Competition for Japanese CCP clients intensifies

The fight is on as SwapClear faces off to local CCPs over Japanese financial institutions

LCH.Clearnet's interest rate swaps clearing division, SwapClear, is pushing hard to secure Japanese banks as full members ahead of any possible co-operation with Japan's two prospective central counterparty (CCP) clearings.

The two local CCP initiatives are led by the Tokyo Stock Exchange (TSE) with its 86.3%-owned clearing arm, Japan Securities Clearing Corp (JSCC), and the Tokyo Futures Exchange (TFX). Both CCPs plan to go live next year, and have stated in reports released in the second quarter that they are ironing out detailed risk management issues with SwapClear, with an aim to link up with the London-based CCP for the clearing of interest rate swaps (IRSs). But the domestic initiatives being set up to move clearing risk from bilateral trades to a central hub funded by a number of member institutions, are also targeting the same Japanese institutions.

Joe Reilly, a director of SwapClear in London, says his company is in active dialogue with the Japanese regulators and buy-side investors in an effort to secure leading Japanese financial institutions as direct members of SwapClear. So far, Nomura, which joined SwapClear earlier this year, is the only full clearing member of SwapClear from Japan. "We are looking at different clearing models that are potentially attractive to players in Asia," says Reilly.

Asia Risk was told by a number of parties that several Japanese banks have applied to become clearing members of SwapClear, but SwapClear refuses to comment on this or about any dialogue with TSE-JSCC or TFX. CCPs are seen as an important mechanism to reduce counterparty risk to individual institutions, which became a significant concern after the collapse of Lehman Brothers last year.

Yen business currently accounts for 19% of all trades cleared through SwapClear, making it the third largest currency behind the US dollar and euro. But both TSE-JSCC and TFX say they believe a link with an overseas CCP such as SwapClear should mean Japanese banks in the future would only need to clear through a Japanese CCP, even if they are trading IRSs with foreign counterparties.

Takeshi Hirano, head of strategic planning at TSE's clearing and settlement department in Tokyo, tells Asia Risk the TSE-JSCC CCP would chiefly help Japanese banks to better manage their credit risks linked with foreign counterparties when trading IRSs. 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 IRSs for almost 10 years through its SwapClear division.

"We have to create a link between LCH.Clearnet and the (upcoming) Japanese CCP," says 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."

A similar view was expressed by Hirohiko Osawa, manager of the clearing planning group at TFX, who tells Asia Risk that "a Japanese clearing house is more useful than a foreign clearing house generally". He says a linkage with SwapClear is now being pursued as most major US and European market participants in IRS are already clearing through SwapClear.

TFX is majority owned by Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation, and it currently trades and clears listed short-term interest rate futures such as three-month, euro-yen futures.

Foreign banks that enter into IRS trades 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 at the Japanese unit. As a result, most Japanese banks that trade IRSs with foreign banks cannot have their contracts cleared through a CCP because many of them are not clearing members of SwapClear.

Atsushi Takahashi, executive officer and general manager of the derivatives production division of Mizuho Corporate Bank in Tokyo, says his team is currently considering becoming a clearing member to a CCP for its interest rate derivatives business due to the high volume of trades his bank turns over every year.

Mizuho Corporate Bank has yet to decide whether to join an offshore or local CCP, and Takahashi believes this is due to neither TSE-JSCC nor TFX having come up with more solid details about criteria for approving clearing members. For example, the levels of margin required and the amount of default fund contribution imposed on each clearing member remains unclear.

"The primary reason we want to join (a CCP as a clearing member) is that we want to address counterparty risk," says Takahashi. "But it's a catch-22 situation, because the counterparties we are dealing with may have not yet made up their minds also, and they might ask me, where would (Mizuho) clear its trades going forward?"

Georgina Lee.