Isda AGM: Japanese derivatives slowdown due to poor health of financial intermediaries, says Broadman

Japan’s derivatives market has been steadily contracting over the last four years, in direct contrast to a growth in volumes globally. While interest rate derivatives volumes have grown by around 20% per year globally over the last four years, the Japanese market has grown by only 4% over the same period. At the same time, foreign exchange derivatives volumes have declined by 1% per year on a global basis, but have shrunk by 13% per year in Japan; while global equity derivatives volumes have grown by 14% per year, but have declined by 16% per year in Japan. Meanwhile, credit derivatives have grown by 40% per year over the last two years globally, but have grown only 3% in Japan.

While the decline in volumes can be attributed to a number of factors, including low interest rate volatility, tumbling equity markets and the strict regulatory environment in Japan, a key factor has been the deterioration in the health of the country’s financial intermediaries following the decade-long recession in Japan, said Broadman.

“It would appear that a derivatives market cannot easily sustain growth while these institutions are in stress. Part of it may be explained by counterparty risk, although collateral agreements go a long way towards mitigating that problem. Part of it may be explained by the diminished risk appetite of the large banks. Perhaps it is less capacity for the necessary technology investments, or perhaps it is as simple as management distraction or key staff attrition,” he said. “Whatever the cause, derivatives professionals have a shared interest in the recovery of Japan’s economy and its financial institutions.”