Choosing the Booking Entity | Derivatives Compass

Booking is the decision, made by a financial group with several legal entities, of which entity's books will carry a trade with a client or other counterparty. Licences, regulatory capital, tax, and contracts with counterparties differ by entity, so the entity that carries the trade changes how the trade is treated.

This is the background for checking how credit exposure and netting change depending on which entity carries a trade, and for comparing a foreign bank's branch in Japan with its subsidiary.

The sales entity and the booking entity

When a financial group with several legal entities enters into a trade with a client, it decides which entity's books will carry the trade. This is called booking (deciding which legal entity's books carry a trade). It has a different meaning from trade capture, which is recording an executed trade in a system. In 2016, the Financial Services Agency (FSA) published its responses to public comments on the margin rules, and they include the phrase "intragroup booking strategy" for the purpose of moving trades between companies in a group¹.

The sales entity deals with the client, and the booking entity carries the trade in its books. They can be the same entity, and they can also be different entities.

According to the 1998 examination manual of the US Federal Reserve Board (the examination manual), some financial institutions move positions between entities so that they can manage risk by product or by regional market². The Financial Stability Board's materials also mention trades made on the same terms within a group to move risk to another entity (back-to-back trades)³.

Why entities are separated, and the constraints

Licences, regulation, tax, and other treatment differ by entity. The table lists the reasons that the sources confirm.

Reason	Link to the entity
Business licences and registration	In Japan, banking requires a licence and financial instruments business requires registration⁴
Regulatory capital	The Japanese capital adequacy notice has chapters setting a standalone bank ratio, separate from the consolidated ratio⁵
Local rules	The US rule generally places the US subsidiaries of a large foreign banking organization under an intermediate holding company, with capital and liquidity requirements⁶
Tax	The Japanese Corporation Tax Act separates domestic corporations from foreign corporations (a Japanese branch is a permanent establishment) in tax liability and in how the taxable base is set⁷
Treatment in failure and recovery	Recovery and resolution call for information at both the group level and the entity level, and also contemplate separating individual entities from the group⁸

Business licences and registration narrow, product by product, the entities that can carry a trade. The Financial Instruments and Exchange Act (FIEA) prohibits a Japanese bank from conducting securities-related business, with exceptions⁹.

The Banking Act lists, among a bank's ancillary businesses, securities-related derivatives transactions that are conducted for investment purposes and acts of brokerage by written order of such transactions. In other items, it lists some securities-related over-the-counter derivatives transactions and their intermediation, brokerage, and agency¹⁰. A bank may also have a subsidiary that is a securities specialist company engaged solely in securities-related business¹¹. These provisions suggest that what a bank may conduct differs between a trade whose underlying is a security and a trade in interest rates or currencies. The entities that can carry them may differ as well. Which entity can carry an individual trade has to be checked trade by trade.

The examination manual makes a similar point. A risk at one entity of the group can be offset by an opposite position at another related entity only where the law allows it, and it must be done in a way that fits the authority granted to each entity. Some entities may not hold, trade, deal in, or underwrite certain financial instruments without regulatory approval¹².

A foreign bank's Japanese branch and subsidiary

Even for the same foreign bank, a branch in Japan and a subsidiary in Japan are positioned differently. A branch is part of the foreign bank, and a subsidiary is a separate entity.

A foreign bank's branch is positioned as directly subordinate to its head office abroad, which the Japanese Banking Act and related laws do not reach¹³. When a foreign bank conducts banking business in Japan, the Banking Act has it designate a principal branch as its base in Japan and obtain a licence. The Japanese branches are treated together as one bank, and the Act's provisions apply to them, except for some of them¹⁴.

