Explanation on Margin Transactions and Loans for Margin Transactions structure

Japanese Margin Transaction (hereinafter, Margin Transactions) is a trading where investors can borrow funds or stocks from their securities companies to purchase or sale stocks.
In Margin Transactions, an investor trades stocks after depositing a certain amount of margin (hereinafter, Margin Requirements　(Note1)) with securities companies and borrowing funds for purchasing stocks or stocks for sale.
In addition, in margin buying, the purchased stocks are used as collateral for the transaction, while in margin selling, the sale proceeds are used as collateral, both of which are allocated as collateral to the securities companies.
Margin Transactions help investors to expand their trading volumes by enabling them to purchase stocks of which the value is in excess of their available funds, or to sell stocks which they do not own. Thus, Margin Transactions broaden and strengthen stock trading and contribute to the smooth circulation of stocks and the fair stock prices formation.

Margin Transactions are used, for example, when an investor considers that the stock price of a certain issue will rise or decline in a short period of time.

When it is expected that the stock price will rise, an investor borrows funds from securities companies for purchasing the stocks (margin buying), and if the stock price rises as expected within a term of repayment (if the investor selects Standardized Margin Transactions, the investor needs to repay within 6 months), the investor sells the stocks, repays the funds borrowed (unwinding margin long position) and receives the gain. The investor may also receive the stocks (Actual Receipt) by procuring funds separately and depositing it with the securities companies.
Conversely, when it is expected that the stock price will decline, an investor borrows stocks from securities companies and sells them (margin selling). If the stock price declines as expected within the term of return (if the investor selects Standardized Margin Transactions, the investor needs to return the stocks borrowed within 6 months), the investor buys back the stocks, returns the stock borrowed (unwinding margin short position) and receives the gain. The investor may also receive the equivalent money to the price of the stocks sold by procuring stocks separately and offering them to the securities companies (Actual Delivery).

In addition to the purpose of obtaining margins as described above, an investor can use Margin Transactions as a means for hedging. In other words, in the event that, although an investor expects that the stock price in hand may decline, the stock is not to be sold for some reasons (such as during convertible period of Convertible Bond with warrant or immediately after purchasing newly issued shares through a Public Offering), the investor can avoid loss with hedging sale by using Margin Transactions.

There are two types of Margin Transactions, Standardized Margin Transactions and Negotiable Margin Transactions. Investors can select whether Standardized Margin Transactions or Negotiable Margin Transactions to engage in buying or selling when placing their orders.

In Standardized Margin Transactions, eligible issues or terms of repayment/return, etc. are determined by stock exchanges and are applied uniformly to all transactions. And Participants of Loans for Margin Transactions (securities companies, etc., hereinafter, Participants) can borrow funds for purchasing and stocks for sale needed to settle Standardized Margin Transactions from Loans for Margin Transactions provided by securities finance companies designated by each exchange.
In Negotiable Margin Transactions, the terms and conditions may be decided freely in negotiation between securities companies and its customer. However, securities companies cannot use Loans for Margin Transactions for settlement of Negotiable Margin Transactions.

Loans for Margin Transactions is a financing scheme in which securities finance companies lend fund or stocks necessary for the settlement of Standardized Margin Transactions. Securities finance companies directly receive a certain amount of margin deposits (hereinafter, Initial Margin of Loans for Margin Transactions) from Participants and lend funds or stocks necessary for the settlement thorough the clearing facilities of the stock exchange.
Only securities finance companies with a license issued by the Prime Minister can conduct Loans for Margin Transactions. JSF conducts Loans for Margin Transactions through each stock exchange (Tokyo, Nagoya, Fukuoka, and Sapporo) and PTS market.

Standardized Margin Transactions and Loans for Margin Transactions are closely related. Here, we explain the process from when an investor places a Standardized Margin Transactions order to when the stocks are settled.

1. Standardized Margin Transactions (The parties concerned: an investor, a securities company, a stock exchange.)
   1. An investor deposits Margin Requirements (which can be substituted with securities) with the securities company and place margin orders (buy or sell) for Standardized Margin Transactions.
   2. The securities company executes the margin orders at the designated stock exchange and receives Margin Requirements.
2. Loans for Margin Transactions (The parties concerned: a securities finance company, a securities company, a clearing facility.)
   3. The securities company applies for Loans for Margin Transactions with securities finance companies and deposits Initial Margin of Loans for Margin Transactions.
   4. The securities finance company delivers the funds for purchasing or the stocks for sale to the clearing facility on behalf of the securities company, and receives the purchased stocks or sale proceeds from the clearing facility. The purchased stocks or sale proceeds are held as collateral by the securities finance company. Similarly, the Initial Margin of Loans for Margin Transactions received from the securities company is also held as collateral by the securities finance company.

If Loans for Margin Transactions is a general fund loan or stock loan scheme, the securities finance company would lend funds or stocks to the securities company, and the securities company would lend it to the investor. On the other hand, the investor must also pay the funds for purchasing or the stocks for sale to the securities company at the same time, and the securities company must deliver it to the clearing facility.
However, in Loans for Margin Transactions, all individual settlements of the funds and stocks transfers are netted and completed only through the flow of funds and stocks from the securities finance company to the clearing facility. This achieves an extremely efficient system for settlement of Japanese stock market.

In Loans for Margin Transactions, the lending of funds for purchasing and/or the stocks for sale occurs on the 3rd business day (T+2 day) from the Application date (Trade date).

1. Application Date (Trade Date)
   When investors have traded Standardized Margin Transactions, the Participant aggregates all margin orders and submits an Application to the securities finance company to procure the necessary funds or stocks for settlement of the Standardized Margin Transactions by the designated time (around 6:30PM(JST)). The securities finance company then promptly announces the Preliminary data of Loans for Margin Transactions Outstanding within about 30 minutes after the completion of Applications from all Participants.
2. On the next business day after the Application Date (T+1 day)
   At the securities finance company, Additional Applications for (1) are accepted, and at the same time, JSF Auction are conducted. Once the Additional Applications and JSF Auction are completed, the securities finance company will announce the Premium Charge Rate for the Trade Date around 10:30AM(JST). Then, around 11:30AM, the securities finance company will announce the Final data of Loans for Margin Transaction Outstanding for the Application Date.
3. Settlement Date (T+2 day)
   The securities finance company executes the transfer of funds and/or stocks on clearing facility.

※For further information on Margin Transactions, please refer to the Tokyo Stock Exchange website.

※JSF also provides Fund Loan for settlement of Negotiable Margin Transactions (Loans for Negotiable Margin Transactions), not just Loans for Margin Transactions for Standardized Margin Transactions.