Japan gears up for OTC derivatives clearing in 2014
Financial services firms in Japan are taking early steps to prepare for new rules on OTC derivatives, according to a new survey carried out by fintech company Calypso in Tokyo.
The survey revealed that some 20% of respondents are already operationally ready for OTC clearing in Japan even before the mandate takes effect next year. The remainder are still working on their preparations, with 50% actively searching for a new system to help with operational compliance. The results were taken from the 130 attendees of Calypso’s Japanese Market Forum 2013, consisting of Japanese banks, brokers, asset managers, insurance companies and financial services firms.
OTC client clearing is due to be mandated in 2014 in Japan, although no set date has yet been finalised. The reforms are part of the G20 agenda decided in 2009, in which member countries agreed to reform OTC derivatives trading to reduce systemic risk in financial markets. Clearing at CCPs will require firms to set aside margin and collateral against the risk of a trade going wrong, thus largely removing counterparty risk and, in theory, stabilising the system.
However, the survey found that more than half of respondents in Japan were concerned that collateral management and collateral optimisation needs would impact their business profitability. Critics of the regulation drive argue that regulators are restricting consumer choice, imposing excessive cost on the industry, and making it difficult for customised products to remain viable.
“The urgency of collateral management is felt more gradually than the need to clear trades, as underlying investors and portfolio managers begin to see the direct cost of collateral impacts to their returns,” said Josh Galper, managing principal at financial consultancy Finadium.
Similar reforms are already being implemented under the Dodd-Frank act in the US, where June was the deadline, and in Europe, where EMIR obligations take effect in phases over the next two years.
“OTC clearing can impose significant strains on existing derivatives systems,” said Sanela Hodzic, head of strategy and marketing at Calypso Technology. “It’s a paradigm shift in derivatives management. Firms have to develop new processes and technology for managing connectivity, margining, collateral management and regulatory reporting requirements.”