The Tokyo Stock Exchange (TSE) is courting domestic financial institutions to become clearing members of its proposed central counterparty (CCP), which it is developing alongside its 86.3%-owned clearing arm, Japan Securities Clearing Corp (JSCC).
The TSE-JSCC initiative plans to set up the new CCP by the first half of 2010.
Takeshi Hirano, head of strategic planning at TSE's clearing and settlement department in Tokyo, told Asia Risk the CCP would chiefly help Japanese banks better manage their credit risks linked with foreign counterparties when trading interest rate swaps (IRS). This is because Japanese branches of foreign banks are already members of international clearing houses, such as LCH.Clearnet, which has offered clearing of vanilla IRS for almost 10 years through its SwapClear division.
"We have to create a linkage between LCH.Clearnet and the [upcoming] Japanese CCP," said Hirano. "Global clearing houses such as LCH.Clearnet would continue to clear for international banks [that do IRS deals with Japanese banks] while we will handle the Japanese side of clearing. [This] only involves us exchanging the balances, such as margin and mark-to-market money transfer, between the two clearing houses."
Foreign banks that enter into an IRS trade with local Japanese banks usually book the trades in the group's global book, so the contract is held by the foreign entity offshore instead of the Japanese unit. As a result, most Japanese banks that trade IRS with foreign banks cannot have their contracts cleared through a CCP because many of them are not clearing members of SwapClear.
By linking with SwapClear, Hirano said, Japanese banks could enjoy the benefits of over-the-counter clearing, such as reduced counterparty risk and more favourable regulatory capital requirements for cleared OTC derivatives.
The JSCC acts as the clearing house for all Japanese cash equities and the TSE's derivatives products.
Hirano said the TSE-JSCC formed a 16-member working group in May that plans to hold its first meeting on July 21 to discuss product development plans, margins levels and the amount of default funds required for each clearing member. The 16 members include foreign and local dealers plus interdealer broker GFI.
The TSE-JSCC initially plans to offer clearing of plain vanilla IRS denominated in yen, US dollars and euro, along with credit default swaps (CDS) on the iTraxx Japan main index. Single-name CDSs will be considered at a later stage.
The working group plans to meet five times before October this year. "I don't reject the possibility that in the future we might work together with Tokyo Financial Exchange (TFX); however, at this moment we are just focusing on our initiatives," said Hirano. TFX published the results of an investigation on setting up a separate CCP in April, saying it would pursue both CDS and IRS clearing, co-operating with SwapClear for IRS.
However, any new Japanese CCP would have to compete against offshore rivals. One bank, Nomura, joined SwapClear earlier this year, allowing its trades to be cleared directly through the London CCP without an intervening Japanese clearing house, and other Japanese banks have also applied to join.
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