, should entail. the fsb will establish a monitoring process to prevent market participants from avoiding numerical haircut floors by booking transactions in different jurisdictions. depending on the results of this monitoring process, the fsb will consider reviewing the scope of the application, which currently excludes repos using government securities, as well as the level of haircut floors as necessary. the bank deems it necessary to continue actively participating in the international discussions regarding the framework for numerical haircut floors, while making sure that these do not have unintended consequences for liquidity in the global repo markets. ii. reforms to increase efficiency ( shortening of the jgb settlement cycle ) in parallel with the international discussions just mentioned, there is an ongoing initiative on efficiency. in japan, market participants are aiming to further shorten the settlement cycle for outright transactions of jgbs from two business days ( t + 2 ) to one business day ( t + 1 ) after the trade date. this initiative was taken in response to the significant increase in settlement fails in the jgb market at the height of the lehman crisis. by compressing the unsettled transaction amount, it intends to reduce settlement risks. in addition, shortening the settlement cycle would bring drastic changes to the repo market, because the initiative is accompanied by the creation of a new market - wide infrastructure. the repo market complements the jgb market, because it accommodates the need to adjust excesses or shortages of cash resulting from outright transactions. therefore, it is essential to introduce a t + 0 settlement cycle for the general collateral ( gc ) repo market in conjunction with achieving the t + 1 settlement cycle for outright jgb transactions. to this end, much greater speed and efficiency are required in processing repo transactions. this leads to the third key idea : increasing efficiency. japan ’ s repo market is planning to introduce the subsequent collateral allocation method for gc repo transactions. for this purpose, the market will establish a new collateral management infrastructure with sufficient allocation capacity. heightened efficiency in the repo market has the potential to bring considerable change to the money market in japan. more specifically, it could lead to the creation of a significantly expanded t + 0 funding market. if all of the overnight gc repos currently settled on t + 1 shift to t + 0, the market size is roughly expected to reach 20 to 30 trillion yen ( chart 8 ). on the other hand, the size of the brokered

s money markets. in cooperation with stakeholders both at home and abroad, the bank will continue to contribute actively to this project. b. reforms to increase stability ( implementation of appropriate risk management ) the second key idea concerns the stability of the repo market. in this regard, “ haircuts ” are intended to increase the safety of a transaction by reducing the market value of the collateral in proportion to factors such as fluctuations in the collateral price. at the height of the financial crisis, the prices of asset - backed securities ( abss ) plunged. these securities were used as repo collateral, and the level of haircuts for them rose sharply. this led to a further decline in prices and liquidity, destabilizing the entire repo market. with these experiences in mind, the fsb is requesting regulatory authorities to apply two measures to all the repo transactions that are not cleared by a central counterparty ( ccp ). the first measure is numerical haircut floors ( chart 5 ). the thinking is that in good times market participants tend to underestimate price volatility risk and set haircuts that are too optimistic. by setting a floor, this measure aims to avoid “ procyclicality ” : excessive buildup of leverage in good times and rapid deleveraging in stressed market conditions due to a sudden rise in haircuts. repos using government securities are exempted from the numerical haircut floors. this is because price movements in government securities tend not to be procyclical, and haircuts on government securities are zero or close to zero for most transactions. unlike in the united states, where a considerable amount of repos uses abss, government securities are mainly used in japan ( charts 6 and 7 ). for this reason, the implementation of numerical haircut floors would have little impact on the repo market in japan. the second measure requested by the fsb concerns methodology standards. regulatory authorities are required to establish qualitative standards for the methodologies that market participants use to calculate haircuts, incorporating stress scenarios. as just mentioned, nearly all the repos in japan use government securities, for which haircuts are hardly applied. however, even the most creditworthy and liquid assets such as bis central bankers ’ speeches government securities can entail a risk of price fluctuations. therefore, to ensure repo market stability, it is important to establish a common understanding among market participants on what risk management, including methodology standards