Collateral Management Japan, 2016

Asia Risk’s Collateral Management Japan | 8 June 2016 | Shangri-La Hotel Tokyo

Collateral Management Japan 2016 Banner

Hopefully the irony of the following article regarding the delay in implementation of the European non-cleared margin rules will not be lost on those who attended the Collateral Management Japan conference: Europe set to delay variation margin regime

Collateral Management Japan 2016 Panel 3 Participants
Collateral Management Japan: How is the global OTC derivatives reform driving the Japanese market?

Collateral Management Japan 2016 Panel 3

Collateral Management Japan: Panel discussion

The Questions

  1. Margin for non-cleared derivatives is being phased in from September this year. From September 2016 the posting of initial margin is required by the largest financial institutions, with progressively more being added each September until 2020 when all but the smallest OTC counterparties will be included.  The exception is March 2017 when all counterparties will be required to exchange daily variation margin. Focusing on initial margin, how prepared is the market in Japan, how has the 9 month delay that has already been allowed effected attitudes and what do you see as the consequences of not being ready on time?
  2. Looking forwards to March next year, the short, regular VM settlement requirements are a significant challenge. Given that all counterparties will have to be able to value their own positions, handle disputes and both pay and receive margin, how do you see those challenges being overcome?  It is known that not all counterparties have ISDA Master Agreements and suitable CSAs executed between them, how big a task is getting them in place in time?
  3. Margin requirements are not just subject to Japanese rules but also to those of the counterparty’s jurisdiction.  What do you see as the key challenges and how do you see this added complexity being managed?
  4. Looking at this from a slightly different angle, with the introduction of non-cleared margin and the licensing of two additional CCPs in Japan (LCH and CME), although they are limited in the currencies they can currently clear, do you anticipate any changes in the market? In particular, the choice of counterparty and clearing venue due to collateral eligibility, concentration limits and so on? Are you seeing any migration from non-cleared OTC instruments to combinations of cleared instruments, even though their characteristics may not be a perfect match?
  5. Delays in MiFID 2 (The Markets in Financial Instruments Directive) were announced in February.  The regulations will now come into force in January 2018.  Although most of the RTS (regulatory technical standards/rules) relate to execution there are some related to post-trade.  Focusing on Japan, what have the effects been?
Collateral Management Japan: Panel discussion questions


  1. 清算されていないデリバティブの証拠金が、今年9月から段階的に導入されます。大手銀行は今年9月からイニシャル・マージン (IM) を支払わなければなりません。毎年9月に銀行の数が段階的に増え、2020年には小規模OTCカウンターパーティーほぼすべてが含まれるようになります。例外として2017年3月に、すべてのカウンターパーティーが日々の変動証拠金 (VM) のやりとりを行わなければなりません。IMや日本のマーケットがどの程度準備ができているかに注目した場合、すでに認められている9カ月の遅れは、どのように市場のやる気に影響を与えるのでしょうか?予定通りに準備が出来なかった場合、どのような結果がもたらされるのでしょうか?
  2. 来年3月、短期間、頻繁のVM決済の必要条件は大きなチャレンジを迎えます。すべてのカウンターパーティーが自身のポジションを評価し、紛争を処理し、証拠金の支払いも受け取りも両方できるようになった場合、これらのチャレンジはどのように克服されると思いますか?すべてのカウンターパーティーがISDA Master Agreements や適切なCSAの契約を結んでいるわけではありませんが、来年3月までにすべての契約が履行されるまで、どの程度の課題があるのでしょうか?
  3. 証拠金の必要条件は、日本の規則のみの対象となっているわけではなく、カウンターパーティーの管轄区域の規則の対象にもなっています。重要なチャレンジとして、どのようなものがありますか?
  4. 非清算証拠金が導入され、日本でLCH および CME の2つの新たなCCP が認可を受けました。LCHとCMEでは現在、清算できる通貨において限度がありますが、市場で今後何か変化が起こると思いますか?(特に、カウンターパーティーの選択やコラテラルの適格性による清算地、コンセントレーション・リミットなどについて)非清算OTC商品から特徴が完全に適合していないかもしれない清算商品の組み合わせへの移行はありますか?
  5. 金融商品市場指令 (MiFID) の遅延が2月に発表されました。規則は2018年1月に施行されます。規制技術基準 (RTS) のほとんどが施行に関連していますが、取引後に関連しているものもいくつかあります。日本に注目した場合、その効果はどのようなものですか?
Collateral Management Japan: Reception – Michael Steinbeck-Reeves, Greg Ballesty (SmartStream), Murodkhon Djaparov (BNY Mellon)

Full agenda for the day: Japan Collateral Forum Agenda

All photographs are copyright © Asia Risk with all rights reserved and are reproduced here with their kind permission.

Quotes and comments 3

Some quotes and comments in the second half of 2015

Dealers warn of hit to Asia from short margin transfer time

Author: Viren Vaghela
Source: Asia Risk | 18 Dec 2015
Categories: Regulation

Dealers warn of hit to Asia from short margin transfer time

SGX mothballs US dollar swap clearing

Author: Viren Vaghela
Source: Asia Risk | 17 Sep 2015
Categories: Derivatives

SGX Mothballs US Dollar Swap Clearing

Quotes and Comments 2

Some quotes and comments in the first half of 2015.


