Scope of Re-hypothecation Regulation (Report of Workshops (3))

Kazutoshi Sugimura, Masaru Itatani and Masaki Bessho
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Kazutoshi Sugimura: Bank of Japan
Masaru Itatani: Bank of Japan
Masaki Bessho: Bank of Japan

No 17-E-3, Bank of Japan Research Laboratory Series from Bank of Japan

Abstract: The margin requirements for non-cleared over-the-counter ("OTC") derivatives transactions are introduced in 2016 (pursuant to an international agreement by the G20 to reduce systemic risk from OTC derivatives) and restrict the re-hypothecation of initial margin collateral. While this restriction is introduced in order to protect client assets, there has been a concern that such restriction may have a negative impact on market liquidity. The Report of the Workshops on "Contemporary Financial Transactions and Their Regulatory Treatment" (2016) (the "Report") analyzes the appropriate scope of regulation in relation to the re-hypothecation of initial margin collateral. Japan implements this regulation in a manner compatible with the international agreement, and introduces a new trust scheme concept, which allows for the segregated management of collateral assets. The Report also analyzes the potential for the trust scheme, which could provide room for the re-hypothecation of securities and hence, mitigate the unintended negative impact on market liquidity, while ensuring harmonization with the international agreement.

Keywords: Re-hypothecation; Regulation (search for similar items in EconPapers)
JEL-codes: G19 G28 G33 K19 K22 K23 (search for similar items in EconPapers)
Date: 2017-03-15
New Economics Papers: this item is included in nep-rmg
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