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

Author

Listed:
  • Kazutoshi Sugimura

    (Bank of Japan)

  • Masaru Itatani

    (Bank of Japan)

  • Masaki Bessho

    (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.

Suggested Citation

  • Kazutoshi Sugimura & Masaru Itatani & Masaki Bessho, 2017. "Scope of Re-hypothecation Regulation (Report of Workshops (3))," Bank of Japan Research Laboratory Series 17-E-3, Bank of Japan.
    • Handle: RePEc:boj:bojlab:lab17e03
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    More about this item

    Keywords

    Re-hypothecation; Regulation;

    JEL classification:

    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K19 - Law and Economics - - Basic Areas of Law - - - Other
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law

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