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Derivatives Compass

PractitionerAdvanced

Compliance and Legal

Who this is for
For compliance and legal staff responsible for contracts, regulatory treatment, customer protection and reporting.
How to read it
Newcomers read the foundations first. Practitioners start at stage 1. If you already work with ISDA documents and the FIEA, start at stage 3.

  1. Stage 1Contracts and the legal frameworkPractitioner

    The ISDA Master Agreement, the CSA, protocols, events of default, close-out netting and Japan's netting act.

    1. IntroductoryThe ISDA Master Agreement and ScheduleSigning a master agreement helps make clear that the later trades are conducted on the same terms.Documentation and Law
    2. PractitionerThe Credit Support Annex (CSA)A CSA fixes in advance who delivers how much collateral, when the market value of the trades under the master agreement moves.Documentation and Law
    3. PractitionerISDA ProtocolsA protocol replaces the separate amendment contract needed with each counterparty with a single adherence to an ISDA document.Documentation and Law
    4. PractitionerEvents of Default and Termination EventsThe master agreement sets out insolvency, failure to pay, and deterioration in credit standing as events that allow the trades to be ended early.Documentation and Law
    5. PractitionerClose-Out NettingIn close-out netting, when the counterparty fails, the net of the values of all transactions becomes a single claim or obligation.Documentation and Law
    6. PractitionerJapan's Close-Out Netting ActThe act has four articles in its main text, covering its purpose, definitions, its relation to insolvency proceedings, and the treatment of collateral in reorganization proceedings.Documentation and Law

  2. Stage 2Japanese regulationPractitioner

    The FIEA at the centre, then the Financial Services Provision Act, the Commodity Derivatives Act, supervisory guidelines, clearing, margin, reporting and trading mandates, and suitability.

    1. IntroductoryJapan's Derivatives Regulation at a GlanceThe Financial Instruments and Exchange Act divides derivatives transactions into three types (market, over-the-counter, and foreign market), and the Commodity Derivatives Transaction Act governs transactions in commodities.Regulation: Japan
    2. PractitionerThe Financial Instruments and Exchange Act and DerivativesThe FIEA defines derivatives transactions in three categories by where they are conducted, and sets the types of transactions and the range of underlying assets in its articles.Regulation: Japan
    3. PractitionerThe Financial Services Provision ActThe Act aims to protect customers and improve the usage environment, and it sets rules for selling financial instruments across sector-specific laws.Regulation: Japan
    4. PractitionerThe Commodity Derivatives Transaction ActCommodity derivatives transactions are of three kinds, transactions on commodity markets, foreign commodity market transactions, and over-the-counter commodity derivatives transactions, and commodities include agricultural products, minerals, and electricity.Regulation: Japan
    5. PractitionerSupervisory Guidelines of the Financial Services AgencyStatutes such as the Banking Act set the obligations, and the supervisory guidelines show the points the authorities focus on when they check controls.Regulation: Japan
    6. PractitionerMandatory ClearingThe obligation arises when a designated transaction is entered into, unless it falls under an exception set by Cabinet Office Order.Regulation: Japan
    7. PractitionerMargin Requirements for Uncleared DerivativesThe margin requirements call for variation margin and initial margin to be exchanged on OTC derivative transactions that are not cleared.Regulation: Japan
    8. PractitionerTrade ReportingThe legal basis is Articles 156-63 to 156-66 of the Financial Instruments and Exchange Act and a Cabinet Office Order.Regulation: Japan
    9. PractitionerElectronic Trading Platform MandateThe notice as amended covers transactions that meet all its requirements. These include yen swaps with a compounded-in-arrears TONA floating rate.Regulation: Japan
    10. PractitionerSuitability and the Duty to ExplainThe FIEA's suitability principle and pre-contract explanation apply depending on whether the client is a professional investor, not on whether it is an individual or a corporation.Regulation: Japan

  3. Stage 3Customer protection and conductPractitioner

    KYC and credit review, suitability, documents, mis-selling cases and complaints, conduct risk, market manipulation, insider trading, AML, best execution and record keeping.

