Settlement process - Japan
Settlement cycles
Listed equities: | T+2 (on a trade date basis). |
Corporate bonds: | T+2 for cross-border settlement (For domestic corporate bonds settlement, it is T+2). |
Japanese Government bonds: | T+2 cross-border settlement (For domestic JGB settlement, it is T+1). |
Note: Off-exchange/off-shore transactions are conducted over the counter (OTC), and therefore shorter settlement periods can be mutually negotiated.
Settlement flow
Pre-settlement matching
Pre-matching is conducted either via JASDEC’s Pre-Settlement Matching System (PSMS), any time trade date (TD) to settlement date (SD) 12:20 or manually by telephone directly with the counterparty as below:
| PSMS (incl. equities, JGBs) | From instructions received to SD 12:20 |
Telephone (incl. JGBs, other bonds) | From SD-1 14:00 to SD 12:20 |
Registered JGBs: | From TD 09:00 to SD-1 12:20 |
Matched instructions become affirmed after SD-1 14:00, when the securities and cash provisioning is made.
Unilateral cancellation of affirmed instructions is not allowed and so investors who want to cancel affirmed instructions must obtain the counterparty's agreement in advance.
Regular trades are settled as follows:
| SD-2 to SD: | Custodian banks receive trade instructions from their clients, match these with the counterparties and advise their clients of any discrepancies. |
| SD-1: | Custodian banks start securities and cash provisioning, where possible, normally after 14:00 via JASDEC PSMS. |
| SD: | The buyer funds his account with his custodian bank. Settlement of securities and cash occurs separately but assured by JDCC when DVP for NETD is used, and completed before 15:30. |
Book-entry settlement of equities and convertible bonds
The JASDEC DVP Clearing Corporation (JDCC) acts as central counterparty for off-exchange transactions and handles the delivery versus payment (DVP) settlement for non-exchange transaction deliveries (NETD). Delivery and receipt of securities and cash are assured and counterparty/principal risk is mitigated by JDCC. DVP for NETD is based on a gross settlement for securities followed by a net settlement of the cash leg.
In line with market practice, the securities settlement occurs between SD 07:00 and 12:30 while the system deadline is SD 14:00. For the cash settlement, the participants should complete the net payment by SD 15:10. JDCC completes the net cash settlement by SD 15:30.
For Non-DVP settlement, JASDEC transfer for off-market transactions are completed by 12:30.
It is market practice to make payments on SD based on the pre-matching result rather than on confirmation of receipt of securities. Incoming funds are normally confirmed by 13:00 and at latest at 17:00.
Physical settlement - registered and some bearer securities
All listed securities are scripless. Some unlisted securities remain in physical form for example, unlisted ordinary shares, unlisted class shares issued by listed companies and fixed income in physical certificates (bearer form) or in registered form.
The delivering party is responsible for the physical delivery of the certificates and/or Letter of Consent (LC, for registered positions) to the receiving party's designated counter on SD.
It is normal practice that, if the counterparty is a securities firm, they will arrange both pick-up (their purchase) and delivery (their sale) from/to the bank.
There are no strict rules on the timing of such deliveries/receipts in the market. Each securities firm or bank has its own policy on the cut-off time for accepting securities.
It is market practice to make payments on SD based on the pre-matching result rather than on confirmation of receipt of securities. Incoming funds are normally confirmed by 13:00 and at latest at 17:00.
Book-entry Japanese Government Bonds (JGBs)
- Book-entry JGBs are transferred via the BOJ's Book-Entry Transfer System for JGBs (also known as Furiketsu).
- DVP and FOP settlement is possible.
- DVP settlement is a real-time gross settlement for both cash and securities.
Registered (Toroku-sai) JGBs
Settlements for foreign investors are conducted using the Letter of Transfer (LT) form. Pre-delivery of the LT generally takes place between SD-2 and early afternoon on SD-1 owing to the BOJ's cut-off for registration on SD-1, 15:00 (local time). The LT is delivered to the receiving party's designated counter in accordance with the date and time agreed at pre-matching. Cash settlements are made separately on SD from the securities settlements.