As an example of how the role of a branch is examined, the FSA's supervisory guidelines for major banks cover the supervision of foreign bank branches. If the branch that screens credit and executes trades differs from the branch that manages the trades as the accounting branch, they check whether the function and role of each are clear¹⁵. The FSA's Q&A on foreign bank agency business (revised in June 2019) addresses a foreign bank's Japan-based office that invests and raises yen funds. If the booking of those transactions is merely made at an overseas office that manages funds centrally, the substance may be assessed as business of the Japan-based office¹⁶.

In the US, the counterparty entity can be the foreign bank itself even in a trade made through a branch. When a firm trades with a foreign bank that has a US branch, the counterparty entity is generally the foreign bank itself. The examination manual of September 2002 cites states, such as New York, that have enacted laws providing for separate liquidation of the branches of uninsured foreign banks¹⁷.

Tax is separated by the Japanese Corporation Tax Act. A domestic corporation with its head office in Japan is liable for corporation tax. A foreign corporation is liable when it has domestic-source income, among other cases. For a foreign corporation with a permanent establishment, the domestic-source income attributable to the permanent establishment is taxed. That income is calculated by considering, among other things, the functions the permanent establishment would perform and the assets it would use if it were an independent enterprise, and internal transactions with the head office and others⁷.

Putting these differences side by side for a branch in Japan and a subsidiary with its head office in Japan gives the following¹⁸.

Point	Branch in Japan	Subsidiary with its head office in Japan
Position as an entity	Part of the foreign bank (directly subordinate to the head office abroad)	A separate entity
Banking Act	The Japanese branches are treated together as one bank, and the provisions apply except for some of them	Not covered on this page
Corporation Tax Act	Treated as a permanent establishment of a foreign corporation; the domestic-source income attributable to the permanent establishment is taxed	Liable for corporation tax as a domestic corporation with its head office in Japan

Credit, netting, and collateral

This section assumes that the entity that contracts with the client is also the booking entity. In that case, which entity carries the trade overlaps with which entity is the party to the master agreement with the client. In the other case, where the sales entity contracts with the client and then books the trade with the booking entity through an intragroup trade, the contract with the client stays with the sales entity. That mechanism is covered in Intragroup Back-to-Back Trades.

Even for trades with the same corporate client, the party to the master agreement changes depending on which entity enters into the trade. The Act on Close-out Netting of Specified Financial Transactions Conducted by Financial Institutions, etc. (the Close-out Netting Act) defines close-out netting as follows. For trades under a master agreement, when a petition to start bankruptcy or similar proceedings is filed against one party, the values are added up into a single claim or obligation between the parties¹⁹. A master agreement identifies the products it covers and the specific entities and branches of the financial institution and the counterparty²⁰. Evaluating whether a close-out netting contract is valid starts with confirming the counterparty entity, and some master agreements are drafted so that trades with several entities can be offset¹⁷.

Consider a hypothetical example in which a group's entities enter into two trades with a corporate client. The market values are from the financial group's viewpoint: a positive value is a receipt and a negative value is a payment. No collateral is assumed. If the trades are entered into with separate entities, trade 1 is with entity A and trade 2 is with entity B, as in the figure below.

Figure 1Two trades with a corporate client, entered into with separate entities

Figure description

The group's entity A has trade 1 with the client under master agreement 1. Its market value is +1 billion yen from the group's viewpoint, so the group is the receiving side. The group's entity B has trade 2 with the client under master agreement 2. Its market value is −800 million yen, so the group is the paying side. The arrows show the direction of receipt and payment as read from the sign of the market value, not actual settlement dates or amounts. Because the master agreements are separate, trade 1 and trade 2 are not offset.

The amount the group could lose if the client fails is as follows (the table also shows the case where the values move the other way)²¹.

Market values of the two trades	Entered into and carried at the same entity (one master agreement)	Entered into and carried at separate entities (a separate master agreement for each entity)
Trade 1 is +1 billion yen and trade 2 is −800 million yen	200 million yen (+200 million yen after offsetting)	1 billion yen (+1 billion yen and −800 million yen cannot be offset)
Trade 1 is −1 billion yen and trade 2 is +800 million yen	0 yen (offsetting gives −200 million yen, and the group is the payer)	800 million yen (−1 billion yen and +800 million yen cannot be offset)

In this example, in both directions, the amount that could be lost is larger when the trades are entered into and carried at separate entities. Some contracts let several entities be offset under one master agreement, so the actual amount depends on the contract and on legal confirmation.

