JGB Repo Markets
Repurchase agreements, securities lending, funding, and leverage in JGB markets
The Repo Market: The Plumbing of JGBs
The "repo" (Repurchase Agreement) market is the single most important part of the market's "plumbing." It is a high-volume, low-margin market that allows participants to lend or borrow cash using JGBs as collateral.
Effectively, a repo transaction is a short-term collateralized loan. The interest rate on this loan is the "repo rate."
How a Repo Trade Works
Despite its name, a repo is a two-step transaction:
- Day 1 (The "Sale"):
- Party A (who needs cash) "sells" a JGB to Party B (who has cash).
- Party B gives cash to Party A.
- Day 2 (The "Repurchase"):
- Party A "repurchases" the *same* JGB from Party B.
- Party A gives the cash back to Party B, plus a small amount of interest (the repo rate).
Party A has successfully borrowed cash overnight, and Party B has earned a small, risk-free return on their cash, protected by the JGB collateral.
(Note: A "Reverse Repo" is the *same trade* viewed from Party B's perspective: lending cash to receive a JGB.)
Japanese Repo Terminology: Gensaki vs. Gentan
The Japanese repo market has historically used unique terminology and structures that differ from Western markets. Understanding these terms is essential when navigating Japanese market reports and talking to local counterparties.
1. Gensaki (現先) — Repo Transactions
Japanese: 現先取引 (gensaki torihiki)
English: Repo Transactions / Repurchase Agreements
Structure: A true repo — legally structured as a sale with agreement to repurchase. This is the global standard format used internationally.
- Documentation: Uses international repo master agreements (e.g., GMRA - Global Master Repurchase Agreement)
- Maturity: Typically short-term, not exceeding 1 year
- Tax Treatment: Sale-and-repurchase format avoids securities transaction tax (abolished in 1999, but structure persists)
- Accounting: Can be off-balance-sheet depending on accounting standards
💡 Market Status (2024): Gensaki is now the dominant format in the Japanese repo market, especially after reforms in 2016 aligned Japan with international standards. When international investors trade JGB repo, they almost always use gensaki.
2. Gentan (現担) — Cash-Collateralized Securities Lending
Japanese: 現金担保付債券貸借取引 (genkin tanpo tsuki saiken taishaku torihiki)
Abbreviation: 現担 (gentan)
English: Cash-Collateralized Bond Lending Transactions
Structure: Legally structured as a securities loan with cash collateral, not a sale. Economically identical to repo, but different legal treatment.
- Documentation: Uses Japanese Master Agreement on Lending Transaction of Bonds (JPBL - Japan Bond Lending)
- Maturity: Maximum 6 months (shorter than gensaki)
- Tax Treatment: Originally created in 1989 to avoid securities transaction tax (securities loans were exempt)
- Accounting: On-balance-sheet as a loan, not a sale
⚠️ Market Status (2024): Gentan usage has declined sharply since 2016 reforms. Most domestic banks and foreign investors have migrated to gensaki to align with global standards. Gentan is now primarily used by legacy domestic participants who prefer the familiar JPBL documentation.
Historical Context: Why Two Formats?
| Period | Event | Impact |
|---|---|---|
| Pre-1989 | Securities transaction tax levied on all bond sales | Traditional repos were expensive due to tax on both legs |
| 1989 | Gentan invented as tax-exempt securities loan | Gentan becomes dominant format (securities loans exempt from tax) |
| 1999 | Securities transaction tax abolished | Tax advantage eliminated, but gentan persists due to market inertia |
| 2016 | "New Gensaki" reforms introduced | BOJ and regulators push market toward international gensaki standards |
| 2024 | Gensaki now dominant; gentan legacy | Foreign investors use gensaki exclusively; some domestic players still use gentan |
📊 For Market Participants:
- Foreign investors & hedge funds: Use gensaki (GMRA documentation, global standard)
- Domestic banks & dealers: Increasingly use gensaki, but some legacy gentan still exists
- Reading market data: When you see "現先" in Japanese reports, it means gensaki (repo). When you see "現担" or "債貸" (bond lending), it's gentan.
- Interoperability: Gentan and gensaki are economically identical but cannot be netted together for clearing purposes due to different legal structures
GC vs. Special: The Two Types of Repo
The JGB repo market is split into two distinct types, based on the collateral.
1. General Collateral (GC) Repo
- What it is: The collateral is "general," meaning the cash borrower can deliver *any* JGB from a pre-agreed basket (e.g., "any 10-year JGB").
- The Rate: The GC repo rate reflects the general, risk-free cost of funding (borrowing cash) in the market. It is heavily influenced by the BOJ's policy rate.
- Use Case: This is purely a funding transaction. Investors use it to finance their bond inventory or manage their daily cash balances.
2. Special (SC) Repo (or "Specials," "Tokutan")
- What it is: The cash lender demands a specific bond as collateral (e.g., "I will *only* accept JGB #375").
- The Rate: The "special" repo rate is *lower* than the GC rate. A very low, or even negative, SC rate means that specific bond is "on special" and very hard to find.
- Use Case: This is a securities-driven transaction. It is used by traders who need to borrow a *specific bond*, usually to deliver it into a futures contract or to cover a short sale.
