# Commission Implementing Decision of 30 October 2014 on the equivalence of the regulatory framework of Japan for central counterparties            to the requirements of Regulation (EU) No 648/2012 of the European Parliament and of the Council on OTC derivatives, central            counterparties and trade repositories (2014/752/EU)         

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U.K.

# Commission Implementing Decision

# of 30 October 2014

# on the equivalence of the regulatory framework of Japan for central counterparties to the requirements of Regulation (EU)                        No 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories                     

# (2014/752/EU)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives,                           central counterparties and trade repositories(1), and in particular Article 25(6) thereof,                        

Whereas:

(1)The procedure for recognition of central counterparties (‘CCPs’) established in third countries set out in Article 25 of Regulation                              (EU) No 648/2012 aims to allow CCPs established and authorised in third countries whose regulatory standards are equivalent                              to those laid down in that Regulation to provide clearing services to clearing members or trading venues established in the                              Union. That recognition procedure and the equivalence decision provided for therein thus contribute to the achievement of                              the overarching aim of Regulation (EU) No 648/2012 to reduce systemic risk by extending the use of safe and sound CCPs to                              clear over-the-counter (‘OTC’) derivative contracts, including where those CCPs are established and authorised in a third                              country.

(2)In order for a third country legal regime to be considered equivalent to the legal regime of the Union in respect of CCPs,                              the substantial outcome of the applicable legal and supervisory arrangements should be equivalent to Union requirements in                              respect of the regulatory objectives they achieve. The purpose of this equivalence assessment is therefore to verify that                              the legal and supervisory arrangements of Japan ensure that CCPs established and authorised therein do not expose clearing                              members and trading venues established in the Union to a higher level of risk than the latter could be exposed to by CCPs                              authorised in the Union and, consequently, do not pose unacceptable levels of systemic risk in the Union.

(3)On 1 September 2013, the Commission received the technical advice of the European Securities and Markets Authority (‘ESMA’)                              on the legal and supervisory arrangements applicable to CCPs established in Japan. A supplement to this advice was received                              on 27 January 2014. The technical advice identified a number of differences between the legally binding requirements applicable,                              at a jurisdictional level, to CCPs in Japan and the legally binding requirements applicable to CCPs under Regulation (EU)                              No 648/2012. This Decision is not only based, however, on a comparative analysis of the legally binding requirements applicable                              to CCPs in Japan, but also on an assessment of the outcome of those requirements in terms of the level of risk mitigation                              they achieve.

(4)In accordance with Article 25(6) of Regulation (EU) No 648/2012, three conditions need to be fulfilled in order to determine                              that the legal and supervisory arrangements of a third country regarding CCPs authorised therein are equivalent to those laid                              down in that Regulation.

(5)According to the first condition, CCPs authorised in a third country must comply with legally binding requirements which are                              equivalent to the requirements laid down in Title IV of Regulation (EU) No 648/2012.

(6)The legally binding requirements of Japan for clearing organisations (‘COs’) authorised therein consist of the Financial Instruments                              and Exchange Act 2006 (‘FIEA’), which establishes the supervisory framework for organisations clearing securities and financial                              derivatives, and the Commodity Derivatives Act 2009 (‘CDA’), which provides the supervisory framework for organisations clearing                              commodities. The present decision only covers the regime set out in the FIEA.

(7)The FIEA provides that before granting a licence to carry out the activities of clearing, the Prime Minister of Japan must                              be satisfied that the CO has business rules —the internal rules and procedures of the clearing organisation- which conform                              to the applicable laws and regulations; that the financial standing of the CO is sufficient for undertaking the clearing of                              financial instruments; that the expected income and expenditure pertaining to the business of the CO are favourable; that                              the CO's staff has sufficient knowledge and experience for conducting the clearing of financial instruments appropriately                              and with certainty; and that the structure and system of the CO are adequately developed so that settlement can function adequately.                              Pursuant to Article 194-7(1) of the FIEA, the Prime Minister delegates to the Commissioner of the Financial Services Agency                              of Japan (JFSA) the powers vested under the FIEA. Therefore, the Commissioner of the JFSA has the responsibility for granting                              a licence for clearing.

(8)Moreover, in December 2013, the JFSA published the Comprehensive Guidelines for Supervision of Financial Market Infrastructures                              (‘the Guidelines’), which detail the supervisory framework with regard to financial market infrastructures, including COs,                              and in particular the way in which the FIEA will have to be complied with by the COs. The Guidelines are implemented in the                              internal rules and procedures of COs.

(9)The legally binding requirements in Japan therefore comprise a two-tiered structure. The core principles for COs laid down                              in the FIEA (the ‘primary rules’) set out the high-level standards with which COs must comply in order to obtain a licence                              to provide clearing services in Japan. Those primary rules comprise the first tier of the legally binding requirements in                              Japan. In order to prove compliance with the primary rules, a CO must submit its internal rules and procedures to the Commissioner                              of the JFSA for approval. Those internal rules and procedures comprise the second tier of the legally binding requirements                              in Japan, which must provide prescriptive detail regarding the way in which the applicant CO will meet those standards in                              accordance with the Guidelines. Moreover, the internal rules and procedures of COs contain additional provisions which complement                              the primary rules. Once approved by the Commissioner of the JFSA, those internal rules and procedures become legally binding                              upon the CO. Those rules therefore form an integral part of the legal and supervisory arrangements that CCPs established in                              Japan must comply with. In the case of non-compliance with the primary rules or the CO's internal rules and procedures, the                              Commissioner of the JFSA has the power to take administrative actions against the CO, including issuing of orders to improve                              business operations or rescinding all or part of the CO's licence.

