Turning a negative into a positive


Francois Maury of Natixis examines how the Japanese market has fared and what it means for borrowing and lending. Drew Nicol reports

How has the Japanese market developed in the past 12 months?

The decision of the Bank of Japan (BOJ) on to push into negative interest rates on 29 January 2016 had a lasting impact on the market.

Local players frequently had difficulty adapting to the new rate environment, both from a systems and legal point of view. It therefore created a dislocation between onshore and offshore markets for JPY assets.

A consequence for the stock lending market was the reluctance of some non-Japanese lenders to accept JPY cash collateral, as the fear of a further push by BOJ into negative interest rate territory added to the negative impact on balance sheet of securities versus cash transactions. On the other hand, Japanese counterparts generally did not change their views on the acceptance of cash collateral. Diverging views most likely affected volumes negatively.

As a result, demand for Japanese names was somewhat lacklustre, with the exception of non-March or September names, which were strongly sought after throughout the year.

And how has all this affected your business?

In 2016, we witnessed a generalisation of total return swaps with funding purposes on JPY underlying. Those instruments now widely traded in the interbank market, which, on the one hand, better address the need for banks to optimise their balance sheets, as the swap buyer needs to sell the equity hedge.

On the other hand, they allow market participants to take exposure on the USD/EUR versus JPY crosses under the form of USD or EUR swaps on Japanese equity.

At the same time, we witnessed a general compression of spreads during the period between January to November 2016, with—to take just an illustration—the price of switches Japanese government bonds versus JPY equities moving significantly down.

That phase ended and reversed last November with the take-off of the ‘reflation-rally’ induced by the US elections and we are now seeing some volume pick-up going into 2017.

Looking ahead, what do you see in Japan’s future in terms of securities lending?

We believe the market could further progress albeit with some volatility episodes. About 15 percent of Japanese companies’ profits come directly from North America-based production and should therefore benefit from a large US stimulus, while being relatively immune to potential new trade barriers. Besides a slightly more inflationary global economic environment—led by the US—can only help the BOJ to better achieve their goal to reboot consumers and companies’ spending.
Features
The latest features from Securities Lending Times
The next implementation phase of the BCBS-IOSCO margin rules is on the horizon, and the buy side could use it as a springboard for long-term gain
Between the LGPS pooling project, Brexit and changes in technology, fund managers in the UK, and their service providers, have a lot to think about
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Broadridge has finished its latest blockchain pilot, focused on bilateral repo. Horacio Barakat discusses the progress made, and where the firm will go next
Forthcoming collateral rules will require the buy-side to find trillions of dollars in additional margin, and securities financing is at the heart of many of the solutions being explored, writes BNY Mellon’s Peter Madigan
Euroclear’s Olivier Grimonpont reviews how new margin rules are forcing collateral managers to adapt, and how collaborative solutions are the answer
The securities lending industry has some much needed respite from new regulations, and the mood at this year’s RMA Conference was upbeat
Collateral managers must embrace innovation and strive for greater efficiency in processing. Jenna Lomax reports from Amsterdam
Anand Krishnan of Natixis Americas explains how regulatory pressures are changing the rules of the game and buy-side entities are changing with it
Country profiles
The latest country profiles from Securities Lending Times
Francisco Thiermann of IBM says the imminent launch of Chile’s securities lending blockchain solution will provide a shot in the arm for the market
Zubair Nizami, head of Asian securities lending trading at Brown Brothers Harriman talks to Drew Nicol about the state of the industry in the region
Asset Servicing Times

Visit our sister site
for all the latest asset servicing news and analysis

assetservicingtimes.com
Being an exciting emerging market is all well and good, but how long can that status really apply before interest wanes? India is doing its best not to find out
Hugh Leonard, director of repo sales at Australia and New Zealand Banking Group, explains how the Australian market has excelled in recent years
Securities lending is in a strong place in Australia. Dane Fannin, head of capital markets in the Asia Pacific at Northern Trust, explains the available opportunities
Federico Ortega Gilly of Mexico’s Nacional Financiera explains why his country’s securities lending market is ripe for foreign investment
Russia’s National Settlement Depository has had a busy year making its securities finance market more robust and attractive to outside investors. The CSD’s Alina Akchurina explains the innovations being implemented
South Africa’s securities lending industry is on the verge of embracing a modern T+3 settlement cycle that could boost the country’s market
Interviews
The latest interviews from Securities Lending Times