This years Sibos comes at a good time for Japan as the host countrys low interest rate environment and economic growth leads its financial institutions to take more interest in growth opportunities beyond their borders.
At the same time, global custodians are looking more into the country and are seeking collaborative efforts with its banks. Nobuya Shida, head of BNP Paribas Securities Services in Japan, says that prior to the launch of its securities services operations in the country in December last year, BNP Paribas provided cash financing for financial institutions. We are promoting the securities services business and will offer global custody, fund administration and some outsourcing, Shida says. Currently there are a small number of these types of mandates. We will be visiting these clients, who are currently serviced by our Singapore and Chennai offices.
BNP Paribas is currently awaiting a foreign bank agency business license from the Financial Services Agency of Japan. It is expecting the license to be granted in about one months time, Shida says. In the meantime, we have been in communication with our clients in the country, and there are significant opportunities in global custody services. In Japan, mutual funds and asset managers have to use Japanese trust banks for global custody with us partnering as their global sub-custodian. For Japanese government bonds [JGB] and equities, we would partner with the trust banks. Fund administration would be provided for offshore UCITS from asset managers in Japan. The distribution needs of asset managers are growing. Japanese funds are relatively conservative. They invest in domestic economies, but there is growing interest in the offshore centers such as Cayman and UCITS structures.
While we already have the domestic service, what were targeting is the overseas entities of Japanese securities firms, specifically the domestic outbound business.
Securities lending is set to become a major product in Japan, says Shida. Its worth noting in this regard that the interest rates in Japan for one year are less than 0.5%, Shida says. We have a bubble economy that collapsed 20 years ago. Its slowly recovering, but people are cautious of activities like securities lending.
To further enhance the efficiency and mitigate settlement risks, the local securities depository, JASDEC, is expected to introduce the use of the delivery-versus-payment settlement system for securities lending transactions in 2014.
The outsourcing business is also one to watch in relation to Japanese corporates overseas. Banks have more of a conservative and in-house policy at present, Shida says. It may be good for some clients who need to improve efficiencies. Its difficult to sell outsourcing, but they recognize it will help reduce costs.
J.P. Morgan has been providing custodial services in Japan since the late 1980s, primarily as a global custodian for outbound investment by Japanese institutional investors. In Japan, the custodian serves major Japanese clients in all sectors including investment managers, banks and insurance companies. We are also providing securities financing support services such as collateral management to major market participants including broker-dealers and banks, as well as working with local issuers with their issuance of depository receipts, says Fumihiko Yonezawa, head of Worldwide Securities Services, Japan, at J.P. Morgan.
Yonezawa puts a positive spin on the low interest rate environment in the country. He says such environments stimulate portfolio diversification, and as a result Japanese foreign investment has almost quadrupled in the last decade. Nevertheless, we strive to provide solutions to our clients in terms of how they can better manage their assets safely, efficiently and in a timely manner, he says.
Masayuki Tagai, industry issues executive, Asia, at J.P. Morgan Treasury & Securities Services Global Markets Infrastructure group, notes other important developments affecting the Japanese securities industry: In the immediate future, the expiry of the Special Taxation Measures Law that lowers the withholding tax rate on dividends from 15% to 7% in December 2013 is a development that we are following closely, as there might be significant impact on the attractiveness of the market to foreign investors as a result.
As for market infrastructure, the dematerialization of stocks in 2009 largely marked the conclusion of a ten-year program to enhance the safety and efficiency of the Japanese securities market, which covered commercial papers, bonds, investment trusts and stocks.
Going forward, regulation-led market structure changes such as OTC derivatives clearing would be an area to keep an eye on, says Tagai, while market discussions to consider the shortening of JGB settlement cycles have resumed. The introduction of ISO 20022 messaging standards by JASDEC as they revamp their systems will not only drive adoption and efficiency in the Japanese market but may also have an impact to the pace of standardization in the APAC region as well, he says.
Japan is also moving toward a T+2 settlement cycle. Unlike Europe, whose rationale for the cycle is spurred by TARGET2-Securities, and the U.S., whose rationale is driven by SIFMA, Japan is approaching T+2 from a settlement risk reduction perspective and as a market initiative. Domestic JGB settlement moved to T+2 from April this year, and a further shortening is seen as a potential follow-up action. Shortening to T+2 for cross-border trades would present a broader challenge, since wider global industry engagement covering both the sell-side and buy-side international investors is required, says Tagai.
Various countries in the East are also facing the challenge of upcoming OTC derivatives regulation, and they are joining up with the countries in the West to meet those challenges. Euroclear, for example, is extending its Collateral Management Highway to the Far East and has signed a collaboration agreement with the Hong Kong Monetary Authority for collateral management. J.P. Morgan will provide securities services for that optimized collateral pool.
Given the significance of the OTC derivatives market in Japan and following the G20 commitment, Japan has passed necessary changes to the Financial Instruments and Exchanges Act in order to mandate the clearing of standardized OTC derivatives, says Tagai. The Japanese Securities Clearing Corporation has started providing JPY IRS clearing from Oct. 9, 2012, while it had been providing clearing services for certain CDS products since July 2011. The Japanese market has also made significant strides in corporate governance and the automation of corporate actions processing over electronic platforms. Global custodians, such as J.P. Morgan, value this development. Take proxy voting, for example. In Japan, the take up of such services may appear low where only 18% of issuers at the Tokyo Stock Exchange use electronic means for voting, says Tagai. However, despite the fact that only 18% of the issuers at the Tokyo Stock Exchange are using electronic voting, this covers a significant portion of the proxy voting activities undertaken by foreign institutional investors.
The remaining part still poses operational risk to our Japanese sub-custodians, which go through a labor-intensive process during corporate action season.
The Japan market is taking corporate action information services to the next level, where the Tokyo Stock Exchange and JASDEC have entered into joint venture research into the implementation of ISO 20022 for corporate action information dissemination promoting the shift to straight-through processing via paperless and standardized securities transactions.
As key participants in this years Sibos, BNP Paribas and J.P. Morgan have high hopes that the event will bode well for future business opportunities both internally and externally. Japanese financial institutions should be more focused on Asia, Shida says. In the past they went to the U.S., but Japan, China and Korea should be collaborating more in that same that way Europe is. However, it is more complicated in Asia amidst the territorial discussions between China and Japan, and it is a shame the Chinese banks wont be attending Sibos. I am, however, pleased to have SWIFT and IMF in Japan as it is important to show the world it is OK after the earthquake.
Yonezawa concludes: While Japan was struck by a particularly tragic event in 2011 and there is a lot more to be done in terms of rebuilding the uninterrupted operations of the market infrastructures and market participants during the crisis underscore a very resilient and robust market with a strong underlying financial foundation. We hope that the participants onsite as well as online share the feeling that the Japanese market is leading the way to create more liquid, efficient and vibrant markets in the region and around the world.
Janet Du Chenne