Tokyo Stock Exchange, Inc. (TSE), Japan Securities Clearing Corporation (JSCC) and Japan Securities Depositary Center, Inc. (JASDEC) have simultaneously published a report by a working group they set up to help develop the OTC derivatives market in Japan. The group concentrated mostly on interest rate swap trading and Credit Default Swap (CDS) trading, due to their large volume of transactions among Japanese financial institutions. The report is a summary of discussions the group held during seven sessions between October 2, 2008, and March 27, 2009.
According to the report, between December 2004 and December 2008, interest-rate trading grew by 1.7 times and CDS trading grew by 7.9 times in Japan. Against this background, the working group aims to improve the security, transparency and efficiency of OTC derivatives trading, particularly in light of the difficulties many institutions have faced due to the effects of the subprime problem. More specifically, in terms of clearing and settlement, the report identifies counterparty risk management, the management of collateral and the transfer of funds in connection with interest payments as areas in need of improvement.
The report recommends the introduction of central counterparty (CCP) functions for both interest-rate swaps and CDS trading, in order to improve areas such as cash management efficiency and counterparty risk management. The CCP function of SwapClear, which is run by LCH.Clearnet (a UK-based independent central counterparty group formed in 2003 in a merger between London Clearing House and Clearnet SA) is commonly used in Japan for interest rate swap trading by foreign financial institutions. Because of this, the report suggests that, if a clearing institution is introduced in Japan, it should be established with the cooperation of LCH.Clearnet .
The report indicates that the working group will try to facilitate exchanges of opinions in order for the implementation plans to be consistent with participants’ business operations. However, the report doesn’t specify how wide the group will now cast its net in gathering opinions on the process.
For a detailed summary of the report and a draft outline of clearing operations for OTC derivatives, please click here.
D.C.