3. Technicalities and Requirements of Public Bonds

Transcription

1 3. Technicalities and Requirements of Public Bonds 38

2 3.1. Public Bond Registration System Introduction The Law Concerning Government Bonds and the Corporate Bond Registration Law provide that the obligation of issuers to holders of JGBs and other public bonds can be proven by registering the right of the holders on bond registration records (Registration System or Tourouku Seido in Japanese). In this case, a bearer-form ( Honken ) of the registered public bond is not issued. (Article 4 of the Corporate Bond Registration Law, Article 28 of the Government Bond Rules) Under the registration system, in order to facilitate the efficiency of the JGB registration process, the government has introduced the JGB Book Transfer Settlement System ( Kokusai Furikae Kessai Seido ) which handles registered JGBs by transferring them via the custodian s books Outline of Registration System (1) Registrar ( Touroku Kikan ) Registration of public bonds is made by recording the following items in a registration book ( Touroku-bo ) provided by the law: type (issuer s name & issue #) of the bond issue, face amount, serial number of bearer forms, holder s name and address, the holder s seal, and the account for interest and principal payments. Those who handle the registration process are called Registrar. Registrar of JGBs: The Bank of Japan (Article 1 of the Law Concerning Government Bonds) Registrars of Non-JGBs: Corporations provided by the Imperial Order Registrars of Non-JGB public bonds are specified by issuer s name and its issue number (usually, a representative trustee of that bond). (2) Issues to be registered 1 JGBs Among registration of JGBs are Type-A and Type-B (Article 21 of the Government Bond Rules. Type-A is registration of a bearer bond, and Type-B is registration of a signed bond). Type-B has been abolished by the Ministry of Finance. 39

3 2 Non-JGBs The following bonds with issuance, coupon payment, and redemption made in Japan are qualified for registration: Corporate Bonds, Municipal Bonds, bonds issued by noncorporate juridical persons that are established under the provisions of a Special Law, bonds issued by foreign countries or foreign corporations specified by a ministerial order (e.g. International Bank for Reconstruction and Development yen-denominated bond). (3) Types of Registration There are mainly 4 types of registrations. JGBs and Non-JGBs are registered under different laws, and have different names of registration request process. Content of Registration Request Non-JGBs JGBs Recording a newly issued bond at its initial offering without issuing bearer forms Recording from bearer forms Transferring bonds from recorded to bearer forms Changing records when the recorded bonds are transferred or inherited Oubosha Touroku (Bidders Registration) Shoyuusha Touroku (Holders Registration) Masshou Touroku (Elimination registration) Iten Touroku (Transfer Registration) Tousho Touroku (Initial Recording) Touroku (Ordinary Recording) Touroku Jokyo (Elimination of Records) Touroku Henkou (Change in Records) (4) Benefits of the Registration System 1 Issuers Benefit a) Bond issuance process is streamlined compared to the issuance of bearer forms b) Interest and principal payments are streamlined 2 Investors Benefit a) Bond custody process is streamlined b) Can receive interest and principal payments through automatic processing c) Serve as protection from loss or theft 40

4 The Registration Suspension Period ( Touroku Teishi Kikan ) (1) The Suspension Period Registrars suspend the acceptance of a request for registration and close a registration book for a specific period to fix recipients of interest and principal (recorded holders). Non-JGBs: JGBs: Suspend for 3 weeks (in calendar days) prior to the dates of interest and principal payments Suspend for 7 business days prior to the dates of interest and principal payments (2) How to Count the Number of Days of the Suspension Period In trading registered bonds, accurate understanding of registration suspension period is detrimental to avoid one s inability to make necessary change of records, such as registered holders. Non-JGBs: When an interest and principal payment date for Non-JGBs falls on a holiday, it is usually moved up to the previous business day (moved down to the following business day for some exceptional issues). On the other hand, Non-JGBs take all days into account regardless of a holiday or a business day in counting the number of days of the suspension period (JGBs count only business days). In case of Non-JGBs 19XX Feb 19XX Mar Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat (21) (3/21 : Holiday) [Example 1] If the interest and coupon payment falls on March 20, actual payment date is moved up to March 18. The registration suspension period is Feb. 27 ~ March 18 and the last day for accepting request for registration is Feb. 25. [Example 2] 41

5 If the interest and coupon payment falls on March 25, actual payment date is also March 25. The registration suspension period is March 4 ~ 25 and the last day for accepting request for registration is March 3. In case of JGBs 19XX Oct 19XX Nov Sun Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat (3) (23) (3,21,23 : Holiday) [Example 1] If the interest and coupon payment falls on November 20, actual payment date is moved down to Nov. 21. The registration suspension period is Nov. 10 ~ 18 and the last day for accepting request for registration is Nov Registration Types and Attached Documents Non-JGBs (in case of request in writing) Registration Type Oubosha Touroku (Bidders Registration) Shoyuusha Touroku (Holders Registration) Masshou Touroku (Elimination Registration) Iten Touroku (Transfer Registration) Required Document Request Form for Oubosha Touroku Request Form for Shoyuusha Touroku Request Form for Masshou Touroku Request Form for Iten Touroku (In case of using a letter of acceptance, Form for Acceptance of Iten Touroku ) 42

