Dodd-Frank 30 Day Countdown: Day 1

Japan’s Financial Instruments and Exchange Law (FIEL)

Japan’s corollary to Title VII of Dodd-Frank is the Financial Instruments and Exchange Law (FIEL), which went into effect in 2008.  While the laws are similar, they are by no means identical. The Japanese law remains silent on topics that Dodd-Frank addresses thoroughly. Most notable among these topics are provisions regarding derivative clearing organizations (DCO’s) and clearing counterparties (CCP’s). Whereas Dodd-Frank provides a framework for how DCO’s and CCP’s must be organized, maintained, funded, and accounted for, FIEL does not give any specific guidance on CCP business continuity, outsourcing, or price transparency. Dodd-Frank imposes across-the-board capital requirements intended to minimize risk in the event of a major default and ensure the business’ functionality for at least a year. In contrast, FIEL’s minimum capital requirement for CCP’s is on a case-by-case basis. Dodd-Frank also implements collateral requirements with the purpose of reducing risk to non-defaulting members in the event that a major member becomes insolvent or defaults.

Interestingly, both Dodd-Frank and FIEL provide exemptions to foreign CCP’s, which allows those CCP’s to operate in their respective markets as long as the foreign CCP maintains no offices within local borders.  Dodd-Frank extends an additional exemption to central banks, including the World Bank, so long as the activities do not directly affect US commerce or contravene CFTC rules.

The differences between the U.S. and Japanese regulation likely stem from a difference in motivation.  FIEL was enacted in response to corporate scandals, such as the Murakami Fund. Dodd-Frank, on the other hand, came about in reaction to the current financial crisis. The drafting of FIEL and its codification occurred in 2006, before the mortgage crisis, which also accounts for some of the differences.

Some Japanese regulators are wary of Dodd-Frank’s potential impact on Japanese markets. When Senator Pat Roberts (R – KS) rose to floor of the US Senate this June, he cited a letter from Japanese regulators, who feared a jurisdictional overreach resulting from Dodd-Frank’s enactment might impinge the operability of Japanese firms in Japanese markets.

The current impact of FIEL on Japan’s economy is difficult to determine due to the recent devastation wrought by natural disasters. The decrease in exports such as produce, largely because of fear of radiation, continues to skew any analysis of FIEL’s effect. Thus, it is difficult to use the FIEL as an accurate predictor of Dodd-Frank’s usefulness. Regardless, the relative increase in depth and scope of Dodd-Frank demonstrates the dramatic change in circumstance from 2006, when FIEL was ratified, to 2010, when Dodd-Frank was signed into law.

-Guest authored by Michael Yohai