Addressing risk through best practice in Japan: Shortening settlement cycles and imposing fail charges

Abstract

From 2002 to 2009, the Japanese securities settlement infrastructure and environment improved dramatically to realise delivery-vs-payment (DvP) settlement and dematerialisation of government bonds, commercial papers, corporate bonds, investment funds and even stocks. However, after the financial crisis, they recognised this improvement was still insufficient and that there was a significant need to improve the efficiency of the securities settlement system further and to enhance the risk control mechanism in order to reinforce the competitiveness of the financial and capital markets. Through feasibility studies and active discussion by market participants, the standard Japanese Government Bond (JGB) settlement cycle is scheduled to be shortened by one day to T+2 from 23rd April, 2012, and the fail charge system has been effective since 1st November, 2010, and has quickly penetrated the market. The study is continuing on T+1 settlement for outright trades. Both the shortened settlement cycle and the fail charge are expected to contribute to market stabilisation especially in irregular economic and/or market situations. The regulators of Japan FSA and Bank of Japan (BoJ) are positive and supportive of these initiatives.