Japan: Japanese Variation Margin Requirements For Derivatives Take Effect

In Short

The Situation: The Financial Services Agency of Japan has introduced an amending ordinance regarding margin requirements for over-the-counter derivatives transactions.

The Result: Certain financial entities not based in Japan and entering into over-the-counter derivatives transactions with Japanese financial institutions may be subject to new collateral requirements.

Looking Ahead: Similar collateral requirements have been introduced in other jurisdictions. Participants in these transactions should remain alert for new mandates that could affect them.


Following the Basel Committee on Banking Supervision and the International Organization of Securities Commissions' March 18, 2015, release of revisions to the framework for margin requirements for non-centrally cleared derivatives, the Financial Services Agency of Japan ("FSA") issued an amending ordinance regarding the margin requirements for derivatives transactions on March 31, 2016 ("Amending Ordinance"). Beginning on March 1, 2017, non-Japanese entities that entered into over-the-counter ("OTC") derivatives transactions with Japanese financial institutions may be required to provide collateral to cover their marked-to-market exposure in certain transactions. Although the Amending Ordinance also sets out other requirements, including those for initial margin, this Commentary focuses on the variation margin requirements for non-Japanese entities.

Background

The Japanese margin regulations applicable to OTC derivative transactions are mainly prescribed in the Financial Instruments and Exchange Act (Act No. 25 of 1948, as amended, "FIEA") and its ordinances. The FIEA sets out licensing requirements for securities-related and/or derivative-related businesses conducted in Japan or for the benefit of any resident of Japan by Japanese and non-Japanese firms. The FIEA also regulates the conduct of financial service providers who hold such license. Under the FIEA, there are two defined types of provider—a financial service provider ("FSP") and a registered financial institution ("RFI"). The Japanese margin regulations primarily target FSPs and RFIs only.

Margin Regulations

Certain FSPs and RFIs are subject to margin requirements under the FIEA and the Cabinet Office Ordinance on Financial Instruments Business, etc. ("Business Ordinance"). Those margin requirements are applicable only to OTC derivative transactions not cleared through a Japanese licensed clearing organization, a non-Japanese clearing organization holding a Japanese license, or a non-Japanese clearing organization designated by the Japanese regulator. As shown below, certain non-Japanese entities would be indirectly affected by these regulations.

Applicability to Non-Japanese Entities

The Japanese variation margin regulations apply only to transactions between a Japanese entity and a non-Japanese entity if the following three conditions are met:

  1. An average aggregate notional amount of OTC derivative transactions (including centrally cleared transactions) entered into by a non-Japanese entity is not less than 300 billion Japanese yen;
  2. The Japanese counterparty is either: (i) an FSP that has a license for Type I Financial Instruments Business or (ii) one of the banks—Shoko Chukin Bank, Development Bank of Japan, Shinkin Central Bank, Norin Chukin Bank—or insurance companies that are RFIs ("Covered FSP"); and
  3. An average aggregate notional amount of OTC derivative transactions entered into by the Japanese counterparty (limited to OTC derivative transactions subject to mandatory clearing or reporting obligations, but excluding those made in trust accounts) is not less than 300 billion Japanese yen.

The average aggregate notional amount referred in conditions (1) and (3) above is:

  • In December, an average of the amount at the end of each month from April of the immediately preceding year to March of that year, or
  • In January to November, an average of the amount at the end of each month from April of the second preceding year to March of the immediately preceding year.

In this case, the Covered FSP is obliged by the FIEA and the Business Ordinance to request the non-Japanese entity to post or collect collateral for the applicable variation margin. Therefore, the non-Japanese entity may be required to follow the Japanese variation margin requirements to the extent necessary for the Japanese counterparty's compliance with the regulations.

Where the Japanese variation margin requirements are applicable, the Japanese counterparty must: (i) calculate its exposure against the non-Japanese entity on daily basis; (ii) request the non-Japanese entity to post or collect applicable margin collateral subject to the minimum transfer amount (70 million Japanese yen or less); (iii) receive such collaterals without delay; and (iv) accept similar requests made by the non-Japanese entity. The Japanese counterparty, at its discretion, may include certain other types of derivative or other transactions into the calculation of variation margin to the extent that such inclusion will be maintained on a continuous basis.

Eligible Collateral

The Business Ordinance and relevant public notices listed a number of eligible collateral, including cash, governmental bonds, bonds issued by certain international institutions, certain corporate bonds with high ratings, certain equities, and certain investment trusts. Each category of collateral is subject to a haircut ratio that varies based upon its maturity and issuer.

Government Guideline on Margin Requirements

Notwithstanding the above regulations, according to the government guideline issued by FSA, FSPs and RFIs may be required by FSA, on a discretionary basis, to request their financial institution counterparty to post and collect appropriate margin collateral, even if the relevant transactions do not meet the conditions mentioned above. Consequently, although this guideline is not applicable to a non-Japanese entity, a non-Japanese entity may be required to post or collect margin collateral by the Japanese counterparty in order that the Japanese counterparty can comply with this government guideline.

Documentation

ISDA has identified various credit support documents to address the variation margin requirement (including regulatory margin self-disclosure letters). Each participant should carefully consider which form is best suited for its document management.

Looking Forward

From this March, similar variation margin requirements have been introduced globally, including the European Market Infrastructure Regulations (see " EMIR Variation Margin Rules Effective March 1, 2017," Jones Day Commentary, February 2017). Entities entered into OTC derivatives transactions are encouraged to pay attention if they are subject to any of the variation margin requirements.


Four Key Takeaways

  • This Commentary addresses only the variation margin requirements for entities not based in Japan.
  • The margin regulations and collateral requirements apply only where certain conditions are met.
  • Eligible collateral includes cash, governmental bonds, bonds issued by certain international institutions, certain corporate bonds with high ratings, certain equities, and certain investment trusts.
  • ISDA has identified a number of support documents to substantiate that variation margin requirements are met.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions