Japanese lawmakers have unanimously approved new regulations intended to curb risks to the financial system.
The upper house of parliament voted quickly Wednesday to approve a bill which requires investors to use clearing agencies to settle certain over-the-counter derivative trades. It also requires those agencies, as well as trading houses, to keep transaction records for submission to financial authorities.
Passage of the Japanese bill comes as the U.S. Senate prepares to vote on a comprehensive bill that would impose tighter rules throughout the U.S. financial system, including the derivative market.
Derivatives are financial products — such as corn futures or stock options — whose values depend on the values of underlying investments. Companies use them to hedge against risks, such as interest rate swings or oil price spikes.
Trading in the complex instruments skyrocketed over the past decade before coming under fire as a vehicle for speculation that helped trigger the financial crisis. Derivative trading levels jumped more than six-fold between 2000 and 2007, according to the Bank for International Settlements.
Lawmakers argue that derivatives should be regulated to allow for legitimate uses while discouraging speculation and irresponsible selling that could trigger another meltdown.
The Japanese bill applies to two types of derivatives: "plain vanilla" interest rate swaps — the most common type of swap — and iTraxx Japan credit default swaps.
Clearing agencies serve as intermediaries between two parties in a trade, facilitating payment and taking on default risks. They are not banks, exchanges or dealers.
The new derivatives rule in Japan will take effect by late 2012.
The bill also includes tighter regulations for securities companies and greater protections for investors. It also introduces stricter standards for insurance companies' financial earnings reports.
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