FMI’s role in mitigating market risks

Yoshinobu Takeuchi

Chairman

Japan Securities Depository Center, Inc.

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i) 5 years passed since Lehman shock (2008)

ii) Sovereign risks in Europe (2010-)

iii) Asian currency crisis (1997-)

iv) Bust of economic bubble (1991-) and bank crisis (1997-) in Japan

- Common features -

i) risk in one sector -> risk in whole market

ii) discrepancy between real economy and financial world

<Lehman Shock>

1) financial engineering, twice leveraged, tremendous exposure

2) financial world is globally united

3) banking sector and capital markets are united (bank loan → derivative products)

<Agenda>

1) macroeconomic recovery

2) reestablishment of the global scheme to strengthen the macro prudence of

the market (G20, FSB)

1. Market booms & busts

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i) CPSS/IOSCO PFMI - risk management of CSD/FMI themselves

ii) Contribution to the macro prudence of the market

(1) CPSS/IOSCO PFMI

a) Structure

i) covering all FMIs (CSD, SSS, CCP, TR, PS), both cash & derivatives markets

ii) recommendation -> principles addressed to FMIs & authorities

iii) 24 principles, assessment, disclosure, recovery plan, resolution

b) Attention

i) As market infrastructures, we should follow the new standard

ii) different risks of each FMI, different development phase of each market

- “One size doesn’t fit all,” we should be based on reality

c) For Asia

i) positive attitude to the new global standard

ii) strengthen the structure through consultation with authorities & market players

iii) chance to boost up and progress markets as a whole

2. Agenda for CSD/FMI (1/3)

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(2) Contribution to the macro prudence of the market

a) Favorable position of CSDs in the market (compared to other FMIs)

i) The last stage of the transactions; legal status of investors and issuers are

determined at CSD, esp. in immobilized/dematerialized form

ii) CSDs are becoming data center of all the transactions, through:

- centralization of transactions to the monopolized CSDs

- matching system as a STP tool

iii) Network center of almost all the players in capital markets

iv) Golden age of CSDs (solid, the importance is recognized in the market)

2. Agenda for CSD/FMI (2/3)

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b) Information can be used for monitoring/surveying the market movements

i) Enhance the transparency of the markets

- boost confidence for investors

- TR is going to be introduced

- Information held in CSDs can be useful to monitor the market by regulators

ii) DTCC Deriv/SERV matching system was useful after the Lehman Shock

to clarify the complicated and unsettled transactions in one month thereafter

- They could perceive the credit risk situation of players

iii) Some CSDs (incl. Asia) with direct account holding structure can commit the

investor protection scheme in emergent situation (ex. intermediaries’ default)

iv) CSDs’ wider activities other than core business can offer the better situation

for mitigating the influence of issuers’ failure (=corporate actions)

2. Agenda for CSD/FMI (3/3)

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(1) Plaza for all the members, welcome new friends, wider and deeper cooperation

(2) In accordance with the Asian economies’ development

(3) Tie up with other stakeholders in each market

(4) Follow up with the movement of capital markets in Asia

- ABMI (ABMF, SF1/2, Cross-border Settlement Infrastructure Forum),

cross-border collateral usage, ASEAN Trading Link, bilateral/multilateral collaboration,

emerging markets, …

(5) More commitment to the global organizations and associations

- CPSS/IOSCO, WFC, AGC, ISSA, World Bank, IMF, SWIFT,…

3. Expectation for ACG

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◆ Market booms & busts experiences in Japan

1986-1991 “economic bubble” Nikkei225 historic high = 38957.44 (29 Dec ’89)

1991-2012 “lost two decade”

1991 JASDEC started its CSD business

◆ Reform of the securities clearing and settlement system

1999- Committee for Reform of the Securities Clearing and Settlement System

- comprehensive legislation for all types of securities (-2009)

- dematerialization (-2009)

- pre-settlement matching (2001-)

- DVP (2001- exchange trades, 2004- customer-side trades)

- CCP (2003- JSCC, 2004- JDCC, 2005- JGBCC)

-> Reform of clearing and settlement was almost completed when Lehman Shock in 2008

Appendix: Japanese experiences (1/2)

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◆ Ongoing efforts for risk mitigation after Lehman Shock

(1) shortening of settlement cycle (2012- T+2 for JGB)

(2) strengthen and utilize CCP (Oct 2013- Merger of JSCC & JGBCC)

(3) DVP for Stock Lending & Borrowing (2014- JASDEC & JDCC)

(4) ISO 20022 (2014- JASDEC, 2015- BOJ)

(5) mandatory clearing for OTC derivatives

(6) trade repository for OTC derivatives, etc.

◆ Toward the future

- Operational risks: international standards for STP

- Unsettled counterparty risks: shorten settlement cycles, risk management at CCP

- Transparent markets: utilize statistic data/information accumulated in CSD

- New links with other CSDs

Appendix: Japanese experiences (2/2)