Friday, January 22, 2010

Japan May Push Derivatives to Overseas Clearinghouses

Posted on Bloomberg by Yusuke Miyazawa and Takako Taniguchi:

Japan’s Financial Services Agency may demand that derivatives traders process over-the-counter transactions through overseas clearinghouses as it seeks to increase transparency and reduce risk in financial markets.

“There is a possibility of centralizing in foreign clearinghouses,” FSA Deputy Minister Kouhei Ohtsuka said in Tokyo yesterday. “Developing the infrastructure of the Japanese market further is important, but we want healthy development.”

The regulator is considering whether to centralize trading of popular derivatives such as interest-rate swaps in local clearinghouses, link domestic clearinghouses with foreign ones, or move clearing entirely to overseas houses, it said in notes distributed to reporters.

U.S. and European regulators are pushing the financial industry to improve safety in the OTC derivatives market after credit-default swaps were blamed for contributing to the collapse of Lehman Brothers Holdings Inc. and American International Group Inc. Some clearinghouses act as counterparties to every buy and sell order, reducing the risk that a trader defaults on his obligation in a deal.

The $605 trillion OTC derivatives industry needs a “major transformation” to increase transparency, Federal Reserve Bank of New York President William Dudley said Jan. 14. Derivatives are securities whose value is derived from underlying assets such as stocks, bonds, commodities or currencies.

Aiful Swaps

A Japanese committee of the International Swaps & Derivatives Association ruled on Dec. 30 that Aiful Corp. had a so-called credit event triggering credit-default swaps written on its debt when the consumer lender agreed to reschedule loan repayment to avoid bankruptcy.

The committee’s ruling ended a dispute that threatened to undermine confidence in Japan’s credit swaps market. It previously rejected three requests to determine a credit event occurred, citing a lack of publicly available information on which to make a judgment.

Japan’s FSA proposed on Dec. 17 that popular deals such as the Markit iTraxx Japan index be centralized in local clearinghouses that decide when Japanese companies have had credit events instead of the ISDA-backed panel.

Local clearinghouses should “participate properly” in the ruling of credit events, “respecting convention,” it said in yesterday’s statement.

‘Long Run’

“Trading through clearinghouses is positive to the market in the long run,” Seiichiro Matsumoto, a credit analyst at Mizuho Securities Co., said in a telephone interview today. “The biggest problem is the small number of participants. I am not sure if it increases if the government participates properly.”

Regional committees of 15 dealers and investors were formed in March to make binding decisions for most of the market on when provisions in the contracts are triggered. The committees must base their decisions on publicly available information such as regulatory filings, press releases and news articles.

The committee governing Japan’s swaps market includes Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc.

“There are some arguing if it’s fair that foreign participants decide the creditworthiness of Japanese companies,” said Matsumoto.

The regulator’s proposals will be submitted to the regular session of Japan’s parliament, or Diet, in March, Ohtsuka said.

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