The new regime will increase the reportable data elements, the number of reporting entities, and make event-based reporting to a trade repository mandatory.
Japan’s FSA (Financial Services Agency) is expected to finalise the data fields that will be required under its revised OTC derivatives reporting regime within the next few months.
Mandatory reporting of OTC derivatives transactions was among the G20 reforms introduced in response to the 2008 Global Financial Crisis.
Last month, the FSA published draft revisions to its reporting rules for OTC derivatives transactions. The consultation was open until 30 May 2022.
The revisions included requirements to report the UPI (unique product identifier) UTI (unique transaction identifier), and CDE (critical data elements), as prescribed by CPMI-IOSCO.
The LEI (legal entity identifier) is also being prescribed as a required data element, doing away with the current practice of using a SWIFT BIC Code as the identifier for trading counterparties in Japan.
During a recent industry meeting organised for trade associations and their members, the FSA said the intention of the rule changes was to create alignment with other jurisdictions, says Seiji Ryusekido, DTCC Managing Director and Representative Director of DTCC Data Repository (Japan) K.K.
To this end, the FSA has been carefully monitoring how other jurisdictions have been progressing efforts to achieve global harmonisation, including the adoption of CDE, UTI, UPI, LEI, and ISO 20022 as the data messaging standard.
“Cross-border trading is widespread in the OTC derivatives market, therefore the global standardisation of trade reporting data fields would be beneficial for data aggregation,” Ryusekido says. “It would also ease the burden of varying reporting obligations for market participants across multiple jurisdictions.”
Indeed, in its revisions, the FSA not only sought alignment with other APAC jurisdictions in relation to the data elements, but also in its implementation schedule, seeking to reducing the reporting burden for the FIs to the greatest extent possible.
The FSA set a 1 April 2024 implementation date for its full reporting requirements. This is the same date specified by ASIC (Australian Securities and Investments Commission) in its latest consultation on its own OTC derivatives reporting requirements.
The FSA’s rule changes largely focus on the adoption of standardised data elements, however a second key change has been to the way in which OTC derivatives transactions are reported.
Reporting cycle changes
To date, market participants in Japan have either been reporting OTC derivatives transactions to a trade repository or to the FSA itself. The new regime will make reporting to a trade repository a mandatory requirement for all market participants.
In addition, Japan will see a shift from weekly reporting to event-based reporting. According to Ryusekido, the reporting cycle change will mean that existing positions will need to be extracted from the FSA and transferred to a trade repository in XML format, while also accommodating the “significant” data field changes.
“The proposed rule changes will have significant impact on systems due to data field changes, as well as the need to convert reported data to XML format and backload existing positions in XML format,” Ryusekido says.
“For market participants who are currently reporting directly to the FSA, this is an even more significant undertaking involving system development to accommodate the reporting cycle changes.”
Ryusekido says the FSA has been hosting industry meetings since March 2021, with a focus on finalising the data fields so that they align with other jurisdictions and a “more meaningful reporting framework” can be established.
Last month, the FSA resumed engagement with its industry working group to finalise the data fields as well as create best practice guidelines, which will be subject to another public consultation sometime within the next few months.
According to Ryusekido, the new guidelines are expected to be similar to the CFTC’s Technical Specifications, describing the details of the data fields and other best practices for reporting.
The guidance will be needed given the significant increase in the number of trading counterparties that will be required to report OTC derivatives transactions under Japan’s new regime.
The FSA has set JPY 300 billion as the average notional threshold for mandatory reporting, however this threshold will not apply to the credit and equity asset classes.
“This means that if a firm trades in credit and equity derivatives, they must report to a trade repository regardless of threshold,” Ryusekido says.
To accommodate the expected increase in the number of entities that will need to report to its trade repository, DTCC has already been working on preparing its onboarding processes.
“Advance preparation will be key to ensuring a smooth and seamless implementation,” Ryusekido says. “Firms reporting to a trade repository for the first time will need to ensure that sufficient time is allocated for onboarding, connectivity testing and user acceptance testing.”
Firms should also start thinking about their processes for backloading existing outstanding derivatives positions, he adds.
“With firms having to comply with reporting obligations across multiple jurisdictions, and many of the rule changes coming into effect around the same time, early preparation will be needed to ensure readiness.”