(i) (ii) (i) VM requirements andd (ii) IM requirements. derivatives transactionss which aree not centrally

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1 ocia ate Newlet Japanee Margin Requirement for Non-Centrally Cleared OTC Derivative Attorney-at-Law (Bengohi) Takenobu Imaeda Attorney-at-Law (Bengohi) Akihiro Tukamoto I Overview A part of financial market reform in repone too the ubprime crii, in September 2013, the Bael Committee on Banking Superviion and the International Organization of Securitie Commiion releaed their final report on margin for non-centrally cleared over-the-counter ( OTC ) derivative tranaction. Thi report et forthh an overall tructure for margin a well a required each national regulator to etablih it margin by December 2015 (thee implementation date ubequently wa delayed to September 2016). In repone, each national regulatorr commencedd an examinationn of margin, and the Financial Service Agency of Japan ( JFSA ),, on March 31, 2016, publihed it margin for non-centrally cleared OTC derivative tranaction following a review which included two public comment procee. Thi article intend to provide an overview of margin in Japan a well a explain how financial intitution need to repond thereto. II Summary of Margin Requirement 1 Purpoe of Margin Requirement obligation under OTC derivative tranaction to central counterpartie ( CCP ) 1 which are a interpoed between both partie to the tranaction. The purpoe of clearing i too reduce ettlement rik by decreaing the aggregate amount of right and obligation under the tranaction by mean of et-off, a well a to mitigate ytemic rik (i.e., the rik that a bankruptcy event of a counterparty in a tranaction would pread into, and negatively affect, the market a a whole). Margin are expected to prevent future financial crie (1)( by promoting central clearing a a reult of the increae inn tranactionn cot for Non-Centrally Cleared OTC Derivative throughh impoing the obligation of exchanging margin in uch tranaction, and (2) by interdicting ytemic rik through the exchange of margin. 2 Type of Margin There are two type of margin: (i) (ii) Variation margin ( VM ), which i exchanged periodically during the term of the tranaction, and thee amount of VM reflect the expoure a partyy ha to it counterparty; c and Initial margin ( IM ), which i mutually exchanged by bothh counterpartie, and the amount of IM reflect the expected ize of the Potential Future Expoure ( PFE ) to the other counterpartyy (i.e., an etimated mark-to-market valuation change during the normal ten-day period between the occurrence of a default event and the confirmation of damage). Margin require financial intitution to Conequently, margin m aree categorized collect and pot collateral a margin for OTC into (i) VM andd (ii) IM. derivative tranaction which aree not centrally cleared ( Non-Centrally Cleared OTC Derivative ) 3 Regulatory Structure S of and Entitie ubject to when they effect OTC derivative tranaction. Clearing (or cleared) mean tranferring the right and 1 CCP mean entitie whichh have a licene for clearing tranaction with financial f intitution

2 ocia ate Newlet Margin Requirement Margin in Japan aree baed on the Cabinet Office Ordinance on Financial Intrument Buine, etc. (the Ordinance ) and everal guideline for uperviion etablihed by the JFSA thereunder (collectively, the Guideline for Superviion ). 2 While the Ordinance i a law adopted by the Government of Japan, thee Guideline for Superviion are (a their name indicate) guideline of a regulatory authority and thu aree interpreted and contrued by the JFSA. The Guideline for Superviion require each financial intitution to take meaure which are conitent with their tranaction volume and rik characteritic. Specifically, Type 1 Financial Intrument Buine Firm and Regitered Financial Intitution whoe average aggregate notional amount of OTC 2 Comprehenive Guideline for Superviion of Financial Intrument Buine Operator, etc.,, Comprehenive Guideline for Superviion of Major Bank, etc., Comprehenive Guideline for Superviion of Small-- and Medium-Sized and Regional Financial Intitution, 3 Whether or not the IM will apply i Comprehenive Guideline for Superviion of determined by reference only to the Ordinance, and thoe Co-operative Financial Intitution, Comprehenive financial intitution which are not ubject to the IM Guideline for Superviion of Inurancee Companie,, and Comprehenive Guideline for Superviion of Trut Companie, etc. puruant to the Ordinance likewie will not be ubject to the IMM under the Guideline for Superviion derivative tranaction in the pat fical year (from April to March) i more than 300,000,000,000 JPY are obligated to etablih a ytem to collect and a pot VM under the Ordinance (Articlee 123, Paragraph 1, Item 21-5). Moreover, if the average aggregate notional amount of OTCC derivative tranaction of uch an intitution on a group bai i beyond a certain threhold, thenn uch intitution i obligated to etablih a ytem to exchange IM under the Ordinance (Article 123, Paragraph 1, Item 21-6). 3 In add to theee et out in the Ordinance, whether or not a ytem for the collecting and poting of VM i appropriately etablihed i a uperviory iue which fall under the purview of the JFSA and ubject to the Guideline for Superviion. The application of margin m i illutrated in the chart below:

3 ocia ate Newlet 4 Enforcement Date Margin will become effective in Japan from September 1, 2016, tarting with the financial intitution with the larget volume of OTC derivative tranaction, conidering the impactt on financial intitution. 4 5 Detail of Margin Requirement (1) VM Requirement Baed on the Ordinance Financial intitution which are ubject to the VM baed on the Ordinancee are required to etablih a ytem which include the following meaure: already poted minu m negative expoure (aa return call) (Note) Limited to the cae where VM i beyond the amount et a the minimum tranfer amount ( MTA ) in the tranactionn (combined amount of IM and VM i le than 70,000,000 JPY) (iii) VM hould be poted without delay (Note) T+X poting i not required, but VM hould be poted a oon a a practically poible. (iv) Other than the foregoing, repone to a margin calll or a return call from the counterparty hould be made. (2) VM Requirement Baed on the Guideline for Superviion (i) The total amount of mark-to-market valuation of Financial intitution which h are ubject only to the Non-Centrally Cleared OTC Derivative and the JFSA Guideline for Superviion are not required to amount of exchanged VM are calculated daily. perform the meaure decribed in item (i) to (iii) above on a dailyy bai, but with ufficient frequency (ii) The following amount hould be called immediately, depending on the market value. taking into account the tranaction volume and rik characteritic, etc. e In cae of poitive market value: poitive expoure amount minu VM which ha been already a collected (3) IM Requirement Baedd on the Ordinance (if any) plu VM whichh ha been already potedd (if any) (a margin call) In cae of negative market value: VM which ha been Financial intitution whichh are ubject to the IM baed on the Ordinance aree required to etablih a ytem which include the following 4 VM will apply to (i) financial intitution meaure: with Non-Cleared OTC Derivative volume of more than 420,000,000,000,000 JPY on a group bai which are Type 1 Financial Intrument Buine Firm or Regitered (i) The PFE andd the amountt of poted IM hould be Financial Intitution whoe average aggregate a notional amount of OTC derivative tranaction in the pat fical calculated, among other, inn cae of the change of year i more than 300,000,,000,000 JPY from f September 1, relation of right under Non-Centrally Cleared OTC 2016, and then to (ii) other financial intitution from March Derivative. 1, IM will apply to financial intitution with (Note) Thi calculation hould be done in accordance Non-Cleared OTC Derivative volume of (i) more than 420,000,000,000,000 JPY on a group bai, from September 1, 2016; (ii) more than 315,,000,000,000,000 JPY on a group with an internal initial margin model ubmitted to the JFSA or a tandardized margin chedule. bai, from September 1, 2017; (iii) more than 210,000,000,000,000 JPY on a group bai, from September (ii) The amount deducted from PFE by IM which ha 1, 2018; (iv) more than 105,000,000,000,000 JPY on a group bai, from September 1, 2019; and a (v) more than been already poted and the amount agreed by the 1,100,000,000,000 JPY on a group bai, from September 1, partie to the tranaction beforehand hould be called 2020, repectively