    1. IntroductoryKYC and Credit ReviewKYC exists to prevent the transfer of criminal proceeds, and credit review exists to prepare for losses if a client fails.Client-Facing Business
    2. PractitionerSuitability ChecksFinancial institutions must not solicit in a way that is inappropriate in light of the client's knowledge, experience, financial situation, and purpose of the contract.Client-Facing Business
    3. PractitionerProduct Explanations and Pre-Contract DisclosuresThe required contents come from the seven items of Article 37-3 of the Financial Instruments and Exchange Act, plus matters for each type of transaction added by a Cabinet Office Order.Client-Facing Business
    4. IntroductoryMis-Selling CasesThe three cases differ in product, issue, and outcome.Client Protection and Conduct
    5. PractitionerComplaints and Dispute Resolution (FINMAC)A client can bring a consultation or complaint to FINMAC, which asks the financial institution to investigate.Client Protection and Conduct
    6. PractitionerConduct RiskConduct risk is the risk of actions that harm user protection, market fairness and transparency, or its reputation; a common understanding has not necessarily formed.Client Protection and Conduct
    7. PractitionerMarket Manipulation and SpoofingJapan's Financial Instruments and Exchange Act prohibits sham transactions, transactions by prior arrangement, and price-moving trading, with criminal penalties, administrative surcharges, and damages for violations.Regulation: Cross-Border Themes
    8. PractitionerInsider TradingThe FIEA prohibits trading before disclosure by people who know material or tender offer facts, and bars passing on information or recommending trades to enable others to profit or avoid a loss.Regulation: Cross-Border Themes
    9. PractitionerAML and SanctionsAnti-money laundering rules prevent the transfer of criminal proceeds and the financing of terrorism, and economic sanctions stop payments and transactions with sanctioned parties, under separate laws.Regulation: Cross-Border Themes
    10. PractitionerBest ExecutionJapan's Financial Instruments and Exchange Act (FIEA) requires firms to set and publish a best execution policy, etc. and to execute client orders in line with it.Regulation: Cross-Border Themes
    11. PractitionerRecord keepingJapan requires financial instruments business operators to create and retain books and records of their business, and a Cabinet Office Order sets the types and periods.Regulation: Cross-Border Themes

  4. Stage 4Overseas regulationPractitioner

    Starting from the G20 reforms, the US Dodd-Frank Act and swap dealer registration, EMIR and MiFID II in Europe, and an overview of Asia-Pacific.

    1. IntroductoryThe G20 OTC Derivatives ReformsThe items are platform trading, central clearing, trade reporting, and capital for uncleared trades, and margin was added later.Regulation: International Standards
    2. IntroductoryOverview of Derivatives Regulation in the USTitle VII of the Dodd-Frank Act newly set rules for over-the-counter swaps and security-based swaps.Regulation: United States
    3. IntroductoryThe Roles of the CFTC and SECThe CFTC regulates futures and swaps under the Commodity Exchange Act, and the SEC regulates security-based swaps under the Securities Exchange Act of 1934.Regulation: United States
    4. PractitionerDodd-Frank Act Title VIITitle VII sets rules for the swap markets in Subtitle A and for the security-based swap markets in Subtitle B.Regulation: United States
    5. PractitionerSwap Dealer RegistrationSwap dealers and major swap participants must register with the CFTC.Regulation: United States
    6. IntroductoryOverview of Derivatives Regulation in the EU and UKAn EU regulation applies directly in the member states, while a directive is implemented by the member states through national law.Regulation: EU and UK
    7. PractitionerEMIRIt imposes a clearing obligation, risk management for uncleared trades, and a reporting obligation on EU financial institutions and companies.Regulation: EU and UK
    8. PractitionerMiFID II and MiFIRMiFID II is a directive that Member States transpose into national law, and MiFIR is a regulation that applies directly in Member States.Regulation: EU and UK
    9. IntroductoryOverview of Derivatives Regulation in Asia-PacificHong Kong, Singapore, China, Korea, and Australia have each implemented the G20 OTC derivatives reforms through their own domestic laws.Regulation: Asia-Pacific

  5. Stage 5Advanced topicsAdvanced

    The Volcker Rule, the Benchmarks Regulation, new product approval, netting opinions, recovery and resolution planning and stay protocols.

    1. PractitionerThe Volcker RuleFive agencies write the rule, each for the banking entities it oversees.Regulation: United States
    2. PractitionerThe EU Benchmarks Regulation (BMR)Most of the regulation applies only to four kinds of benchmarks, including critical benchmarks.Regulation: EU and UK
    3. PractitionerNew Product ApprovalIn general, a product should not be traded until management and relevant personnel understand it and can build it into risk measurement and control systems.Governance and Controls
    4. AdvancedNetting Enforceability and Legal OpinionsA legal opinion states in writing that close-out netting is expected to be recognized in the relevant jurisdictions.Documentation and Law
    5. AdvancedRecovery and Resolution PlanningA firm prepares the recovery plan and the authorities prepare the resolution plan, and in resolution the authorities use tools such as transfers of business, bridge institutions, and bail-in, alone or in combination.Booking Models
    6. AdvancedResolution stay protocolsWhen a large financial institution enters resolution, counterparties' simultaneous terminations can unsettle the market and obstruct the resolution measures.Booking Models

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