Summary of the New JGB Book-Entry System. March, 2003 Global Securities Services Division

Transcription

1 Summary of the New JGB Book-Entry System March, 2003 Global Securities Services Division

2 Background New Legal Framework Securities Settlement System Reform Law (Law concerning the Establishment of Relevant Laws to Improve Securities Markets through the Reform of the Securities Settlement System) Transfer of Corporate Debt Securities Law (Law concerning Book-Entry Transfer of Corporate Debt Securities) Enacted in the 154 th Diet Session on June 5, 2002 Effective as from January 6, 2003 Realized a uniform legal framework for achieving full dematerialization of corporate debt securities and JGBs 2

3 3 Comparison of JGB Book-entry System Previous JGB Book-Entry System Based on private law and contracts between BOJ and Participants (Direct, Indirect, FIP) Assumes the existence of JGB certificates New JGB Book-Entry System Based on a uniform special law for the bookentry system (Transfer of C.D.S. Law) - common legal framework for most bonds Achieves full dematerialization Implemented January 27, 2003

4 Summary of the New System Common Characteristics Transfer instructions are transmitted via the Bank of Japan Financial Network System (BOJ-Net) Amendments Change of Legal Framework (see page 3) Eliminate the precondition of the existence of physical JGB certificates (No certificates deposited with BOJ) Change of Rights concerning JGBs will be effected by book entries (the record of debit and credit to the books) Abolishment of Package Registration by BOJ It is not possible to (re-)convert Book-entry JGBs to JGB certificates or Letter of Transfer Method of Calculating Interest From theoretical certificate method to total amount method amount multiplies coupon rate 4

5 Amendments - continued Obligation to resolve Overbooking Overbooking institution is obliged to resolve. Joint Responsibility in the tiers above customers (excluding FIPs) Investor Protection Trust Scheme The scale with about JPY 10 billion assumed Foreign investors / FIPs are excluded from the contribution and protection from the Trust. STRIPS (Separate Trading of Registered Interest and Principal of Securities) The coupon and principal can be separated and consolidated for limited eligible JGBs JGBs Designated for Individual Investors New securities type 5

6 Required Actions for Non-FIP Intermediaries NEW Obtain AMI(Account Management Institution) Status and Foreign Indirect Participant (FIP) Status Registered JGB (Letter of Transfer) will gradually cease to exist after January JGBs will be issued only in (new) book-entry form after January 27, Existing JGB can be held in Registered form (Letter of Transfer) till maturity. However, tax exemption by depositing into book-entry, is permitted for only a 5 year transition period. JGB trading market will shift to book-entry In case the beneficial owner is eligible for tax exemption, the FIP/AMI who has direct relationship with the beneficial owner has to obtain QFI (Qualified Financial Institution) status to be able to certify that the beneficial owner is tax exempt. Strongly recommended to apply for AMI / FIP status, to be able to hold JGBs and convert the holdings to book-entry form on behalf of your clients. 6

7 Procedures to obtain AMI / FIP 1. Submit draft Application Form to BOJ BOJ will ask questions, BTM act as liaison. After BOJ is satisfied with the Application Form; 2. Submit to BOJ; i. draft Letter of Intent ii. draft Representations Shou : consent to observing the laws, rules and regulations of the book-entry system iii. iv. draft Legal Opinion Certificate of Existence (for AMI approval from MOF) BOJ will check whether filled properly Especially for Legal Opinion there will be quite a few questions and suggestions to amend 3. Submit signed final documents to BOJ 7

8 Procedures to obtain QFI & tax exemption Requirements for QFI Must have AMI / FIP status The QFI must be located in state/country that has a tax treaty with Japan with an article of exchange of information Obtain approval from Tax Authority (Nihombashi Tax Office) Submit application form Applying for tax exemption Eligible foreign investor to submit Application Form for Withholding Tax Exemption - through QFI Submit the Statement of the Holding Period at every coupon payment BTM will prepare this 8

