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UPDATE 1-Japan passes bill to tighten OTC derivatives rules
* Bill requires some OTC derivatives to use clearing agencies
* Move targets plain vanilla yen IRS and iTraxx Japan CDS
* New rules to come into effect by late 2012
(Adds analyst comment in paragraphs 6-8)
TOKYO, May 12 (Reuters) - Japan's parliament approved a bill on Wednesday that will require some over-the-counter (OTC) derivatives trades to go through a clearing agency, aiming to cut the risks these contracts pose to the financial system.
Regulators globally are moving to require that a large share of derivatives contracts go through central clearing houses to prevent a domino-like collapse of the financial system if a major dealer, similar to Lehman Brothers, were to fail.
The bill passage also comes as U.S. regulators and lawmakers are examining the cause of a sudden plunge on U.S. stock markets last week, adding to expectations that the government there will make new regulations to curb runaway computer trading. [ID:nN11102380]
The Japanese bill includes measures such as requiring some OTC derivatives trades -- initially plain vanilla yen interest rate swaps and iTraxx Japan credit default swaps (CDS) -- to be conducted via a clearing agency.
Financial institutions and clearing agencies will also be required to store trading records of such derivatives transactions and to submit such data to authorities.
Some market players hope that requiring iTraxx Japan CDS trades to be conducted via clearing agencies could help attract more participants to the CDS market, said Hisayoshi Nogawa, structured credit strategist for BNP Paribas Securities.
"This might make it easier for people who had been concerned about counterparty risk to conduct such trades," Nogawa said.
"There are hopes that the market could grow if asset management institutions enter the market and join current market players such as banks and some life- and non-life insurers."
The bill, which was passed by the upper house of parliament on Wednesday, is expected to be officially announced as law over the next week or so.
Provisions of the bill pertaining to OTC derivatives will come into effect within 2-½ years after the law is publicly announced, or by late 2012.
Central clearing, in which a clearing house stands between the two parties to a trade and assumes the risk of a default, is seen by regulators as key to reducing risks due to the maze of exposures the derivatives create between firms.
Credit default swaps are used to protect against a borrower defaulting on debt, or to speculate on its credit quality. (Reporting by Masayuki Kitano)
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