Source: Kinzai | 22 June 2015

 Kinzai 22 June 2015

Smooth operator: Japan looks to ease into electronic trading

Author: Aaron Woolner
Source: Asia Risk | 17 June 2015
Categories: Regulation

Smooth operator: Japan looks to ease into electronic trading

Low CCP compression rates in Japan vex foreign banks

Author: Viren Vaghela
Source: Asia Risk | 04 June 2015
Categories: Derivatives, Risk Management
Low CCP compression rates in Japan vex foreign banks

Japan is where ‘global’ regulation runs out of road

Jurisdictions may vary but the markets are international and regulation is effectively ‘global’, or is it? Perhaps.  Here in Japan, we have a different and significantly more nuanced perspective, which is reflective of other parts of the world.

What has been clear for some time is that the largely uncoordinated and rapid introduction of new laws and rules in the wake of the 2008 financial crisis and subsequent G20 Pittsburgh Summit has led to a range of unintended consequences.

The prevailing ‘one-size-fits-all’ mind-set is a classic example.  Take the CFTC guidance for the definition of a ‘US Person’, subsequently amended to meet non-US political and operational imperatives.  Even now, the US and EU are still wrangling over mutual recognition of CCPs.  But the headlines mask some more subtle, significant challenges in other jurisdictions, where market structure and culture differ from Europe and the US; one of these relates to swaps clearing, trade compression and leverage ratios.

Having been based in Tokyo for several years, I have lived with a domestic market quietly and effectively becoming the first in the world to be subjected to a clearing mandate for OTC interest rate swaps (November 2012).  Since then, Japan has certainly not stood still.  Nor has it allowed itself to be consumed by prevailing financial forces or dominated by the same concerns – at least not in the same way.  While foreign banks are considerably exercised over leverage ratios under Basel III (an arguably artificial measure which has little bearing on the riskiness of a portfolio, based on the gross notional of outstanding swaps positions) Japanese banks simply do not have the same view.  For them, leverage ratios figure on a distant horizon, of little immediate importance.  Given substantial capital reserves, there is certainly no business incentive to be overly concerned in the short term.

One effect of this removed philosophy is that techniques that are both valuable and urgent to ‘foreign’ market participants here are of far lower priority to home players.  Where the regulatory worlds collide over the imperative to reduce leverage ratios this can be particularly apparent, nowhere more so than when it comes to the volume of swaps portfolios (cleared or uncleared) participating in risk-free netting and compressions.  Typically risk free netting allows the consolidation of trades with identical economic profiles, previously held as separate outstanding contracts, into a single contract. The process is not mandatory and participants can choose which trades to net.  Compression by contrast is a multi-organisational process with all participating members and clients agreeing which trades in their portfolios are eligible, along with their risk and other tolerances.  The compression is normally finalised before the beginning of business on the morning of the compression day, with the Members’ and Clients’ positions being communicated back to them for updating in their systems, an operationally intensive process.

This is where international financial markets receive the reality check of national difference. The structure of the market in Japan is very different from those in the US and Europe; it is dominated by a small number of very large domestic swap dealers, trading with the foreign banks and a large number of smaller domestic institutions.  The underlying market tends to be highly directional, with the majority of the Japanese banks in one direction and their foreign bank counterparts the other.

Even this tells only a partial story. There are arguments that hedge accounting makes compression ineffective for qualifying trades, particularly in a directional portfolio, but there may still be significant benefits where adjacent tenor buckets can be offset or regular adjustment to hedges creates a large number of offsetting trades.  The question of how easily auditors can be convinced that a compressed portfolio with a similar risk and payment profile meets hedge accounting standards still remains.

What is certain is that the current situation which has the potential to increase risk in Japan will manifest in other jurisdictions.  From a purely Japanese perspective, the recently demonstrated limited participation in compressions by the Japanese banks is adding risk to JSCC’s default management process.  Internationally we should all be taking notice. Inevitably, as time passes there will also be an increasing number of incompressible trades in foreign banks’ portfolios (as the CCP must always stay flat, an economically identical, corresponding trade is needed for that trade to be included).  Should a foreign bank default, its portfolio will be auctioned off.  But if that portfolio consists of uncompressed trades with a large notional principal, it may be of such a size that no bank with concerns over leverage ratios would be safely able to bid on it. Even those who could bid would discount their bid to account for the impact on their leverage ratio.  Worse still, even if the regulators were to allow some short-term rule relaxation to help stabilise the market, it still might not be possible to sufficiently reduce the gross notional of the portfolio at a later date.

In such circumstances, during a time of financial crisis, the consequences could be that foreign banks would have a significantly worse view of the value of another foreign bank’s portfolio in a default auction, making their bids less competitive or even below the “one cent” level, particularly given that they are likely to be simultaneously bidding for a number of other default portfolios across multiple jurisdictions and time zones.

So, what is the solution?  Of course all this may be a temporary blip in the Japanese market due to the staggered phasing-in of leverage ratio rules.  If however, it is down to the structure of the Japanese banks then both here and in other similar jurisdictions worldwide, we will need additional incentives, beyond the leverage ratio, to change behaviour.  As markets wake up to the implications, we may well see a “premium”, impacting all participants in affected markets.

Published on: DerivSource 27 May 2015

Published on: Tabb Forum 01 June 2015