Collateral also moves under a contract between the parties to the trade. The credit support annex (CSA), which sets the terms for delivering collateral, is a set of provisions attached to a master agreement. If the trades are entered into with separate entities, collateral is also delivered under separate contracts. For rehabilitation proceedings, the Close-out Netting Act provides that if a collateral contract contains certain provisions, the property that is the subject of the collateral is vested in the counterparty and deducted from the single claim that arises from close-out netting²².

The calculation of the effects of netting and collateral is covered in Risk Reduction through Netting and Collateral.

Later transfers

The authorities look at roles and policies. The guidelines also check whether the function and role of each branch are reasonable as part of the risk management framework of the whole group¹⁵. As an item to be included in back-office policies, the examination manual lists policies for booking intracompany trades and trades with affiliates²⁵. How the booking entity is chosen, and in which field the entity is specified when a trade is entered, are not covered on this page.

One way to move a trade to another entity afterward is novation. The original entity leaves the trade, another entity enters it, and the original trade ends and a new trade arises²⁶. Because the parties change, the counterparty for close-out netting and collateral also changes.

For complianceIntragroup transfers and regulatory treatment

A trade from before the margin rules took effect that is novated to another company in the same group is likely to be outside the scope of the rules if it can be clearly identified as the same trade as the pre-rule trade. The identification is made through contract documents and accompanying documents, system records, and the like. The FSA's responses to public comments on the margin rules for non-centrally cleared OTC derivatives, published in March 2016, say that a trade after a novation made to avoid the rules may be assessed as a new trade. A group's strategy for which company holds which trades, and transfers made for sound risk management, are distinguished from this. The comments received note that some companies book the novation date as the trade date and others book the original trade date, so how easily a trade can be identified differs by company¹.

The structure of entities differs by financial institution. Organizational forms differ greatly by the size and sophistication of the institution, the markets and regions it serves, and its management policy. In some places subsidiaries operate independently of related entities, and in some places branches operate autonomously¹². The way of dividing entities here is one view, not a standard form.