6 3.2. JB Net Settlement and Paper Settlement ( Shomen Settlement) Introduction Japan Bond Settlement Network (JB Net) was established to enable simultaneous Non-JGB public bond (registration completion notice, Touroku-zumi Shou or Zumi-shou ) delivery and cash settlement similar to that of JGBs. Before the JB Net was established, sellers did not necessarily deliver a registration completion notice on the settlement date, and in many cases, they delivered a depositary certificate ( Azukari-shou ) instead and replaced them with a registration completion notice later. In the worst case, it would take half a year to deliver a registration completion notice. This was because a registration completion notice was to be delivered for each transaction, and the dividing into each notice was a very time-consuming process. Such delay was allowed since a depository certificate had the same effect as the registration completion notice. JB Net System was introduced to address those issues, however JB Net is not without problems. One problem is that not all investors participate in the system, and not all types of bonds covered. The other problem is that, although a registration completion notice is no longer required, a bearer form and a serial number system still remain. In short, the JB Net settlement and the paper settlement (by a written registration request) still co-exist. Also, while operational work in case of the JB Net settlement must be completed prior to the settlement, operational work in case of the paper settlement is not required to be completed before the actual settlement. Even under the JB Net settlement, different deliveries cannot be offset with each other unless the types of bearer forms and serial numbers are perfectly synchronized. Other than the above, These are other issues to consider when settling via JB Net. The points, which should be checked before the actual transaction takes place are as follows: Can a bond concerned be settled through JB Net? Who holds a bond? When is the bond delivered in case of Non-JB Net settlement? Is a bond under Repo? (Transfer of a bond is required for Repo transaction as well as an outright transaction.) 43

7 Paper Settlement ( Shomen Settlement) Before the JB Net settlement was introduced, the settlement of Non-JGBs was managed under the Corporation Bond Registration System ( Shasai Touroku Seido ). When such bonds are traded, a seller and a buyer are required to deliver the following documents to one of registrars: Seller: Buyer: Form for Acceptance of Transfer Registration ( Iten Touroku ) Registration Completion Notice Request Form for Transfer Registration ( Iten Touroku ) After the transfer registration is completed (registered holder is changed to the buyer), the buyer will receive a registration completion notice or a depositary certificate. The delivery of a registration completion notice is often delayed, and the settlement is made with a depositary certificate instead of a registration completion notice (called Mono-okure ). These series of processes are required to be done for each transaction. One needs to repeat this process each time for each transaction even if the bonds are settled on the same day. Such settlement method (called Paper Settlement or Shomen Seikyuu ni yoru Kessai ) had many problems as listed below, and many market participants have been arguing the need for improvement. Problems: 1 When many transactions piled up or buyers and sellers were located far away from each other, the delivery of a registration completion notice was often delayed, and actual delivery was delayed ( mono-okure ). 2 Simultaneous bond (a registration completion notice) delivery and cash settlement was impossible since the delivery of the registration completion notice was usually delayed. 3 Registrars are dispersed across the country. In case of some bonds, documents required for registration were delivered to registrars in other Prefectures even if the transaction was made between two participants in Tokyo. 4 Settlement occurred only every 10 days (three times a month). There was a long interval between a trade date and a settlement date, and many settlements tended to be concentrated on one day. 5 Settling a paper named registration completion notice, not a bond itself. Such problems, JB Net and the rolling settlement scheme were introduced to resolve such problem. 44

8 JB Net Settlement All the processing flow occurs on-line as follows (On-line Settlement or On-line Seikyuu ni yoru Settlement): 1 Transaction occurs 2 Exchange MAC codes 3 Input transaction data into JB Net Terminal 4 Settle on the settlement date 5 Receive a registration completion notice via mail or at a teller counter Problems: a) JB Net does not cover some bond names. Non-JB Net names must be settled on a written request basis. b) Participation in JB Net is optional, not required. c) As bearer forms and serial numbers still remain, one cannot net many transactions settled on the same day similar to JGBs (one needs to settle transaction by transaction). d) Timing difference between the data input into JB net and the submission of a registration request form sometimes makes settlement impossible. On-line request Ordinary cases: Trade date ~ 2 days prior to Settlement date Special cases: 9:00 ~ 15:00 One day prior to Settlement date 9:00 ~ 13:00 Written Request Form: Only on the settlement date 45

