Buying and Selling on the Secondary Market
Trading
Secondary market trading is done through securities companies or authorized banking institutions via the following methods:
1.Over-the-counter (OTC) trading
a. Outright sales and purchases
Outright sales and purchases is the basic method of bond trading. Trades are normally done for specific bond issues. Institutional investors, however, often trade several issues in one transaction. Trade agreements are based on final yields and other conditions, such as remaining tenor, price, interest rate, type of bond, month of interest payment, number of annual interest payments, and settlement date, among others.
b. Swap trading
Swaps sell one bond and buy another at the same time. Institutional investors often use this method for selling and buying several issues at one time, with the aim of creating the desired portfolio.
c. Gensaki trading
Gensaki trading (conditional buying and selling) is a sale or purchase of bonds with an agreement to buy or sell them back after a specified period of time. These trades are done primarily for short-term financing and investment.
d. Transactions with delayed settlement
Transactions with delayed settlement are done based on an agreement to deliver a bond at specified date, one or more months after the contract date.
e. Other sales and purchase methods
Other sales and purchase methods include lagged switch trades (whereby the delivery dates for both seller and buyer lag), basis trading (which takes advantage of the gap between the current cash price and the futures price), and dealing that uses options such as covered calls.
The Japan Securities Dealers Associations (JSDA) runs the OTC market. Prospective investors are advised to contact members of JSDA for trading on the OTC market. Investors and OTC-securities companies registered with the JSDA agree to given terms and conditions for a particular bond issue and initiate transactions. Deals can be made on listed or unlisted bonds, publicly offered or privately placed bonds, and terms of delivery. JSDA also provides a list of foreign securities companies.
2. Exchanges
While exchange turnover for bonds is relatively small, these trades play an important role in letting investors know indicative prices of representative issues. Securities companies trading on the Tokyo Stock Exchange (TSE), the Osaka Securities Exchange (OSE), and the Nagoya Stock Exchange (NSE) will assist investors buying and selling listed bonds. Only member companies of an exchange are authorized to trade listed bonds.
For trading hours, minimum orders, and trading methods, please refer to trading specifications of TSE, OSE and NSE.
Settlement
Settlement varies depending on where bonds are traded – whether on securities exchanges or through the OTC market.
For securities exchanges, settlement is multilateral netting with Japan Securities Depository Center, Inc. (JASDEC), where all trades in the same security are sorted into final long and short positions for each participant. Investors must open an account with JASDEC participant securities companies, or other institutions approved by the securities exchanges. JASDEC will begin paperless settlement of corporate bonds in January 2006.
On the OTC market, corporate bonds are settled through a book-entry system on a delivery versus payment (DVP) basis through the Bank of Japan Financial Network System (BOJ-NET). Eligible participants are usually financial institutions authorized by the Bank of Japan.
The settlement period for all bond trades is T+3.
Payment of interest and redemption is via a multilayered holding structure in order of Issuer, Paying Agent, Account Management Institution, and bondholder.
Participants (the issuer, paying agent, and bondholders) either entrust the Account Management Institution or use the Japan Securities Depository Center, Inc. (JASDEC) to claim interest and redemption amounts on their behalf.
Issuers are responsible for paying agents while bondholders appoint their account management institution.