Note: Re-registration of JGBs requires an account to be open at BOJ. BOJ will accept the account opening with the actual holding/application only.
Book-entry Corporate Bonds
Such bonds are transferred via JASDEC’s Book-Entry Transfer System for Corporate Bonds. Settlement is possible on a DVP and non-DVP basis. DVP settlement occurs on a gross basis for securities and funds. Cash is transferred via BOJ-NET.
Registered corporate and foreign bonds
Once the instructions match, the delivering party will prepare a Letter of Consent and pass it to the receiving party. The receiving party will then issue a Letter of Transfer and physically deliver both letters to the registrar agent.
In order to have the transfer of ownership completed during the same day, the letters should reach the recording agent by noon (Tokyo time).
Once ownership has transferred on the books of the recording agent, the receiving party will receive a confirmation of ownership transfer from the recording agent.
Settlement failure
Generally, transactions where the delivering participant cannot deliver the securities to the Japan Securities Clearing Corporation (JSCC) by SD 13:00 JST are considered to be a fail.
For on-exchange settlement, the failing delivering participant will be charged with a penalty fee of JPY 0.04 for every JPY 100 of the undelivered securities for each failed day (annual rate of 14.6%).
There are no regulations/rules in relation to fail settlement or buy-in procedures for off-exchange transaction settlements. Although this rarely happens, each broker can arrange their own buy-in procedures at their own discretion based on their internal procedures; thus, the time frame, details of the procedure and penalties/costs vary.
The settlement process in Japan is irrevocable and settled trades cannot be reversed.
There are two ways to resolve failed settlements for on-exchange transactions:
- Postponed settlement and continuous netting settlement
Delivery of securities and payment of cash will be postponed until the following business day. On the following business day, the particular settlement will be netted with the other transactions, which are to be settled on that day. The failed delivering participants will be charged with a penalty fee.
Fail cost:
Delay compensation: JPY0.04 for every JPY100 of the undelivered securities for each failed day (annual rate of 14.6 per cent)
Additional delay penalty: JPY0.02 for every JPY100 of the undelivered securities for each failed day. This will be imposed by the JSCC from the fifth business day after the original SD
- Buy-in:
Buy-ins are not common for off-market transactions, but counterparties can institute a buy-in claim for delayed settlement.
Buy-in process for on-exchange transactions
The buy-in process is initiated by the buyer whose counterparty failed to deliver. The procedure and related costs vary according to the security type, as follows:
Listed securities (equities, ETFs and REITs):
The buy-in process is as follows (in JST):
| SD+1 13:30 - 14:30: | Buy-in request is submitted to JSCC by the initiator. |
| SD+3: | JSCC executes buy-in. |
| SD+4: | Buy-in is settled. (The JSCC will find participants wishing to sell the particular security under the buy-in scheme). |
The costs associated with the buy-in process are as follows:
| Calculation of buy-in cost: | 10% or less of the market value of the shares on the day the buy-in is enforced. |
| Transaction fail control cost: | ((Market value of shares set by the stock exchange on the day buy-in is enforced) x up to max. 10%) - (against payment amount of the original transaction). |
| Fail cost prior to buy-in | 14.6% of the end of day market value of the shares, on a daily basis, until the day prior to actual settlement. |
| Investors cost: | At broker’s discretion. |
Corporate bonds:
Delivering participants are allowed to settle corporate bonds (with consent of the receiving party) by Due Bill (DB) in lieu of actual securities delivery. The securities must be delivered within 5 business days after the original settlement date.
JGBs:
Settlement will be postponed to the next settlement date but must be settled no later than SD+4. The delivering participant must notify JSCC in advance of the date on which settlement of the failed transaction will take place.
Costs are, per failed day: JPY 4 for every JPY 100 of market value or cost of delivery of JGB.
