On August 14th, the creation of the Japan Government Bond Clearing Corporation (JGBCC) was agreed upon by 19 financial institutions. The JGBCC will be the central counterparty for JGB clearing after its inauguration in September, and it will work to initiate JGB clearing operations in January 2005.
The Bank of Tokyo-Mitsubishi and 18 other financial institutions will be investing a total of 344 million yen to capitalize JGBCC. Once operational, all JGB settlements will be centralized at JGBCC, which will serve as the central counterparty and execute settlements netting. It is also hoped that the start of its operations will lead to the realization of T+1 settlement in JGBs.
JGBCC is planned to start its function as the infrastructure through which participants buy/sell JGBs to their counterparts from January 2005. As JBGCC will always exist between the settlement parties, it will reduce systemic risk associated with settlement fails. Also, because it nets all trades done within a certain time frame (e.g. day), the participant’s overall settlements amount is netted down to a smaller amount, which is settled via the BOJ Net. Thus, JGB settlement parties are able to substantially reduce the credit risk with fails as well as do not have to procure a large amount of funds for settlements.
Sources at the Global Securities Services Division, Bank of Tokyo-Mitsubishi, state that, “Participants hope that they will be able to reduce clerical processing costs and enjoy increased efficiency in trading JGBs. Also, if JGBCC takes payment obligations on a real-time basis, i.e. at the same time when participants transmit instructions to JGBCC, the participants will be able to avoid credit risk at its counterparty even before the actual fund settlement occurs.”
The project to create JGBCC started after the introduction of real-time gross settlement (RTGS) in 2001.