Japan Securities Depository Center, Inc.

FEATURE2

ANUUAL REPORT 2002

1011

F EAT U R E 2

New businesses under development
Commercial Papers
The Law Concerning Book-Entry Transfer for Short-Term Corporate Bonds was formulated in June
2001 to respond to growing industry-wide requests for the creation of book-entry transfer system forshort-term corporate bonds, namely commercial papers (CPs), in dematerialized form in Japan.
Following this legislation, the Committee for Reform of the Securities Clearing and Settlement
System of the Japan Securities Dealers Association (JSDA) studied the feasibility of DVP settlementfor CPs at the request of the Japan Business Federation (former Keidanren). JSDA asked JASDEC in
December 2001 to study for achieving a Gross-Gross Type DVP system for CPs.
Responding to the participants’ requests in the market, JASDEC set up the CP Working Group
under the Committee for New Projects in January 2002 and started discussions to implement thesystem requested. In March 2002, JASDEC drew up the outline of book-entry transfer system for
CPs and are now undertaking to draw up the operational scheme and develop the computer systems
necessary to launch the system in 2003.
Two major characteristics have to be highlighted concerning the book-entry transfer system ofCPs: realizing book-entry transfers in dematerialized form and implementing a Gross-Gross TypeDVP system.
First, in this system, physical papers are not issued from issuance through redemption, and theright of the CP holders is recorded and transferred between the accounts of securities companies orbanks opened at JASDEC. Investors, therefore, are required to open an account at such entities,
while issuers are requested to provide JASDEC with a summary of the issuance and the names ofthe underwriters.
Second, a book-entry transfer of CPs at JASDEC can be connected with cash settlement at theBank of Japan to achieve the settlement of CP trades on a DVP basis. Specifically, JASDEC temporarily records the amount of CPs to be delivered on the memorandum ledger until receiving thenotice of fund transfer from the Bank of Japan, then, executes the book-entry transfer of suchamount from the deliverer’s account to the receiver’s account.

Japan Securities Depository Center, Inc.

F EAT U R E 2

Delivery versus Payment
Delivery versus Payment (DVP), a system for ensuring performance of security deliveries and fund payments,
is essential for reducing settlement risks as well as promoting STP. JASDEC is working on an introduction of a
DVP settlement system for non-exchange transaction deliveries, which are the significant part of the bookentry deliveries at JASDEC.
We plan to introduce a “Gross-Net” scheme. Each book-entry delivery of securities will be processed on a
trade-for-trade (gross) basis while payment of fund will be made on a net basis. The basic framework of ourplan is modeled after the DVP system used by the Depository Trust & Clearing Corporation (DTCC) in theUnited States. We aim to build a risk management system that can compare to the best practices in the world.
The DVP system will be run by a JASDEC subsidiary (clearing organization). Under the system, the subsidiary will be the central counterparty for both deliverer and receiver through novation. If a DVP instruction
satisfies all the conditions for executing DVP (executing conditions), securities subject to the delivery aredelivered from the deliverer’s account to the subsidiary’s account. For each participant, all the payable amounts
for receipts of securities and all the receivable amounts for deliveries of securities will be offset and theremaining balance will be paid to or received from the subsidiary. Securities to be received shall be deliveredfrom the subsidiary’s account to the receiver’s account if the receiver fulfilled the payment.
In case a DVP participant fails to make payment, the shortage of fund will be covered by the participant
fund and borrowing from banks to minimize the systemic risk. To limit the size of such a default and to recover
the fund applied to make up the default, net-debit cap and assurance asset will be set for each DVP participant.
The DVP system will be implemented by the end of March 2004. We are making efforts to implement thesystem as soon as possible by further discussing on the details of the scheme and taking the development ofcomputer system into account.

ANUUAL REPORT 2002

DVP SYSTEM FOR NON- EXCHANGE
TRANSACTION DELIVERIES
Gross-Net Type>> Security Deliveries

JASDEC
Participant A

3322JASDEC
Subsidiary

Participant B
557

Participant C

Participant X

7Participant Y

Participant Z

Netting calculation for fund settlement
Transfer of data to BOJ>> Fund Payments
Participant CParticipant A

7

3C’s
Account

Netting
result
6Settling
Bank D

6Settling
Bank D
X’sAccount2Settling
Bank E

Settling
Bank E

Subsidiary

ParticipantB

3A’s
Account

7ParticipantZ

1Y’s
Account

5

Bank of Japan
Participant X

Participant Y*Approval of subsidiary’s account at BOJ by BOJ is necessary.

Netting
result21213