(10)The primary rules applicable to COs complemented by their internal rules and procedures deliver substantial results equivalent                              to the effects of the rules contained in Title IV of Regulation (EU) No 648/2012. In particular, the legally binding requirements                              applicable to COs regarding the number of defaults to be covered by total financial resources require COs clearing more than                              95 % of the volumes cleared in Japan to cover the default of at least the two clearing members to which they have the largest                              exposures under extreme but plausible market conditions (the ‘cover 2 principle’). That requirement ensures an equivalent                              degree of risk mitigation to that pursued by the requirements set out under Title IV of Regulation (EU) No 648/2012 and therefore                              should be considered equivalent.

(11)The legally binding requirements applicable to COs regarding liquidity risk require COs clearing more than 95 % of the volumes                              cleared in Japan to apply the ‘cover 2 principle’. That requirement ensures an equivalent degree of risk mitigation to that                              pursued by the requirements set out under Title IV of Regulation (EU) No 648/2012 and should therefore be considered equivalent.                              Finally, the legally binding requirements applicable to all COs regarding business continuity, collateral requirements, investment                              policy, settlement risk, segregation and portability, calculation of initial margins and governance, including organisational                              requirements, requirements relating to senior management, risk committee, record keeping, qualifying holdings, information                              transmitted to the competent authority, conflict of interests, outsourcing and conduct of business deliver substantial results                              equivalent to those laid down in Regulation (EU) No 648/2012 and therefore should be considered equivalent.

(12)The Commission therefore concludes that the legal and supervisory arrangements of Japan ensure that COs authorised therein                              comply with legally binding requirements which are equivalent to the requirements laid down in Title IV of Regulation (EU)                              No 648/2012.

(13)According to the second condition under Article 25(6), the legal and supervisory arrangements of Japan in respect of CCPs                              authorised therein must provide for effective supervision and enforcement of those CCPs on an ongoing basis.

(14)The JFSA is responsible for the supervision of financial market infrastructures. The JFSA conducts ongoing monitoring of COs'                              compliance with risk management requirements through surveillance and risk-based examination procedures including testing                              of prudential requirements. In particular, the JFSA can request COs to provide information, reports and other materials concerning                              their business and can inspect the business, records and books of COs. It also assess COs' compliance with their obligations.                              Those examination exercises result in a report which identifies any deficiencies perceived. Various measures are available                              to the JFSA to ensure that COs appropriately address any identified issues, including requiring COs to demonstrate, in writing,                              timely correction of such issues. The JFSA has additional means to enforce compliance, including the ability to issue orders                              to improve business operations and the enforcement of such orders. The JFSA can also rescind all or part of the CO's licence.

(15)The Commission therefore concludes that the legal and supervisory arrangements of Japan in respect of CCPs authorised therein                              provide for effective supervision and enforcement of CCPs on an ongoing basis.

(16)According to the third condition under Article 25(6) of Regulation (EU) No 648/2012, the legal and supervisory arrangements                              of Japan must include an effective equivalent system for the recognition of CCPs authorised under third country legal regimes                              (‘third-country CCPs’).

(17)Third-country CCPs may apply for a ‘foreign CCP’ licence enabling them to provide the same services in Japan as they are authorised                              to provide in that third country. The criteria applied to a third-country CCP applying for a licence are similar to the criteria                              applied to the licensing of Japanese clearing organisations. In particular, the applicant third-country CCP, on the basis                              of the legal and supervisory arrangements applicable in the third country, should have sufficient financial basis, sufficient                              knowledge and experienced personnel as well as a sufficient system and structure for carrying out clearing activities appropriately                              and with certainty. Moreover, third-country CCPs are exempted from certain requirements applicable to domestic CCPs authorised                              in Japan where they have been granted an equivalent licence from foreign authorities with whom the JFSA has concluded cooperative                              agreements.

(18)It should therefore be considered that the legal and supervisory arrangements of Japan provide for an effective equivalent                              system for the recognition of third-country CCPs.

(19)The conditions laid down in Article 25(6) of Regulation (EU) No 648/2012 can therefore be considered to be met by the legal                              and supervisory arrangements of Japan regarding COs and those legal and supervisory arrangements should be considered to be                              equivalent to the requirements laid down in Regulation (EU) No 648/2012. The Commission, informed by ESMA, should continue                              monitoring the evolution of the Japanese legal and supervisory framework for CCPs and the fulfilment of the conditions on                              the basis of which this decision has been taken.

(20)The measures provided for in this Decision are in accordance with the opinion of the European Securities Committee,

HAS ADOPTED THIS DECISION:

# Article 1U.K.

For the purposes of Article 25(6) of Regulation (EU) No 648/2012, the legal and supervisory arrangements of Japan consisting                     of the Financial Instruments and Exchange Act 2006 (FIEA) as complemented by the Comprehensive Guidelines for Supervision                     of Financial Market Infrastructures and applicable to clearing organisations (‘COs’) authorised therein shall be considered                     to be equivalent to the requirements laid down in Regulation (EU) No 648/2012.                  

# Article 2U.K.

This Decision shall enter into force on the twentieth day following that of its publication in the *Official Journal of the European Union*.                  

Done at Brussels, 30 October 2014.

*For the Commission*                            

*The President*                            

José Manuel Barroso                            

1

OJ L 201, 27.7.2012, p. 1.