Following the release of its basic blueprint for reform of the financial services market at the end of last year, the Japanese Financial Services Agency (FSA) has this month indicated that it will be drawing up a draft bill, including reforms related to capital and liquidity risk reporting, for governmental consideration this year. A key part of this will be to expand risk controls on large securities companies above an as yet unspecified value of total assets, thus adding more reporting requirements for firms at a consolidated group level.
Much the same as moves by regulators in other countries across the globe, the Japanese FSA is keen to ensure that systemically important financial institutions have adequate risk management systems in place to function effectively. The regulator is extending capital requirements further to cover subsidiaries and affiliates of Japanese securities companies, as well as their parent companies in this manner, thus linking together the entity risk data chain. However, the regulator has also noted that when group-wide consolidated regulation and supervision has already been conducted based on other industry laws, provisions are needed to eliminate duplication of similar regulation and supervision. The key seems to be in adopting a more integrated approach to large financial institutions in the Japanese markets.
As previously noted by Reference Data Review in relation to other similar regulatory proposals, these endeavours will throw into the spotlight the challenge of a lack of standardisation in the entity identification space. The inability to track entity exposure across a firm’s various subsidiaries and therefore assess the overall risk picture will necessarily involve some regulatory intervention in the entity identification space.
The Japanese regulator is also looking to more closely regulate the buy side with regards to risk management and notes in a recent communication: “In view of international discussion and also taking into account the actual business condition of investment managers, the items to be reported by hedge fund managers to the authorities are to be expanded in collaboration with other countries.”
This will necessitate investment by these hedge fund managers into new risk and regulatory reporting systems, making them look much more like the more traditional players in the market in terms of internal systems architecture. Greater data transparency and structure and the automation of regulatory reporting functions are likely to be key areas of investment for the sector, once reforms have been passed.
However, the regulator notes that the particularities of the Japanese market mean that hedge funds in the market do not need to register, unlike the plans within other regions. Under the Financial Instruments and Exchange Act, hedge fund managers in Japan are subject to regulation as registered investment managers and no collective investment schemes for professionals, which are subject to a notification system, has been confirmed at present as falling under the category of hedge funds, according to the Japanese FSA.
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