market's new settlement system due to start next month.
Many market players said the funds' activity pushed some market participants to the verge of failing to deliver necessary cash JGBs at settlement, which has never before happened.
Failure to deliver bonds is strictly forbidden in Japan's settlement system, unlike many other countries where failure is overlooked if a fine is paid. The hedge funds' activity centred around the September JGB futures and the cheapest cash JGBs deliverable against the September contract, namely the 161st and the 163rd 10-year JGBs. Cash delivery for the September is due on Friday.
A record 2.3519 trillion yen ($21.5 billion) worth of the September contract is due for settlement through delivery of cash JGBs, according to the Tokyo Stock Exchange (TSE).
Some said those funds would receive about 1.8 trillion yen ($16.5 billion) worth or about three-fourths of the total JGBs to be delivered.
Many traders said CS First Boston Ltd seems to be receiving much of the cash delivery against the September contract, trading on behalf of the hedge funds. One official at CS First Boston said he was aware of such market talk but declined to comment, citing client confidentiality.