Japan FSA Executive Summary on OTC Derivatives Regulation
On using electronic trading platform (ETP) for OTC derivatives markets
Purposes of establishing a framework in Japan
・To enable regulatory oversight on trades, including the price formation process.
・To contribute in stabilizing the markets during financial crises, through establishing a reliable method of trading based on defined set of rules.
・To enable improvement in market efficiency and increase in market participants through improvements in price transparency.
・To promote straight-through processing (STP), from execution through to settlement.
Overview of the proposed framework
・Parties included in this framework: In the first instance, those OTC derivatives dealers (Financial Instruments Business Operators – FIBOs) whose trading volume of eligible trades is significant (by notional outstanding and trading volume) will be subject to this framework, and the scope will be expanded as necessary.
・Eligible trades: Products that are sufficiently standardized, maintains adequate liquidity and cleared through CCP. In the first instance, Yen-denominated plain vanilla IRS is envisaged to be deemed eligible for ETP trades.
・Requirement for ETP operators: ETP operators will be required to register as Type I FIBO. To fulfill the regulatory objective, ETP operator will be required to record and disclose trade data to regulators and to the public, and to implement trading rules to ensure fair trading.
・Special rules for foreign ETP operators: A foreign ETP operator may operate in Japan without requiring registration as Type I FIBO, if it is regulated by the home-country regulator, and if a framework for cooperative oversight arrangement exists.
・Implementation: Considering the time required for both ETP operators and users, we intend to establish the framework without delay, but will provide certain period before implementation (circa three years)
On CCP clearing and trade reporting frameworks
・Building on the 2010 amended Financial Instruments and Exchanges Act which provided frameworks for CCP clearing and record keeping / reporting of trade data, Cabinet Ordinance will contain further details for these frameworks.
・For both these frameworks, implementation will take place progressively; in the first instance FIBOs will be the primary focus, reflecting their significant trade volumes and notional outstanding.