9 Settlement Involving both JB Net and Written Registration Request (1) Settlement is difficult in the following situations: 1 Company A Company B Company C Request in wriiten Form On-line Request As described before, registration request in a written form is accepted only on the settlement day. As the deadline of the on-line request is 9:00 ~ 11:00 on the settlement day, the settlement by registration request in written form must complete by 11:00. 2 Company A Company B Company C On-line Request Request in wriiten Form Registration requested on-line is processed as of 15:00 on the settlement day. As the registration request in a written form is not accepted after 15:00, the settlement (transfer registration) between B & C cannot be made on that day and will be done on the following business day. (2) Points to Consider In trading Non-JB Net names, one needs to check who is the registered holder of the bond. If the bond is under repurchase agreement (Repo) and the bond borrower has sold the bond to someone else, one cannot sell the bond. Repo Sell Seller Company A Company B Sell Buyer Market If the seller has sold the bond to Company A under repurchase agreement and the Company A has sold that bond to someone else, Company A must borrow the same name from the market with the same settlement date. However, Company A cannot always borrow an eligible bond on time. Thus, the buyer can purchase the bond only when the bond is not under Repo and the seller is a registered holder of the bond. The buyer should obtain a Letter of Registration Request Acceptance ( Touroku Seikyuu Shoudaku-sho ) as soon as a registered holder has been checked. 46

10 The Market Regardless of whether bonds are settled through JB Net, by Paper ( Shomen ) Settlement, or whether investors are registered on JB Net, or not they all co-exist in the same market. For this reason, the market is vulnerable to various problems, and for this very reason, JB Net names are preferred to, and more liquid than Paper Settlement names. When JB Net started its operation in December 1997, liquidity deteriorated and spread widened significantly between JB-Net names and Paper Settlement names, especially in the Municipal Bonds market. Before JB Net was introduced, an investor could trade bonds in a depositary certificate form, even if a registration completion notice had not been delivered. However, Once the JB Net settlement began, even Paper Settlement names could be sold without a registration completion notice in hand to avoid the late delivery ( mono-okure ) trade. In 1999, the number of JB Net names increased and the market liquidity improved. Nevertheless, as bonds of non-normal maturing method cannot be settled through JB Net yet, JB Net settlement and Paper Settlement still co-exist, and two different settlement dates exist regardless of whether the same bonds traded on the same day or not. 47

11 3.3. Bearer Form and Serial Number All of the Non-JGB domestic bonds have specific bearer forms and serial numbers. It means that the investor will receive different bearer forms with different serial numbers for the same amount purchased of the same name. When many transactions concentrated on the same settlement date, an investor cannot net those transactions like JGBs, and must handle transfer registration for each transaction in case of Non-JGBs. One is not allowed to divide one transaction without confirming the type of bearer forms involved in that transaction (for example, one cannot divide 1 billion transaction into 546 million and 454 million at one s own convenience). If one erroneously split the transaction, all the processes involved including JB Net are suspended, and the delivery will fail. In a domestic Yen Bond transaction, there is no practice of paying penalty for delivery failure. In any case, one cannot make delivery failure, and delivery failure is considered a fatal error. One s reputation will be significantly damaged and the client relationship will be lost. It is the dealers responsibility to manage such issues. [Example] In trading a bond with the same settlement date through paper settlement method as below, arrows show a series of transfer registration flow (a series of change of registered holders): Company A We Company C Company D In paper settlement, one must physically deliver a registration completion notice. In the above case, if companies A, C and D are located far away from Tokyo, the notice might not be delivered on the same day and may result in delivery failure. 48

12 3.4. Paying Agent Fee JGB Minus Govt.Gtd. Corps CB WB BKD BKD Samurai NTT cpn bond disc. bond for Coupon for Principal (in, per 100 Notional Amount) (Note 1) Agent fees for Corporate Bonds, Convertible Bonds, and Warrant Bonds have repeatedly been reduced. Since June, 1994, agent fees have been defined for each issuers name and the agent fee for most names of Corporate Bonds have now been reduced to 0.20 for interest payment and 0.10 for principal payment. It should be noted that the upper limit of the fee paid to a securities company, which handles principal payment, is 1,000,000. (Note 2) Agent fees for Yen-denominated Foreign Bonds (Samurai Bonds) have been reduced since KEPCO Bonds issued in August 1995, and now settle on 0.20 (20 sen) for interest payment and 0.10 (10 sen) for principal payment. (Note 3) Principal payment fee for Discount JGB (except for TBs and FBs) is 0.09 (9 sen). Principal payment fee for TBs and FBs is (0.009 sen). (Note 4) The upper limit of the agent fee payment is 5,00,000 (equivalent to 5,555,000,000 in principal) per one issue name held by one registered holder for Registered JGBs ( Touroku JGBs)and per account for JGBs under Book Transfer Settlement System ( Furiketsu JGBs). The upper limit of principal payment fee charged to a client for TBs and FBs under Book Transfer Settlement System is 15,000 (equivalent to 16,666,660,000 in principal). 49