08.14.2013
By Terry Flanagan

Japan Prepares for OTC Clearing Mandate

Japanese capital markets firms are gearing up for the transition to centrally cleared OTC derivatives transactions.

According to a survey on OTC clearing conducted by Calypso Technology at its recent Japanese Market Forum 2013 in Tokyo, 80% of respondents are working on achieving operational readiness for OTC clearing in Japan, and 20% are already operationally ready, even though it is not mandated.

It is expected that OTC client clearing will be mandated in 2014 in Japan, whereas in the United States, the majority of derivatives end users were required by the Dodd-Frank Act to clear OTC derivatives beginning June 10, 2013.

“OTC clearing can impose significant strains on existing derivatives systems,” said Sanela Hodzic, managing director, 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.”

Survey participants shared their concerns and plans to implement an OTC clearing infrastructure and strategy in Japan. Of note, 20% of the survey respondents are currently operationally ready for OTC clearing. More than 50% of those firms are actively searching for a new system to help them with operational compliance.

In contrast, more than 70% of derivatives end users in the U.S. and Europe state that operational challenges in OTC clearing are no longer the biggest sticking point, according to a report by research firm Finadium.

In the survey, over 50% of respondents revealed concerns that collateral management/collateral optimization will impact their business profitability once OTC client clearing becomes a reality. “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 Finadium.

Japan Securities Clearing Corporation (JSCC) began clearing CDS transactions and IRS transactions in July 2011 and October 2012, respectively, in line with global initiatives to improve market safety and transparency following the financial crisis. IRS transaction clearing volumes are steadily increasing; outstanding balances have reached over JPY 320 trillion, according to a report by JSCC.

The Japanese Market Forum featured an update from Takeshi Hirano, head of strategic planning at JSCC’s OTC Derivatives Clearing Service, on the current status of and future developments in Japanese clearing. The event featured a presentation on OTC clearing technology and a panel discussion moderated by Takehiro Hosomura, deputy director of the OTC Derivatives Clearing Service, with senior industry practitioners from both the buy-side and sell-side discussing the new requirements driven by OTC clearing.

Conference attendees were also polled on how they would select clearing brokers. The majority (61%) of respondents highlighted that breadth of services was the most important attribute when selecting a CCP partner. In terms of the most valuable clearing services, operational support around connectivity (46%) and risk and margin management (22%) topped the list.

“The survey confirms that the Japanese market is well aware of the client clearing challenges ahead. Clearing firms recognize the need to implement solutions to support new stringent compliance requirements such as the 60-second limit checking rule,” said Hodzic. “Calypso is breaking new ground in this space, ensuring that our clients around the world are equipped with the tools and processes they need to optimize collateral in light of new clearing requirements.”

Related articles

  1. PRI and signatories with $9.2 trillion AUM welcome the elevation of sustainability information to the same lev...

  2. Essentia analyses data to create behavorial “nudges” for fund managers' investment decisions.

  3. Corporate Bond Trading on the Rise

    With Adam Conn, Head of Trading, Baillie Gifford

  4. The partnership will develop suite of U.S.-listed, physically backed, digital asset ETFs.

  5. Corvil Deploys Real-Time Analytics

    The addition of Essentia behavioral analytics solutions is an extension of Northern Trust Whole Office.