Collateral Expansion: Japanese Government Bonds - 1Q 2013
J.P. Morgan's Agent Lending team is now actively accepting Japanese Government Bonds (JGBs) as collateral. The addition of JGBs is part of a broader initiative to expand our eligible collateral set, which has over the past two years seen the inclusion of equities collateral and sovereign debt from seven additional OECD member states.
As JGBs are currently a cheaper form of collateral relative to U.S. Treasuries / Agencies and EUR sovereign debt, loans collateralized with JGBs demand a slight premium over those collateralized with these asset types. The premium for Japanese equity GC loans is on average eight to 13 basis points; for loans of U.S. Treasuries and EUR sovereign debt, borrowers are indicating a premium of up to five bps. It should be noted, however, that the premium for government bond loans is driven primarily by a requirement for term loans, as borrowers are matching the loan maturity to currency swaps executed in connection with the purchase/sale of the bonds.
- To minimize the requirements for potential tax withholding and reporting, clients accepting JGBs must be exempt from Japanese withholding tax.
- J.P. Morgan must set up a segregated collateral account for each participating beneficial owner that would be used solely for collateral liquidation in the situation of a borrower default.
To satisfy both of these requirements, clients must complete a "Confirmation and Application for Withholding Tax Exemption" (also know as a "Japan Letter"). Clients who have already completed a "Japan Letter" in connection with custody holdings of JGBs do not need to resubmit it.
For more information, please contact your Agent Lending relationship manager.