9 9 Tax Exemption Eligibility(Until March 2002) Beneficial Owner (Non-resident investor) with a legal personality (LP) LP judged under the responsibility of QFI Individuals and corporations considered to have LP Collective investment scheme (Fund) with a corporate structure as defined by the law of the residential country of the scheme UK Pension Funds were the only type of funds without corporate status which had been approved comprehensive eligibility

10 10 Tax Exemption Eligibility (After April 2002) Amendment of tax law - April 2002 Collective investment schemes (without corporate status) which are both i. Trust/funds established abroad based on legislations of that ii. iii. country/market, publicly offered, and marketed outside Japan have become eligible for tax exemption All funds that satisfy the two conditions and are confirmed by the QFI are eligible. There is no list of eligible funds released from authority. If the QFI is unable to determine the eligibility of any specific investment scheme, QFI has to refer to the authority on case by case basis. Other funds (privately offered funds or occupational pension funds) must be individually confirmed by National Tax Authority see Ministry of Finance website for already approved types of funds BTM will act as your liaison with Tax Bureau STARTING POINT Research Items of Overseas Group Investment Scheme attached on page 12 In other words, this second point is out of the scope of the above law amendment. However, inclusive approvals have been outlined by a paper from the Japan Securities and Dealers Association (JSDA) to UK pension funds, and most recently, US pension funds, that satisfy certain criteria. See next page.

11 Research Items of Overseas Group Investment Scheme Research Items 1. Legal Characteristics (1) Base law for foundation of corporation (2) Applicable laws (3) Is it given a Corporation status under the local law? (4) Does it have the following rights and abilities? Ability to be a party to law suit (may sue or be sued) Legal ability to own property subject to compulsory execution Limited liability of the shareholders from claims by the creditor of the entity Limited liability of the entity from claims by the creditors of the shareholders 2. Components of Organization/Investment Scheme (1) Shareholder of the entity (2) Owner of the assets (3) Transfer of equity (4) Decision making body (governing board) within the entity (5) Perpetual existence (6) Responsibilities of beneficiary of the entity 3. Tax Treatment (1) The Fund itself is situated as taxable? (2) If Yes to No. 3-(1), will the Fund be actually taxed or not be taxed? (3) Tax payment status of beneficiares of the Fund Note: Countries to be researched: The United States, England, Germany, France, Italy, Netherlands, Luxembourg, Switzerland, Singapore, Hong Kong, Taiwan, Kayman, etc. Scheme for Object of Research: Investment trusts, pension funds, and other investment scheme which is expected to hold JGB. Remarks: Please collect the references regarding base laws, ordinances or any relevant codes. 11

12 Example Research Items 1. Legal Characteristics (1) Base law for foundation of corporation (2) Applicable laws (3) Is it given a Corporation status under the local law? (4) Does it have the following rights and abilities? Ability to be a party to law suit (may sue or be sued) (4) Decision making body (governing board) within the entity (5) Perpetual existence (6) Responsibilities of beneficiary of the entity 3. Tax Treatment (1) The Fund itself is situated as taxable? (3) Tax payment status of beneficiares of the Fund Research Items of Overseas Group Investment Scheme Legal ability to own property subject to compulsory execution Limited liability of the shareholders from claims by the creditor of the entity Limited liability of the entity from claims by the creditors of the shareholders 2. Components of Organization/Investment Scheme (1) Shareholder of the entity (2) Owner of the assets (3) Transfer of equity (2) If Yes to No. 3-(1), will the Fund be actually taxed or not be taxed? (Example)Business Trust of ABC State ABC State Code It is registered as Investment Company under the Investment Company Act of It is situated as unincorporated association under the ABC Law, and it is regarded as separate legal entity. Yes (ABC State Law 12 Sec. 3804) Yes (ABC State Law 12 Sec. 3804) Yes (ABC State Law 12 Sec. 3803) Yes (ABC State Law 12 Sec. 3804) Shareholder Trusts or beneficiaries Freely transferable/redeemable of share ownership Board of Trustee Unlimited period of time Limited Taxed as a corporation Taxed at the time of receiving dividends 12