Isda changes Japan credit derivatives documentation

Japan’s credit derivatives dealers have opted to drop ‘obligation acceleration’ and ‘repudiation/moratorium’ from the list of credit events for standard credit default swap transactions, bringing Japan in line with the European and US credit derivatives markets.

The move by the International Swaps and Derivatives Association’s (Isda) Japan Credit Derivatives Working Committee will come into effect on August 12. Following the changes, the list of credit events for standard credit derivatives transactions will comprise ‘bankruptcy’, ‘failure to pay’ and ‘restructuring’.

Trade association Isda decided to drop obligation acceleration and rupudiation/moratorium in Europe last April. But while there have been calls to follow suit in Japan, there had been concern that credit derivatives transactions without obligation acceleration would not qualify for regulatory capital relief under current Japanese regulations.

But Japan’s regulator, the Financial Services Agency, and the central bank, the Bank of Japan, recently confirmed that the elimination of the two credit events would not lead to unfavourable regulatory capital treatment, Nobukazu Saeki, Tokyo-based manager of derivatives and structured products at Bank of Tokyo-Mitsubishi, and co-chair of Isda’s Japan Credit Derivatives Committee, told RiskNews. As such, the decision to eliminate them from the list of credit events was taken at last week’s Isda Working Group Committee meeting, Saeki said.

Obligation acceleration is where one or more obligations of the reference entity become due and payable before maturity as a result of a default. Repudiation/moratorium is where a reference entity either refuses to honour its obligations, or is prevented from making a payment because of a sovereign debt moratorium.