Notes

Financial Services Agency, "コメントの概要及びコメントに対する金融庁の考え方（非清算店頭デリバティブ取引に係る証拠金規制）" (Summary of comments and the FSA's responses, margin rules for non-centrally cleared OTC derivatives, our translation) (March 31, 2016, the date on the publication page), items 13 and 14 (pages 2–3) (in Japanese). The phrase "intragroup booking strategy" is in the FSA's responses. ↩ ↩²
Board of Governors of the Federal Reserve System, "Trading and Capital-Markets Activities Manual," Section 1010.1 (February 1998), page 1. ↩
Financial Stability Board, "Key Attributes of Effective Resolution Regimes for Financial Institutions" (revised version, April 25, 2024), 12.2(iv) (page 19). ↩
"銀行法" (Banking Act, in Japanese; English translation: Japanese Law Translation), Article 4, paragraph 1 (licence for banking), and "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 29 (registration of financial instruments business). ↩
Financial Services Agency, "銀行法第十四条の二の規定に基づき、…自己資本の充実の状況が適当であるかどうかを判断するための基準" (Standards for determining whether a bank's capital adequacy is appropriate, under Article 14-2 of the Banking Act, our translation; updated on August 24, 2026), table of contents (in Japanese). Chapters 2 and 4 cover the consolidated ratio, and chapters 3 and 5 cover the standalone ratio. ↩
12 CFR 252.153 (Electronic Code of Federal Regulations as of September 30, 2026), the heading and paragraph (a)(1) (total US assets of USD 100 billion or more, and non-branch assets of USD 50 billion or more on average), (b)(1) (placed under the intermediate holding company), (c) (cases where a different organizational structure is allowed), (e)(1) and (e)(4) (capital and liquidity requirements). ↩
"法人税法" (Corporation Tax Act, in Japanese), Article 2, items 3 and 4 (domestic and foreign corporations), item 12-19 (permanent establishment), Article 4, paragraphs 1 and 3 (tax liability), and Article 141, item 1 and Article 138, paragraph 1, item 1 (taxation of income attributable to a permanent establishment). ↩ ↩²
Financial Stability Board, "Key Attributes of Effective Resolution Regimes for Financial Institutions" (revised April 25, 2024), 12.2 (page 19) and I-Annex 3, 4.2 (page 36). ↩
"金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 33, paragraph 1. ↩
"銀行法" (Banking Act, in Japanese; English translation: Japanese Law Translation), Article 10, paragraph 2, item 2 (securities-related derivatives transactions), item 16 (securities-related over-the-counter derivatives transactions), and item 17 (their intermediation, brokerage, or agency). Derivatives transactions other than securities-related ones are in items 12 and 14 of the same paragraph. ↩
"銀行法" (Banking Act, in Japanese; English translation: Japanese Law Translation), Article 16-2, paragraph 1, item 3. ↩
Examination manual, Section 1000.1 "Preparation for Examination" (February 1998), page 1 (authority of each entity) and page 3 (differences in organizational form, hedging of exposures). ↩ ↩² ↩³
Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.), VI-1 (supervision of foreign bank branches, purpose) (in Japanese). ↩
"銀行法" (Banking Act, in Japanese; English translation: Japanese Law Translation), Article 47, paragraphs 1 and 2 (the proviso of paragraph 2 lists the provisions that do not apply). ↩
Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.), VI-2(3) (supervision of foreign bank branches), fourth point of focus (in Japanese). ↩ ↩²
Financial Services Agency, "外国銀行代理業務に関するＱ＆Ａ（改訂版）" (Q&A on foreign bank agency business, revised version, our translation) (revised June 2019), Question 18 (page 12) (in Japanese). ↩
Examination manual, Section 2070.1 "Legal Risk" (September 2002), page 3. ↩ ↩²
Each row of the table sets side by side what is written in the preceding paragraphs of the same section and in their footnotes (Banking Act Article 47, the Corporation Tax Act articles, and VI-1 of the FSA's supervisory guidelines). ↩
"金融機関等が行う特定金融取引の一括清算に関する法律" (Act on Close-out Netting of Specified Financial Transactions Conducted by Financial Institutions, etc., in Japanese), Article 2, paragraphs 5 and 6 (master agreement, close-out netting) and Article 3 (relationship to bankruptcy proceedings and the like). ↩
Examination manual, Section 2070.1 "Legal Risk" (September 2002), page 1. ↩
This is a worked example. For trades under the same master agreement, the amount that could be lost is the positive part of the net of the values added up. For trades under separate master agreements, it is the sum of the positive parts of each. ↩
"金融機関等が行う特定金融取引の一括清算に関する法律" (Act on Close-out Netting of Specified Financial Transactions Conducted by Financial Institutions, etc., in Japanese), Article 4, paragraphs 1 to 4 (a person for whom reorganization proceedings have commenced; the contract provides that the secured party takes ownership of the property or disposes of it). ↩
Examination manual, Section 2021.1 "Counterparty Credit Risk and Settlement Risk" (March 1999), page 5. ↩
Examination manual, Section 2040.1 "Operations and Systems Risk (Management Information Systems)" (April 2003), page 4. ↩
Examination manual, Section 2060.3 "Operations and Systems Risk (Back-Office Operations) Examination Procedures" (February 1998), page 1. ↩
Novation is not the only way to move a trade. A comment received in the FSA's responses to public comments (item 13) gives an example of changing the "booking entity" to another group company by novation. ↩