FMI

1
FMIs role in mitigating market risks

• Yoshinobu Takeuchi
• Chairman
• Japan Securities Depository Center, Inc.

2
1. Market booms busts

• 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 -gt risk in whole
  market
• ii) discrepancy between real economy and
  financial world
• ltLehman Shockgt
• 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)
• ltAgendagt
• 1) macroeconomic recovery
• 2) reestablishment of the global
  scheme to strengthen the macro prudence of
• the market (G20, FSB)

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

• 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 -gt 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 doesnt 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

4
2. Agenda for CSD/FMI (2/3)

• (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)

5
2. Agenda for CSD/FMI (3/3)

• 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)

6
3. Expectation for ACG

• (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,

7
Appendix Japanese experiences (1/2)

• 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)
• -gt Reform of clearing and settlement was
  almost completed when Lehman Shock in 2008

8
Appendix Japanese experiences (2/2)

• Ongoing efforts for risk mitigation after Lehman
  Shock
• (1) shortening of settlement cycle (2012-
  T2 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