Off-exchange transactions
The Japan Securities Dealers Association (JSDA) has set out the following guideline governing failed transactions and fail charge of book-entry JGBs as well as Corporate Bonds, which is applicable to all JGB and Corporate Bond trades including cross border transactions (transactions settled through International Central Securities Depositories and Repo trades are also included).
A JGB/Corporate Bond trade that fails to settle by 14:00 SD JST will be subject to a fail charge, unless the settlement failure is caused by the buyer (securities receiver) or the transaction is free of payment. A claim for fail charge is initiated by the buyer directly against the seller and is computed as follows:
(3% - reference rate*) x* settlement amount x* number of days for the fail / 365
The minimum fail charge is JPY 50,000 and claimed on a monthly basis in writing to the counterparty by the 10th business day of the following month of the settlement failure, otherwise the right to claim will lapse.
*The "Reference Rate" shall be set at zero percent (0%) so long as the Bank of Japan is pursuing a strategy of controlling the monetary base as the operating target in its money market operations. When the Reference Rate is changed during the fail period, the Fails Charge for the fail period after the effective date of the change shall be calculated by applying the Reference Rate after the change. If the Bank of Japan changes the operating target in its money market operations from the monetary base to the uncollateralized overnight call rate, the Reference Rate shall be changed to the target level (or if it is indicated by target band, the lower limit of the target band). If the said operating target is changed from the monetary base to any indicator other than the uncollateralized overnight call rate, the Fails Charges shall be calculated by using tentatively the Reference Rate before the change. In this case, the Reference Rate shall be reviewed promptly.
In addition, even during the time the monetary base is the Bank of Japan’s operating target in its money market operations, if it becomes inappropriate to keep the Reference Rate at zero percent (0%) because of change in money market conditions (e.g., the actual uncollateralized overnight call rate remaining far from zero percent for a certain period of time), the Reference Rate shall be reviewed promptly.
Registration
Equities
All listed equities are dematerialised and held in book-entry form at JASDEC. Registrars appointed by the issuing companies maintain shareholder holdings in their books based on the information provided by JASDEC participants via JASDEC on record date (RD)1. Based on these records, entitlement is determined by each registrar and communicated to the issuing company and JASDEC.
JASDEC participants operate omnibus accounts at the CSD and settlement of securities takes place between these accounts. Each participant keeps their own records of their underlying clients, for example global custodians.
Unlisted equities are not eligible in JASDEC and must be registered in the account name opened at the custodian in the Japan market or in “street name” to identify ownership. There are no market rules for name registration for unlisted equities acceptance of registration, the relevant procedures, requirements and the time frame vary depending on the issuer.
Equities with foreign ownership level (FOL)
There are restrictions for a number of listed companies subject to FOL, though, foreign investors are still able to acquire FOLs even after the aggregate limit is reached. FOLs are specified in laws that relate either to a particular industry or to a specific company, and impose aggregate foreign investment limits of either 20 or 33 percent. Complete details on FOL issues and their daily provisional ratios can be found directly on JASDEC's website as mentioned below.
FOL shares are kept at JASDEC in book-entry form. The registration process for listed equities described above also applies for FOLs. If the limit in foreign investment is reached on RD, any increases in investors foreign holdings will be allocated on a pro-rata basis in board lots. Allocation of eventual fractions will be done by lot.
Details of entitlement rules
- Shareholders on the previous RD will be protected for entitlements on the next RD.
- Actual shares held on the current RD will be compared to the positions held on the previous RD and corporate entitlements will be allocated for the lower position of the two RDs only.
- Any remaining FOL “room” created between the two RDs will be assigned on a pro-rata basis, based on total shares held by all foreign shareholders.
- The minimum pro-rata allocation will be one board lot. Fractional entitlements will not be allocated on a pro-rata basis but will be pooled by the issuer.
- The fractional pool will be allocated by lot.
