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Wednesday, 14 November 2018

Japan goes live with swaps trading mandate

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New rules requiring over-the-counter derivatives to be executed on registered exchange-like platforms went live today in Japan, making it the first jurisdiction in the Asia-Pacific region to implement swaps trading commitments that global leaders signed in 2009 at the G20 summit in Pittsburgh.

Under new regulations from Japan’s Financial Services Agency, Japanese yen interest swaps in five-, seven- and 10-year maturities that are transacted between large financial counterparties must be traded on electronic platforms and publicly reported to data repositories.

Tradeweb, which extended its electronic swaps trading platform to include yen swaps in 2008, has been granted an electronic trading platform licence by Japan’s FSA and completed its first yen interest rate swaps trade under the new mandatory trading rules on Tuesday.

“The market has been preparing for the derivatives trading mandate in Japan for some time now, and there has been a trend toward electronic trading even before the regulations became effective,” said Andrew Bernard, managing director and head of Asia at Tradeweb.

Prior to the new rules coming into effect, Tradeweb attracted 18 dealers to the ETP, offering trading on a request-for-quote basis or via an order book. It can also be used to book voice transactions above block size.

Many have been attracted to electronic trading ahead of the mandate by the post-trade processing and reporting efficiencies that can be achieved. Trade details are sent for clearing at the Japan Securities Clearing Corporation in real time and trades can be reported on InSite, Tradeweb’s data publication portal.

“To make it as easy as possible for our clients to comply with the new regulations, we’ve designed our ETP to provide an effective solution for trading, processing and reporting yen-swap transactions. Banks using the platform also benefit from greater efficiency and risk reduction in their trading functions,” said Bernard.

Just over a year ago, the platform saw the first electronically-traded and cleared yen swap transaction by a Japanese bank.

Others brokers have expanded their Asian capabilities ahead of the mandate. Interdealer broker, BGC Partners, added yen interest rate swaps to its BGC Trader proprietary platform earlier this year.

Speed over scope

Dealer-to-dealer platforms are likely to see a bigger impact from new rules than dealer-to-client models as the mandate applies only to trades between financial firms with outstanding swaps notional of ¥6trn (US$50bn).

That may limit the number of trades in the US$46trn-equivalent yen swaps market that are caught in the regulatory net, but the narrow scope has been crucial in enabling the country to leapfrog European authorities in implementing new derivatives rules.

Europe’s e-trading mandate, which forms part of Mifid II, will not take hold until January 2017 and market participants increasingly view that as an ambitious deadline given that the swaps clearing mandate will not take effect for the first wave of clients until April 2016. By contrast, the US surged ahead with trading on newly created swap execution facilities becoming mandatory for the most standard swaps and the largest counterparties from February 2014.

Market participants believe that Japan’s mandate will closely follow the path set in the US, where additional client groups are phased into new regulations, although the FSA has yet to announce any extension to the initial wave.

Mandatory clearing for Japanese interest rate swaps has, however, begun to expand. The clearing obligation went live in 2012 for the largest firms and was subsequently extended to the first phase of clients in December 2014 after JSCC added client clearing capabilities to its platform.

The clearinghouse, which is the only domestic provider of clearing services for yen swaps, has open interest of ¥1,111trn outstanding in the instruments, while LCH.Clearnet has ¥1,717trn of notional outstanding through its Swapclear service.

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