The Depository Trust & Clearing Corporation (DTCC) has received approval from the Financial Services Agency of Japan (J-FSA) to set up a Japanese over-the-counter (OTC) derivatives trade repository.
The service will be up and running ahead of the J-FSA’s 1 April deadline for market participants in Japan to begin reporting their OTC derivatives transactions directly to regulators or to a third-party trade repository.
The Japanese rules are in-line with the new global rules that are only now coming into effect after the 2008 financial crisis to effectively force OTC trading ‘on exchange’ via a central clearing mechanism or repository, thereby increasing transparency and improving the ability to unwind trades in the event of another cataclysmic failure like Lehman Brothers.
The first US Commodity Futures Trading Commission (CFTC) mandate to centrally clear OTC derivatives came into play yesterday on 11 March. The European Union is also enforcing similar rules in accordance with the G20’s wishes to see centralised OTC clearing, forcing Euroclear, ClearStream and other clearing houses to increase their collateral and revise their business models and offerings. This is at the same time as the investment banking industry itself is facing a collateral scarcity gap, according to the International Capital Market Association’s (ICMA), leading to solutions like the Euroclear ‘collateral highway’ which has recently signed up Citi and BNP Paribas. The Target2-Securities (TS2) single settlement engine for securities, being insisted upon by the European Central Bank (ECB) for November 2016, will also have a significant impact on Euroclear and ClearStream, prompting further change in the ecosystem of the traditional financial markets.
New Japanese DTCC OTC Derivatives Trade Repository
Based in Tokyo and operated by the company’s DTCC Data Repository (Japan) KK (DDRJ) subsidiary, the new centralised service in Japan will be the first ever trade repository to be approved and established in the country. DDRJ will support trade reporting across four major OTC derivatives asset classes when it goes live this month, covering credit, equities, interest rates, and foreign exchange (FX). The DDRJ subsidiary will also operate a client support office in Japan to help participants in the Japanese financial markets to comply with all current and future regulatory requirements.
The new service uses the same messaging and software capabilities as DTCC’s currently operating repository services in Europe and the US ensuring consistency in the data accessed by regulators in addition to helping DTCC’s global client base avoid duplicative costs as they comply with the aforementioned global reporting requirements in multiple jurisdictions across the globe.
“DTCC is pleased to be able to deliver to regulatory authorities and market participants in Japan a comprehensive, robust trade repository that brings greater transparency and risk mitigation to the OTC derivatives markets,” said Michael Bodson, chief executive officer (CEO) of DTCC. “We are committed to working with supervisors to promote a safer environment for OTC derivatives trading, as well as helping our clients in Japan and worldwide meet their reporting obligations.”
According to Keiko Fukuda, executive director at Morgan Stanley MUFG Securities Co. Ltd., and a volume users of OTC trade services: “It is critical that there is a strong infrastructure in place that provides market participants with the ability to submit trades for regulatory supervision in a seamless and cost-efficient manner. The launch of a Japanese trade repository is a significant and welcome development for facilitating effective OTC derivatives trade reporting.”
Stewart Macbeth, president and CEO of DTCC’s Deriv/SERV subsidiary, which is focused on OTC derivatives trading is also keen, commenting: “DTCC is focused on providing regulators and our clients in Japan with the guidance and services they need locally, particularly now that reporting requirements are beginning to take hold in this market.”