Japanese Equities

Source：Bank of Japan Review “New Initiatives to Improve
the Transparency of Securities Financing Markets in Japan”
10Repo market structure（3）• Japanese repo markets are mainly yen based, centered on
JGBs. Overseas transactions are mainly with Europe.

Source：Bank of Japan Review “New Initiatives to Improve the Transparency of Securities Financing Markets in Japan”

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Repo market structure（4）European repo markets

Source：“Euro Repo Market
Functioning: Collateral is King“ P.
Schaffner et al, BIS Quarterly
Review, December 2019

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Repo market structure（5）• Repo markets are expanding worldwide• This stems from growing transactions to procuresecurities− SC transactions are on rise in both Japan and Europe.

• Rise in securities procurement trades driven by:− (Demand side) Transaction collateral requirements frompost-Lehman regulatory tightening, greater collateraldemand for pledges to clearing/settlement houses− (Supply side) Increasing scarcity of limited-supply securities
following asset purchasing spurred by global monetaryeasing policies
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Repo market structure（6）• (cont’d) Example: Falling repo rate in Europe fromscarcity of sovereign bonds

Source：“Euro Repo Market
Functioning: Collateral is King“ P.
Schaffner et al, BIS Quarterly
Review, December 2019

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Role of securities lending at JSF(1) Loan for margin transactions
Supply funds/stock liquidity to margin transaction markets and act as market infrastructure
Stock (sales proceeds)

Stock (sales proceeds)JSF

Purchased asset(loaned stock)

Securities
firm

Purchased asset(loaned stock)

Interest rate
(lending fee)

Interest rate(lending fee)

Margintransaction
investor(2) Repo transactions
Act as intermediary for repo transactions derived from (1) utilizing creditworthiness andneutrality
Stock/bondStock/bondInstitutional
investor

Collateral(fund/securities)
Borrowing fee

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JSF

Collateral(fund/securities)

Borrower

Borrowing fee

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Applied research on blockchain technology in securities fieldBlockchain technology is• Resistant to manipulation/counterfeiting• Resistant to damage• More efficient processing (automation) when used withsmart contracts• These elements can help reduce settlement andbusiness risk and should be applicable to the securities
business as with other fields.

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Experimental token settlements (1)• Token as payment means− JPM Coin: US dollar settlement platform set up by JPMorgan Chase with client
institutions. Settlement uses tokens at $1 per coin. Similar schemes havebeen proposed by Well Fargo and others.
− Utilty Settlement Coin: Fnality offers 1 token per currency unit in Canada,Eurozone, Japan, UK and US, including cross-border settlements.

• DVP settlements for securities and cash (*)− Project Jasper: Joint project by Payments Canada and the Bank of Canada
offering settlement of securities tokens and cash tokens on the same ledger
through token-vs-token (TvT).
− Project Stella: Joint ECB and BoJ project offering TvT DVP settlements.
− Projct Ubin: TvT by Monetary Authority of Singapore and Singapore Exchange.
(*) Delivery Versus Payment (DVP) links securities delivery with payment so that neither occurs
without the other.

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Experimental token settlements (2)• Actual cases− The World Bank and Commonwealth Bank of Australia have issued bonds ontheir Bond-i platform using blockchain technology.
− Societe General has issued €100mn in covered bonds as a security token on
the Ethereum blockchain.
− Börse-HQLAx: DVP settlement for tokenized securities developed by Deutsche
Börse Group and HQLAx.

• Platforms supporting tokenized securities− SIX Digital Exchange: An experimental settlement platform for tokenizedstocks/cash run by SIX Swiss Exchange and Swiss National Bank. Cashsettlements have been carried out for both wholesale central bank digitalcurrencies and the nation’s existing RTGS system.
− Bank of England has upgraded its RTGS system to accept security tokens.
➢ Source: Morten Bech, Jenny Hancock, Tara Rice, Amber Wadsworth, “On the future of securities
settlement”, BIS Quarterly Review, March 2020
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Overseas developments (1)The aforementioned growth in collateral demand has become an acuteproblem in Europe, prompting a look at blockchain technology as a way touse securities as collateral more efficiently and swiftly and with low
settlement risk.
• For example, the Blockbaster Project by Deutsche Bundesbank andDeutsche Börse could increase the efficiency of verification work between
the collateral lender and borrower, allowing automatic delivery of collateralin near-real time all day every day. The project‘s utility is now being
studied.
− We should note that such projects are not intended to immediately replace existing
securities settlement systems, which are highly efficient and risk controlled. Existingsystems are designed to meet a variety of needs, including regulations, and any newtechnologies would likely be operated in parallel for a substantial period.

➢ Source: Deutsche Bundesbank, Deutsche Börse, “How Can Collateral Management Benefit from DLT?”- Project“BLOCKBASTER”, January 2020

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Overseas developments (2)• It would be unrealistic at this stage to aim immediately to turnto blockchain as a replacement for existing systems, which arealready efficient and realizing low settlement risk.
• Implications of experiments are as follows.
− Blockchain technology may help streamline back-office processing andcut costs and time, such as simplifying the multiple verification
procedures performed from contract to settlement. Shareholder voting,dividend payments and other corporate actions may also be automatedbased on ledger records.
− Given the essential role played in existing systems by intermediaries infacilitating transactions such as supplying liquidity, especially during
times of stress, it is not just a matter of simplifying the process.