Why is the "Special" Rate Lower?
If the GC rate (cost of cash) is 0.10%, and a specific bond is "on special" at -0.50%, what does that mean?
It means the market is so desperate to borrow that *one specific bond* that cash lenders (who own the bond) can say: "I will lend you my bond, but you must lend me your cash at a *negative 0.50% rate*." The lender of the bond is willing to *pay* 0.50% just to get their bond back the next day, because they need it so badly (e.g., it's the CTD).
Therefore, a "special" SC rate is the market's "borrow fee" for a specific JGB.
Market Failures and BOJ Operations
Settlement Fails and Fail Costs
A "settlement fail" occurs when a seller (e.g., in a repo or a short sale) fails to deliver the promised JGB on the settlement date. This can happen when a specific bond (like a CTD) becomes extremely scarce and impossible to borrow. Fails can clog up the market's plumbing and cause systemic risk.
When a settlement fails, the seller who cannot deliver faces economic penalties:
- Explicit fail charges: Cleared repos (via JSCC) apply standardized fail penalties
- Opportunity cost: The failing party loses repo interest they would have earned
- Reputational damage: Repeated fails can lead to exclusion from future repos
- Forced buy-ins: The buyer can purchase the bond in the market and charge the failing seller the difference
BOJ Operations and the Securities Lending Facility (SLF)
The Bank of Japan (BOJ) is the ultimate backstop for the repo market, providing both funding liquidity and securities liquidity.
1. BOJ Repo Operations (Funding)
The BOJ uses repo as a primary tool for monetary policy:
- Funds-Supplying Operations: BOJ lends cash against JGB collateral (expansionary) — used extensively during QQE
- Funds-Absorbing Operations: BOJ borrows cash, lending out JGBs (contractionary) — rarely used since 2013
- GC Repo Rate Influence: BOJ operations set the floor/ceiling for GC repo rates, aligning them with the policy rate
2. Securities Lending Facility (SLF) — Bond Liquidity
The SLF is designed to prevent fails and stop special repo rates from becoming too disruptive.
| Feature | Details |
|---|---|
| Mechanism | BOJ lends specific JGBs from its portfolio against cash collateral |
| Fee Structure | Typically 10-20bp fixed fee (rate varies by bond type and market conditions) |
| Tenor | Overnight to 1 week (can be rolled) |
| Eligibility | Primary dealers and major financial institutions |
| Purpose | Prevent fails, cap SC spreads, ensure market orderliness |
💡 SLF as a Circuit Breaker: When SC spreads widen beyond the SLF fee (e.g., >20bp), arbitrageurs borrow from the BOJ at 20bp and lend to the market at wider spreads, naturally capping the spread. This prevents market dysfunction during delivery squeezes.
Historical SLF Usage (YCC Era)
During 2016-2024 Yield Curve Control, the BOJ held 40-50% of outstanding JGBs, creating severe bond scarcity:
- 2016-2019: SLF lending averaged ¥1-2 trillion per month
- March 2020 (COVID): Emergency SLF operations surged to ¥2.5 trillion in one week, preventing systemic fails
- Dec 2022 (YCC Widening): SLF usage spiked to ¥3.8 trillion as the market anticipated policy shifts
- 2024-present: As BOJ tapers QE, SLF usage declining to ¥500B-1T per month
📊 Data Source: BOJ publishes monthly SLF operation results: BOJ Market Operations
Day Count Conventions in Repo
Repo interest calculations use different day count conventions than the underlying JGB bonds themselves. This is a critical detail for accurate P&L calculations.
JGB Cash Bonds vs. Repo Transactions
| Instrument | Day Count Convention | Year Basis |
|---|---|---|
| JGB Cash Bonds (coupon accrual) |
Actual/365 | Actual days / 365 (see Section 1.9) |
| Repo Transactions (gensaki/gentan) |
Actual/365 | Actual days / 365 |
| Money Market (Tibor, Libor) |
Actual/360 | Actual days / 360 |
✅ Key Takeaway:
JGB repo uses Actual/365, matching the underlying JGB cash bond convention. This differs from USD repo (Actual/360) and some other money markets. When calculating repo interest, always use 365 as the denominator.
Repo Interest Calculation Formula
Worked Example:
- • Principal (cash borrowed): ¥1,000,000,000
- • Repo Rate (GC): 0.15%
- • Trade Date: January 10
- • Maturity Date: January 17 (7 days)
Repo Interest = ¥1,000,000,000 × 0.15% × (7/365)
= ¥1,000,000,000 × 0.0015 × 0.019178
= ¥28,767
Repurchase Amount: ¥1,000,000,000 + ¥28,767 = ¥1,000,028,767
⚠️ Common Pitfall: Traders used to USD markets may instinctively use 360-day basis. This creates a 1.4% error (365/360 = 1.0139) in repo interest calculations. Always verify the day count convention when onboarding to JGB repo trading systems.
References
- Bank of Japan. "The JGB Repo Market." *Market Review*. Available at: https://www.boj.or.jp/en/mopo/markets/review/index.htm.
- Bank of Japan. "Securities Lending Facility (SLF)." *Outline of Market Operations*. Available at: https://www.boj.or.jp/en/mopo/outline/ope.htm.