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.”