Exploring new horizons

Global Investor spoke to Kazutaka Tajima, Director, Loans for margin trading, relationship management at Japan Securities Finance for an introduction of alternative short selling opportunities in the Japanese stock market.

This article is part of the 2023 Asia Pacific Securities Finance Guide, which can be accessed here.  

Kazutaka shares vital information related to alternative short selling opportunities in the Japanese stock market and how Japan Securities Finance fits in the picture. Light is shed upon standardised margin transactions (SMT), the background system of the unique trading system with loans for margin transactions and how to take advantage of the SMT since the cost involved include premium charges.

A traditional and unique trade system - Standardised margin transactions 

If you need to short sell shares, a common way is to borrow these shares from a securities lending market. However, there is a unique method called “standardised margin transactions(“SMT”)” in Japan. SMT have a large presence on the stock market in Japan. The big advantage of SMT, You can freely short the majority of all listed issues without the need for complicated prior contracts, negotiations or paperwork with lenders.

Let’s imagine you think that the price of a certain stock will fall in the future. Instead of borrowing those shares from a prime broker and selling them on the market, you can use a SMT to borrow and sell those shares from a Japanese securities company.

You can then repurchase the shares when their price drops within the repayment period (up to six months) and give them back to the securities company. You will then receive the difference in those prices. Moreover, you can also avoid losses through hedge selling using SMT for hedging purposes (in other words, when you think the price of the shares you hold will drop) in addition margin acquisition purposes like this.

The background system of SMT - Loans for Margin Transactions 

Japan Securities Finance (“JSF”) administers loans for margin transactions(“LMT”) in SMT. That means JSF provide the ex-post loans for the funds and shares necessary for securities company. Prime brokers normally need to procure shares in advance before short selling them because of the short selling regulations.

However, LMT are built into SMT. Therefore, you can immediately short sell shares without procuring them in advance as there is no conflict with naked-short selling regulations. Any securities companies which have received a trading order for a SMT from an investor can procure the funds and shares necessary for settlement by providing a certain level of collateral to JSF.

How does JSF procure the funds and shares necessary for LMT? JSF can borrow the funds necessary from financial markets due to our high credit rating (S&P A rating). Meanwhile, JSF procures the number of shares necessary from participants through an auction process.This JSF auction is held the day after the trading date. This cost determined in the auction process is called the “premium charge.” The premium charge is set in advance by the table corresponding to the amount of investment.

Margin sellers pay a uniform premium charge according to the SMT short balance. On the other hand, auction participants and margin buyers can receive these premium charges according to the number of shares they successfully bid for and the SMT long balance.

The premium charge rate is an indicator which expresses the supply and demand of the stock loan market in Japan. If the premium charge rises sharply, it has the effect of encouraging margin sellers to clear their accounts and margin buyers to newly enter the market. In general, the balance between margin buying and margin selling reaches an equilibrium through self-adjustment with such premium charges.

Nevertheless, if the outlook for procurement through the auction process is unclear due to special factors such as sudden price fluctuations, corporate actions and listings which carry over into the next fiscal year from application, JSF will issue a warning or suspend applications (prohibit new sales) in the use of stock loans according on the situation, thereby controlling the increase in excessive selling through such measures.

Take advantage of SMT 

The costs incurred in SMT consist of the premium charge and the lending fee set by the securities company.

Regarding the premium charge, there are many cases in which the costs involved in margin selling are lower the cost of borrowing on the securities lending market. In particular, it is possible to find many issues which are comparatively less expensive if you use margin selling among those which are difficult to borrow with high market rates.

One of the reasons for that is that almost no professional investors have entered the SMT. Most users tend to be individual investors in Japan. The preferences of professional investors and individual investors are often divided. You can also now short Japanese shares at a reasonable price with SMT without paying high fees on the securities lending market.

If you would like to prove it, you can easily obtain the historical data of LMT from Quandl (a member of Nasdaq group). SMT and LMT are very interesting system unique to Japan which enables you to short a wide range of issues. You can also start engaging in these transactions at any time by opening a margin trading account with a securities company in Japan.