Nomura Research Institute, Ltd. (NRI: Tokyo, Japan; Akihisa Fujinuma, President, CEO & COO) has started today system service for financial institutions to support delivery/settlement operations*¹ for gentan repo transactions*² and gensaki transactions*³ involving inflation-linked government bonds (hereinafter referred to as "inflation-linked government bond repo transactions").

Inflation-linked government bonds are financial products in which the principal for redemption and interest payments changes relative to the consumer price index (CPI). Since the first issue of this inflation hedge investment product in March 2003, the product has been growing steadily in terms of both the outstanding amount and the share of the total issue amount of government bonds (see "Reference" below). Along with such increases, needs for these inflation-linked government bond repo transactions have also been growing in the government bond trading market where repo transactions*⁴ account for an overwhelmingly large trading volume as compared to over-the-counter cash trade transactions. However, transactions of inflation-linked government bonds impose substantial burdens on financial institutions handling such products. These burdens include CPI management and the calculation of the market value of inflation-linked government bonds based on a linkage coefficient*⁵.

To meet these needs, NRI has started providing system service for financial institutions to support delivery/settlement operations for inflation-linked government bond repo transactions. This service covers all processes from CPI management and the calculation of a linkage coefficient to execution recording, client reporting, position management, preparation of legal ledgers and accounting processing. The system enables automatic connection to the Pre-Settlement Matching System of the Japan Securities Depository Center and supports the settlement of government bonds on the Bank of Japan Financial Network System (BOJ-NET). This service thus supports overall delivery/settlement operations for inflation-linked government bond repo transactions.

By providing this service, NRI enables straight through processing (STP)*⁶ handling all processes concerning repo transactions of government bonds from execution recording to matching/settlement. This ASP service also enables the reduction of initial investment, maintenance costs, etc. In addition to securities firms, banks, life insurance companies and other financial institutions can use this service.

In the future, NRI plans to provide system services that support financial institutions in responding to changes in the settlement system as necessitated by the introduction of the book-entry transfer system for mutual funds*⁷ in 2007 and the start of the paperless stock certificate system*⁸ by 2009.

*1: Delivery/settlement operations
These operations refer to those in which a bond is delivered and cash is paid with respect to an executed trade.

*2: Gentan repo transaction
This refers to a transaction in which bonds such as government bonds are loaned or borrowed for a fixed period and collateral money and accrued interest are given or received.

*3: Gensaki
This refers to a transaction in which bonds are to be traded on the agreement that such bonds are traded at a fixed price after a fixed period.

*4: Repo transaction
This refers to a transaction in which bonds are loaned on the security of cash.

*5: Calculation of linkage coefficient
This refers to a coefficient that is obtained based on the applicable date for each trade and the price index for the month in which bonds were issued.

*6: Straight through processing (STP)
This refers to the automatic processing of operational functions from execution to settlement and delivery of products without manual intervention.

*7: Book-entry transfer system for mutual funds
This refers to the settlement system that realizes paperless mutual fund benefits for the purpose of achieving efficient and improved settlement of mutual funds.

*8: Paperless stock certificate system
This refers to the settlement system that realizes paperless stock certificates for the purpose of streamlining the settlement for equity transactions, etc.

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