Exceptions are Nippon Television Holdings, Inc (JP3732200005), Fuji Media Holdings, Inc (JP3819400007) and Japan Airlines Corporation (JP3705200008) for those companies, there may be cases where the number of voting rights for foreign investors would be reduced from previous record date, especially when total number of voting rights of Japanese residents are equal to, or become less than previous record date. For such cases, entitlement allocation of voting rights and dividend are made by proration (based on holding balance) to all existing foreign shareholders and therefore, entitlements at previous record date would not be secured. An example formula for FOL stocks with the limit 20% is as below.
Total voting rights of Japanese residents x 25%2 = maximum voting rights of foreign investors
To help shareholders monitor the FOL, JASDEC provides a daily indicative report of the foreign ownership ratio for FOL. Details can be found on the JASDEC website.
Current FOL ratios quoted on the website are based on the information provided by each JASDEC participant; therefore they may differ from actual ratios maintained by relevant registrars.
FOL ratios published on JASDEC's website are provisional and for reference purposes only and should not be taken as a guarantee for successful registration.
Registered corporate and foreign bonds
A bank is appointed as registration agent for registered bonds. These registered bonds at issuance are primarily straight bonds. As registration agent, the appointed bank controls all registration information.
Beneficiaries must register their holding with the registration agent to secure their bondholder status. It takes one to two business days for registration to be completed, and some costs may be incurred.
Book-entry Japanese Government Bonds and Corporate Bonds
Book-entry JGBs and Corporate Bonds are held in dematerialised form and registration is not applicable. However, each participant of the JGB book-entry system (that is direct participants and foreign indirect participants, FIPs) and of the JASDEC book-entry system for Corporate Bonds and Stocks, etc. (that is direct participant and foreign indirect account management instruction, FIAMIs) are obliged to record the transactions, balances and other details for the underlying clients and end investors.
Settlement guarantee fund
On-exchange transactions
The stock exchanges maintain a guarantee fund that is managed by the JSCC. The guarantee fund is only available to member firms and not to public or foreign investors.
Off-exchange transactions
A settlement guarantee fund (Participation Fund) has been established by JDCC with the introduction of delivery versus payment for non-exchange transaction deliveries. The required amount is determined by JDCC in accordance with their regulation but this guarantee fund is only available to member firms and not to public or foreign investors.
Payment and cash settlement systems
The three electronic fund transfer systems for interbank payments in Japan are BOJ-NET, Foreign Exchange Yen Clearing System (FXYCS) and the Zengin system.
BOJ-NET
The major role of BOJ-NET is interbank fund settlement via fund transfer between the current accounts that financial institutions maintain with Bank of Japan. Fund transfers have immediate effect. BOJ-NET allows interbank payment transfers and transfers between financial institutions and the Bank of Japan.
Foreign Exchange Yen Clearing System (FXYCS)
The FXYCS’s major role is to process cross-border financial transactions. The system is English language based and accepts messages based on Swift formats. Cut-off time for core-time settlement is 15:00, and the actual system deadline for settlement is 21:00 with real time cash transfer on the participant's account with BOJ (RTGS). Late payments after 15:00 can be settled if both parties agree.
Zengin system
The Zengin system processes client transfers between resident accounts. It is a domestic Yen electronic funds transfer network that enables same-day value credit across the nation, if a payment application is delivered to the originating bank before noon.
The Zengin System is run by the Tokyo Bankers Association. The daily balances for each participating financial institution are generally totalled at 15:30 each day and then reported to the BOJ. The BOJ settles these balances at 16:15 by effecting transfers between the current accounts that financial institutions hold with the BOJ.
Stamp duty
Stamp duty is normally not payable for most securities transactions. While stamp duty is payable on physical securities, this is usually at the minimum rate and absorbed by the custodians in the Japanese market.
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1. For equities, record date (RD) is determined by the respective company and major RDs usually fall in March and September semi-annually.
2. Since ratio of voting rights of foreign shareholders should not exceed 20%, the total voting rights of Japanese residents should be more than 80%, thus voting rights of foreign investors should be equal to/or less than one fourth of 80% of voting rights of Japanese residents).