Non-Cleared Derivatives Rules Criticised Again

Risk Magazine reports that the EU draft regulatory technical standards (RTS) on risk-mitigation techniques for OTC derivative contracts not cleared by a CCP, published in April 2014 (see this blog post for more detail) may mean that Japanese firms increasingly avoid trading with EU counterparties.  Apparently, the trigger is the concentration limit within the RTS which restricts the value of securities issued by a single name to a maximum of 50% of the collateral collected from a counterparty.  This effect of this will be felt particularly acutely in Japan due to the relatively small size of the Japanese corporate bond market when compared to the size of the Japanese government bond market.  Risk cites data provided by the Asian Development bank which suggests that just 9% of the Japanese bond market is comprised of corporate bonds, as compared to 27% in the US.

Equally noteworthy, but almost relegated to the status of a footnote at the end of the article, is a paragraph which notes that the concentration limits rule may also have implications for future equivalence decisions between Japan and the EU – equivalence constituting a pre-requisite for those wishing to avoid the potential of dual regulation of cross-border trading and more penal risk weightings under CRD IV.