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Clearing Amp Settlement
LCH.Clearnet moves to expand in Japan
From the Financial Times of Tue, 18 Nov 2014 11:31:42 GMT

LCH.Clearnet is working on an application to clear over-the-counter derivatives in Japan as it expands its Asian operations and exploits new global rules designed to curb systemic risk.

The European group wants to convert its “carveout status”– which does not allow it to clear for the domestic operations of Japanese companies, but only their international arms – into a full licence, say two people familiar with the matter. That would enable more Japanese companies and institutions to use its services.

It would allow LCH to clear yen-denominated swaps for local companies as economic uncertainty in Japan creates demand for tools to hedge against interest-rate and foreign exchange moves. LCH, the world’s largest clearer of interest rate swaps, has not yet formally submitted its application but plans are advanced, the people said, and it hopes to have the licence in the first quarter of next year. The company declined to comment.

The application follows European approval of Japanese clearing rules three weeks ago as equivalent as each jurisdiction implements a post-crisis G20 mandate to push more OTC trades through clearing houses. A clearing house stands between two parties in a deal, guaranteeing the trade in the event of a default.

Japan is one of the world’s largest markets for OTC derivatives trading. Mandatory clearing of deals conducted between brokers in Japan has been in effect for more than two years. The first stages of rules for clearing by institutional investors are set to come into effect on December 1.

Approval may herald increasing competition to clear OTC swaps in one of the world’s largest markets as Japan introduces the next tier of rules intended to toughen the market. At present LCH, majority-owned by the London Stock Exchange Group, has an exemption that allows international entities of Japanese companies to use LCH.

It would enable LCH to attack Japan Securities Clearing Corporation, the incumbent and sole clearer of swaps in the domestic market. Last month, JSCC said it had cleared more than Y1tn in notional value of yen-denominated instruments since October 2012 for both local and overseas banks. LCH has already cleared more than Y269bn ($2.5bn) in yen-denominated products this year, mainly in interest rate and basis swaps and largely from London. CME Group, the biggest clearer of interest rate swaps in the US, is also exploring an application for a full licence in Japan, the people said.

Similar approval in Australia more than two years ago has had a dramatic effect on the local market. LCH has grabbed market share from ASX, the local clearing house operator. It now clears more than a third of the overall swaps market and is widely used by many overseas banks as well as some local ones.

LCH and JSCC had explored creating links more than five years ago but talks foundered. JSCC is awaiting approval from European authorities for authorisation to clear derivatives.

Japan is a market well understood by Suneel Bakhshi, LCH’s chief executive, who was chief executive of Citigroup Global Markets Japan until his move in March this year.

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