Japan Securities Finance Co., Ltd. won awards for ‘Most Innovative Financing Company’ and ‘Most Innovative Securities Lending Service Provider.’ The 95-year-old Tokyo-based securities company deals in loans for margin transactions, bond financing & general loans, bond services, and Stock lending. It is closely associated with Japan Exchange Group.
We interviewed Yutaka Okada, JSF’s Senior Managing Executive Officer, asking about his firm’s vision.
Okada speaks of expansion into Asian markets like Hong Kong, Korea, Thailand, and Indonesia; and talks briefly about the future of the securities industry and its projections in the West and Japan. JSF is also experimenting with blockchain technology in partnership with professors at Tokyo university to improve the securities industry. The Managing Executive also informed us about JSF’s state-of-the-art data gathering techniques and analyses published in JSF Prime Index.
Q: JSF is a unique financial institution in Japan, focusing primarily on the securities finance business sector. Could you explain more about your business model?
A: Established in 1950, JSF is a financial institution specializing in securities finance. If you include our predecessor Tokabu Daiko Co., Ltd., we have been in this business for 95 years.
Unlike other financial institutions in Japan, JSF has been approved and supervised by the Financial Services Agency as a securities finance company under the Japanese Financial Instruments and Exchange Act.
Since its establishment, JSF has been a pivotal force in Japanese financial markets by providing the infrastructure for securities finance. The firm also deals with margin loans for equities and securities lending/borrowing transactions.
As for the standardized equity margin loans, JSF has become a sort of last resort to provide cash and equity liquidity based on the institutionalized relationship with the Bank of Japan and the Japan Exchange Group, a role exclusive to JSF. Including the standardized margin loans, JSF’s business is conducted on a securities-backed basis in principle and managed within the Risk Appetite Framework. Against this background, JSF has maintained high S&P credit ratings such as long-term A and short-term A-1.
As many global banks, broker-dealers and investors are recently participating in Japanese financial markets, our business with these players is also growing.
Q: You mentioned that JSF increased transactions with overseas clients. Please explain the nature of these transactions?
A: As explained above, JSF has long been focused on Japanese markets. However, with the awareness that JSF is a player in Asian markets, we have recently begun to handle Asian equities repo transactions, in places like Taiwan, Hong Kong, and Korea, which allows us to contribute to the development of Asian markets by using triparty services.
Due to the increasing demand for government bonds as collateral for various financial regulations, we are also expanding repo transactions related to JGB and other government bonds where JSF is the lender.
It is well known that Japanese institutional investors and regional banks have a sizable amount of government bonds in their portfolios. With our high credit ratings and neutrality (We do not belong to any other Japanese major financial groups), JSF has maintained excellent relationships with these organizations. Therefore, JSF can effortlessly respond to the demands of overseas investors by working as an intermediary to provide access to their portfolios.
Also, from the viewpoint of balance sheet control, major financial institutions recently prefer synthetic trading to physical repo trades. So, JSF has also started handling these synthetics.
Q: Please tell us if there are any other initiatives unique to your company.
A: As I just explained, JSF has a very long history, and the margin loan market, in particular, has been run by JSF alone.
Our company has a large volume of transaction data. Individual investors have played a crucial role in the Japanese stock market, and many of them use margin loan transactions. We have conducted research into the behavior of these individual investors by analyzing our margin loan data in collaboration with Professor Yasuyuki Kato of Kyoto University and the Deutsche Börse Group.
Professor Kato is well known for creating many indices in Japanese markets and has helped us find that the margin loan was one of the major factors driving the Japanese market. Since we believed this factor would be essential information for investors, JSF began publishing it as the JSF Prime Index in 2020.
In addition, as this Index outperformed TOPIX, we launched a self-managed fund to build a track record for launching other investment products.
The recent progress in financial DX has been remarkable, and we believe that blockchain technology and digital tokens are areas worth venturing into for the securities finance industry. Digital tokenization of securities and blockchain technology makes the transfer of both collateral and securities more effective. Simultaneous delivery of securities and collateral will decrease settlement risk in cross-border transactions. Keeping this in mind, JSF has started a demonstration experiment collaborating with Associate Professor Kenji Tanaka of the University of Tokyo, which is already showing excellent progress in electricity exchange using blockchain technology.
Q: Please tell us about your future strategy as a specialized securities finance company.
A: Based on the experience, know-how, credibility, and neutrality we have cultivated as the only licensed and specialized securities finance company, JSF plans to work on the following points.
We will develop the global securities finance business by expanding the range of security, cash for collateral, and counterparties from Japanese markets to US and European markets. With the rise in synthetic transactions, JSF is also considering moving into the derivatives markets. JSF would like to commit more to Asian and Middle Eastern markets, which show potential.
While initiatives for sustainable finance are becoming vital in the space of the securities finance business, JSF would like to contribute to sustainability by collaborating with startups in this area. And also, in middle and back-office support like fund administration which we newly launched.
As we explained above, blockchain technology has good prospects for collateral trading – an area of interest for securities finance. So JSF has already set up a demonstration experiment to explore this technology, and we are considering implementation in the future.
About the data business, JSF expects to develop our asset management business by using our JSF Prime Index. The data maintained by JSF is categorized as alternative data, so we are now planning to provide the original data to overseas entities by collaborating with a global data company.
The Japanese margin loan finance system that JSF has long been responsible for is an excellent system to apply to emerging markets where the securities market is growing. JSF has already provided the know-how to China, Korea, and Thailand to establish these markets. Recently, we supported the set up of the securities finance company in Indonesia, PT Pendanaan Efek Indonesia, and thus holds ten stakes together with the Indonesian stock exchange group. We wish to maintain a good relationship with them for further collaboration in Asian markets.
JSF expects to develop the global securities finance business and contribute to the finance industry by implementing these projects.