Major: Japan Rule Explained
This article covers the following sections for Major Japan:
- Major Japan explained
- The rules
- How the rules function
- How to set up base dates reporting for SRS-qualified investors
- Disclosure requirements for SRS clients
- Setting Up in Rapptr
- Exceptions that we do not account for
- The 1% lending rule
- Converting a Non-Disclosure Result into a Disclosure
- Sold out/Below 0.1% Entity Limitation
We have enhanced our Major: Japan rules to add functionality for Special Reporting Regime, co-holders, base dates, and stock lending. In addition, we created a link between the top entity and sub-entities which are co-holders, which allows Rapptr to anchor the shareholding levels of all entities whenever a disclosure is made. Please feel free to reach out to your Client Success Manager or firstname.lastname@example.org for further clarification.
Major: Japan explained
Major: Japan is a complicated rule and this article covers some of its many nuances. Let's start with an explanation of the terms that will be mentioned in this article:
Special Reporting Regime (SRS) - SRS applies to certain institutional investors who trade securities without the intention of materially affecting changes in the business activities of the issuer. SRS investors are only obligated to report their holdings on-base dates, which can be 2 to 3 times a month. It is also important to note that SRS is only applicable when holdings are between 5 and 10%.
Base dates - SRS investors can choose to report on either (i) the second and fourth Mondays of every month (in a month that has a fifth Monday, the second, fourth, and fifth Mondays) or (ii) the 15th day and the last day of every month.
Co-holders - co-holders or joint holders are entities that have a relationship in which they are likely to jointly exercise the voting rights of a company. Within Rapptr, co-holders are recognised as entities that have portfolios holding the securities. As illustrated below, in a multi-layered aggregation tree, the middle entities are not required to make a disclosure.
Swinging thresholds - Major: Japan uses swinging thresholds. Meaning that disclosure is made when there is a >1% movement from the last disclosure. E.g. the first disclosure is made at 6.5%, which means that another disclosure will be made only if your holdings go <5.5% or >7.5%.
Anchor points - After a disclosure is made, the holdings of the top entity and co-holders have to be anchored, and the swinging thresholds will be based on the anchor points.
There are 8 Japan rules covering the jurisdiction, with a set of 4 for clients on SRS and another 4 for non-SRS clients. The rules are:
Please note that in addition to the aforementioned 8 rules, the rule engine relies on the Major: Japan - Diluted Denominator rule to calculate accurate results (please see details below). Furthermore, we also allow clients to monitor a lending change of 1% or more using the Major: Japan - Lending/Lending Prime rule, which is explained in more detail below as well.
How the rules function
Initial disclosure (when shareholdings first breach 5%)
For movements between 5 to 10%
The new rules check if there is a ≥1% movement at either the top entity or co-holder level. If there are, disclosures will be made at both levels. It also registers the new shareholding levels of the co-holders if there is a disclosure at the top entity or vice versa.
Exit disclosures (shareholdings >10%)
As mentioned above, investors who qualify for SRS have less onerous reporting requirements when their shareholding is between 5 and 10%. Shareholding disclosure will default to normal if your shareholding exceeds 10%. Upon re-entry to the SRS range, Rapptr will revert to base date reporting once a disclosure is made within the SRS range, i.e. on the next base date.
Exit disclosures (from >5% to below 5%)
How to set up base dates reporting for SRS-qualified investors
Clients who are SRS-qualified should activate the SRS set of rules and provide base dates in the rule properties field.
Accessing the Rule Properties menu
Login to your environment and navigate to the Portfolio menu (the folder icon located in the top right corner of your navigation bar).
Select any of your existing portfolios, entities, or umbrellas, and then click the Edit button on the upper right-hand of your screen.
Disclosure requirements for SRS clients
Disclosure requirements for SRS-clients only differ when their holdings are between 5 and 10%. In that range, they are only required to disclose on-base dates. If you exceed 10%, the shareholding disclosure requirements revert to normal (just like non-SRS clients).
If your holdings exceed 10% and then return to between 5 and 10%, you would be prompted to make a disclosure. Subsequently, you would return to reporting on-base dates.
0.1% mandatory exemption from aggregation for controlled undertakings
Who does the exemption apply to:
There are two different types of co-holder arrangements, controlled undertakings and concert parties. The mandatory exemption is only applicable to those co-holders in a controlled undertaking arrangement.
Controlled undertaking: co-holders in this arrangement are under the control of the parent company (parent company holds >50% of the voting rights in the subsidiary), and will typically transact and vote according to the parent company's discretion.
Concert parties: co-holders in this arrangement are those that have jointly agreed to transact or vote, (most likely when the parent only has a minority of the voting rights in the subsidiary).