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Overseas developments (3)(cont’d)− Exchange of securities tokens and fund tokens on a blockchain isvirtually immediate, but it is always essential to have gross settlement
funds on hand. (To address this issue, some projects have tried
connecting with existing RTGS (*) systems having liquidity-saving
mechanisms.)− Further legal consideration may be needed on measures to ensure
settlement finality.
➢ Source: Morten Bech, Jenny Hancock, Tara Rice, Amber Wadsworth, “On the future of securities settlement”, BIS
Quarterly Review, March 2020•(*) Real-Time Gross Settlement (RTGS) is a method of interbank fund transfers used by central banks along with
Designated-Time Net Settlement (DTNS). In the latter method, transfer instructions sent by financial institutions to thecentral bank are stored until a specified time, at which point the difference between payments and receipts at eachfinancial institution is settled. In RTGS, transfer instructions are instantly carried out individually as soon as they arriveat the central bank.

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Tanaka Laboratory-JSF Project (1)JSF JAPAN SECURITIES FINANCE CO., LTD.

22Tanaka Laboratory-JSF Project (2)• JSF and University of Tokyo released a report on 18 June 2021 entitled “JSF andUniversity of Tokyo Start Empirical Research on Securities Lending andBorrowing Using Distributed Ledger Technology”.
• The research is set in securities lending and borrowing in the secondary
securities market. In this sense, the research is rare in Japan, and we are trying
to make it as unique as possible in light of the aforementioned globaldevelopments.
• Special features(1) Limited to specific parties− This is not a public trading system but a system to verify bilateral transactions as often seen insecurities lending and borrowing (Gensaki) transactions.

(2) Test of transactions exchanging collateral for tokenized securities− We deal explicitly with cases where the collateral is securities rather than funds. We seek toverify its applicability in view of the increasing demand for goods (securities) in recent years.

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Tanaka Laboratory-JSF Project (3)(cont’d)(3) Transfers of foreign-currency-denominated securities and collateral, whichusually involve a time difference, can be performed simultaneously betweenthe parties in near-real time, though the result is not final.
− For securities and collateral issued in different countries, the final settlement will becarried out in each country, resulting in a time difference. For this reason, there is arisk (Herstatt risk) that securities may be delivered without collateral.

(4) It offers other benefits such as increased system availability and more
efficient business processing.
(5) Against these merits, we examine whether various assets, including lowliquidity assets, can be used as collateral.
− Issuance of unlisted securities (e.g., venture company stocks) has become popularworldwide in securities markets in recent years.

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Thoughts on industry-academia alliance (1)• For over a year, participants in the Tanaka Laboratory-JSF Project (Tanaka
Laboratory, JSF, USD [system development firm]) have carried out individual
tests and held monthly meetings targeting an active exchange of opinions andprogress management reports.
• Active involvement of the university for social implementation of its academic
achievements and knowledge will
− offer scientific backing for business− contribute to resolution of social issues− allow companies to make use of difficult basic research results• It will also contribute significantly to the S (Society) portion of ESG, a set ofcriteria for corporations toward solving social issues such as climate change. (*)(*) Among the 17 sustainable development goals (SDGs) for transforming theworld, the following two items apply.
GOAL 9: Industry, Innovation and Infrastructure
GOAL 17: Partnerships for the Goals

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Thoughts on industry-academia alliance (2)(cont’d)• The company’s role is to examine and propose research themes,
investigate related information, and verify and evaluate thedeveloped system. The university side is in charge of systemdevelopment and research.
• Even if the company is not a specialist in the field, it must try tounderstand the university’s research results as much as possible
and help clarify the experimental concept for actual socialimplementation.
• Blockchain and AI are used in various fields other than finance,such as electric power trading at Tanaka Laboratory. That is, newtechnologies can become a link between finance and various fields.
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Thoughts on industry-academia alliance (3)(cont’d)• We hope to continue developing collaborative
relationships between universities and companies
through concrete projects.

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Reference materials (main)
1. Japanese developments• BoJ Financial Markets Department, “Trends in the Money Market in Japan Results of the Tokyo Money Market Survey (August 2021) -”, December 2021
• Nobukazu Ono, Kouga Sawada, Akira Tsuchikawa, “Toward Further Developmentof the Repo Market”, BoJ Review, April 2015
• Sasamoto Kana, Nakamura Atsushi, Fujii Takanori, Semba Takashi, Suzuki
Kazuya and Shinozaki Kimiaki, “New Initiatives to Improve the Transparency ofSecurities Financing Markets in Japan: Publication of Statistics on Securities
Financing Transactions in Japan” (BoJ Review, February 2020)• Tanaka Shuichi, Soejima Yutaka, “Attempt to construct securities value chain
with distributed ledger technology -trends in security token in major countries-”(BOJ Reports & Research Papers, August 2020) (*)(*) Available only in Japanese

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2. Overseas developments• Shimamura Yuko, Nakamura Shintaro, Ishizaka Shingo,
Hideshima Hirotaka, “Trends in global government bonds
repo market”（BoJ Review, June 2017）(*)• Patrick Schaffner, Angelo Ranaldo, Kostas Tsatsaronis,“Euro repo market functioning: collateral is king”, BIS
Quarterly Review, December 2019
• Morten Bech, Jenny Hancock, Tara Rice, Amber Wadsworth,“On the future of securities settlement”, BIS QuarterlyReview, March 2020
• Deutsche Bundesbank, Deutsche Börse, “How Can
Collateral Management Benefit from DLT?”- Project“BLOCKBASTER”, January 2020(*) Available only in Japanese

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Thank you for your attention.

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