The flow from trade execution to settlement is divided into three parts; 'trading in markets,' 'clearing in the clearing organization' and 'settlement in settlement organizations.'
In Japan, there are five stock exchanges including TSE, and an over-the-counter market (JASDAQ). Each market has designated the Japan Securities Clearing Corporation (JSCC) as a clearing organization to undertake the clearing of the trades executed on their own markets. Each market had its own clearing operations before the switch to JSCC, which has provided cross-market clearing operations since January 14th, 2003.
Trades cleared on JSCC are settled at the following organizations.
- Stocks and convertible bonds ---Japan Securities Depository Center (JASDEC)
- Japanese government bonds---Bank of Japan
- Cash---Bank of Japan or commercial banks which JSCC designates as fund settlement banks
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Clearing Organization
The main functions of the clearing organization are assumption of obligations from participants, cross-market netting, settlement instruction, and settlement guarantee.
- Assumption of obligations
When trading is effected, sellers have the obligation of delivering securities and the right of receiving cash, and buyers have the obligation of paying cash and the right of receiving securities. The clearing organization assumes these obligations and acquires these rights as a central counter party (CCP) between sellers and buyers. As a result of this assumption of obligations, the counter party for settlement is changed from the original trading counter party to the clearing organization. Therefore all participants can trade without worrying about the credit risk of the trading counter party. Thus, clearing operations become more efficient.
- Netting
The clearing organization offsets the selling and buying amounts of securities and cash to be settled on the same day for mitigation of settlement volume. Securities are netted by issue and cash is netted on the basis of total amount of payment and receipt.
- Settlement instructions
The clearing organization determines the settlement amount, notifies that amount to each clearing participant , and then notifies the settlement organizations so they may execute settlement. Depending on settlement method, there may be a case that clearing participant instructs it to the settlement organization in accordance with notification from clearing organization. Securities cleared on JSCC, and eligible for Japan Securities Depository Center (JASDEC), are settled on a DVP basis
- Settlement guarantee
Since the clearing organization, as a CCP, assumes the obligations and acquires the rights of settlement, it has to finalize settlement between participants even if a participant fails in settlement. This system enables every market participants to trade securely. If a loss occurs in the clearing organization because a clearing participant fails settlement, JSCC provides a settlement guarantee scheme as follows.
- The loss is compensated for with the defaulting participant's property, such as its clearing fund deposited with JSCC.
- If such amount is insufficient, other participants must compensate for it.
Japan Securities Depository Center, Inc. (JASDEC) is the sole central securities depository based on the Law Concerning Central Securities Depository and Book-Entry Transfer of Stock Certificates and Other Securities (CSD Law) in Japan. It provides services of deposit and book-entry transfer of the following securities.
- Domestic stocks
- Corporate bonds with subscription warrants for new shares (Convertible bonds)
- Beneficiary certificates of exchange traded funds
- Investment securities of real estate investment trusts
- Preferred equity securities
JASDEC keeps securities deposited by participants, and transfers those securities (which also means the transfer of ownership) by book-entry transfer. Participants are securities companies, securities finance companies, banks, trust banks, insurance companies and other organizations such as stock exchanges and clearing organizations designated by the competent ministers under the CSD Law. These participants can open accounts for themselves in JASDEC directly. Personal investors and business corporations open accounts in participants as customers and deposit securities to JASDEC through those participants.
Please refer to JASDEC's website for more information.