As the label 'mandatory' suggests, if co-holders are in a controlled undertaking arrangement, the exemption must be applied.
What is the exemption:
Any individual co-holders with holdings of Japanese shares less than 0.1% are exempted from aggregation.
Setting Up in Rapptr
We assume that most clients have entities that are controlled undertakings. Hence, by default, if you approve the new rule, the exemption will apply.
For clients who have a concert parties arrangement, please specify 'NotJPAggExempt' in the CompanyType list for each entity, including the top entity.
Exceptions that we do not account for
The rule limits the maximum exemption to 1%. However, we have not accounted for that in our rule because we believe that it is unlikely to happen.
Scenario 2 shows when the calculated figure may be incorrect.
We have 12 entities. 1 entity holds 4.5%, 11 entities hold 0.09% each.
Aggregated result: 5.49% (4.5% + 11*0.09%)
Rapptr result: 4.5% correct result
We have 13 entities. 1 entity holds 4.5%, 12 entities hold 0.09% each
Aggregated result: 5.58% (4.5% + 12*0.09%) correct result
Rapptr result: 4.5%
In scenario 2, the total holdings from entities with <0.1% each are 1.08%. However, Rapptr does not factor in that part and still applies for the exemption.
Major: Japan - Diluted Denominator
When calculating the denominator, all Major: Japan rules require the total number of convertible instruments (which convert into unissued shares) held by an investment manager to be added to the total number of issued shares of an issuer. The Major: Japan - Diluted Denominator rule is used to calculate that additional part of the diluted denominator. Please note that the rule calculates the diluted denominator at the group level - therefore, if any group entity holds relevant convertibles, the denominator will be increased accordingly for all group entities.
In short, if a client holds shares and convertible instruments in a Japanese issuer, the Major: Japan - Diluted Denominator rule will ensure that the denominator for this issuer is increased accordingly.
The 1% lending rule
The introduction of the MajorJP-Lending and MajorJP-Lending-Prime rules in Oct 2019 rounds up our planned changes based on the May 2019 Aosphere memo. The memo suggests that lending of 1% or more is considered a material change. We have coded our rules to look at lent securities on an aggregated basis, and trigger a disclosure if there is a 1% or greater change in lent positions since the last disclosed value.
Please note: for the lending rules to work, both SRS and non-SRS rules have to be activated. Meaning you have 10 Major: Japan rules activated in total.
The illustrations below will explain how the two lending rules work alongside the existing rules.
Converting a Non-Disclosure Result into a Disclosure
Our Major: Japan rules have been updated to give clients the ability to convert any non-disclosure result into a disclosure alert. This new capability covers all Major rules, with the exception of the Major: Japan - Diluted Denominator and the Major: Japan - Lending - Prime rules.
In the context of our Major: Japan rules, this enhancement is especially valuable as the rule sets rely on swinging thresholds. Additionally, there exist various scenarios which require a disclosure, e.g. change of purpose of the holding or change of address of the joint holders, but are not covered by the Rapptr rule engine. For more detailed information, please refer to the aosphere memorandum on Japan.
When using the new functionality, it is absolutely crucial to convert to disclosure all results of all entities and all Major: Japan rules (with the exception of Major: Japan - Diluted Denominator and Major: Japan - Lending - Prime) for a given issuer for the day on which you wish to anchor a value, for a disclosure that was made outside of Rapptr.
As an aside, in certain circumstances where an entity has been fully sold out/dropped below 0.1% without triggering a disclosure, there will be no alert in Rapptr that can be converted into a disclosure. Since no assets are captured by the rule on that day, the engine does not calculate a holding and thus triggers no alert that is convertible.
Sold out/Below 0.1% Entity Limitation
We identified that the logic to re-anchor entity/lending positions might lead to incorrect disclosure triggers following this specific chain of events:
1. A disclosure is triggered for a given issuer at below 1% for Entity A
2. The position then becomes non-reportable in Entity A (due to a sellout or a drop to below 0.1%)
3. Subsequently, while the position is non-reportable in Entity A, a separate disclosure obligation occurs outside of Entity A, meaning that the latest public disclosure shows a position of 0 for Entity A
In this very specific case, Rapptr will continue to use the last disclosed value prior to the sellout/drop below 0.1% for Entity A as an anchor point for the 1% swinging threshold. This anchor value will remain in the system until a new disclosure is triggered while Entity A holds over 0.1%. However, in this scenario, the correct anchor value would be 0%.
This means that, theoretically, Entity A could cross the 1% swinging threshold by building up a position without triggering a disclosure in Rapptr. However, we would anticipate either another disclosure obligation to arise or the group level 1% threshold being reached first