4 ocia ate Newlet immediately (a margin call). (Note 1) The amount can be et within the total of 7,000,000,000 JPY on a group level. (Note 2) Limited to the cae where IM I i beyondd the amount et a the MTA in the tranaction (combined amount of IM and VM i le than 70,,000,000 JPY). (iii) IM hould be poted without delay. (iv) IM hould be managed throughh the creationn of trut or any other appropriate manner.. 5 (v) Other than the foregoing, a margin call fromm the counterparty hould be reponded. III Meaure to Be Taken by Financial Intitution 1 Dometic Financial Intitution etablihing a collateral compliance ytem and hiring addal peronnel to calculate, exchange and manage the margin. m Taking into coniderationc n regulatory cot, the election of counterpartie and any cancellation of unneceary trading, or reconidering the continued ue of the Non-Centrally Cleared OTC Derivative, D alo may bee prudent. If, however, a dometic financial intitution i ubject only to the Guideline for Superviion, an a analyi of the rik it would ubject too and the regulatory and operational cot it would incur in etting up a ytem correponding thereto houldd be undertaken in orderr to enure an appropriate balance between the rik and regulation cot and expectedd profitability in trading i achieved. In add to the foregoing, in the cae of Non-Centrally Cleared C OTC C Derivative with foreign financial intitution counterpartie, meaure for compliance withh foreign margin, whichh may be directly or indirectlyy applicable, alo a need to be conidered and implemented. A dometic financial intitution hould confirm m the 2 Foreign Financial Intitution application of margin by examining whether it and it counterpartie are ubject to margin under the Ordinance or the Guideline If a foreign financial intitution i either a Type 1 Financial Intrument Buine Firm or a Regitered for Superviion, and whether the derivative Financial Intitution, it would be ubject to VM tranaction in which it engage are off the type ubject baed b on the Ordinance or the to margin, and then iff applicable,, the tranacting intitution hould take meaure to et up a Guideline for Superviion,, depending on the total notional amountt of it OTC derivative tranaction in ytem for margin exchange by executing an the pat fical year. y In add, when it i ubject to appropriate ISDA Mater Agreement and CSA and the VM baed on the Ordinance, it alo i ubject to the IM if the total 5 IM hould be handled through the creation of trut or tranactional amount i beyond the threhold on a other appropriate manner to meet the following two conolidated bai. If, however, the foreign financial (Article 123, Paragraph 1, Item I 21-6(4) of the intitution i neither a Typee 1 Financiall Intrument Ordinance): (i) in the event of a poting party default, the IM can be Buine Firm nor n a Regitered Financial Intitution, ued a compenation for the damage ariing out off the it i not directlyy ubject to the margin. r default; and (ii) in the event of a collecting party However, in thi ituation, when uch a firm conduct inolvency, the IM i returned to the poting party without comingling with collecting party aet. The collecting derivative tranaction a it buine in third party could place IM with a third party cutodian a well a countrie (limited to thoe juridiction where the a trutee. In any cae, an examination a to whetherr the margin baed on the Ordinance are met, taking effectivene of cloe-out netting i confirmed) and a into conideration the type of IM aet, governing laww and Japanee dometic financial intitution i the other iue, i neceary in each individual cae

5 ocia ate Newlet counterparty, the tranaction willl be ubjectt to Japanee margin. In thi cae, a dometic financial intitution will require the foreign financial intitution to pot and collect margin and thereforee the foreign financial intitution indirectly would need to et up a ytem whichh i conitent with margin in Japan. Pleae note though that iff the foreign intitution ha a ytem which implement meaure for margin which are recognized a being equivalent to margin in Japan, an exemption may apply. Accordingly, for foreign financial intitution it i important to pay attention to thee reult off an evaluation of equivalence. 6 * * * Thi overview i, by neceity, brief and of a general nature. We urge client to dicu with u their pecific circumtance and buine need and plan o that the impo of the margin regime with repect to OTC derivative tranaction i properly undertood and incorporated into their trading environment. Attorney-at-Law (Bengohi) Takenobu Imaedaa Direct phone number +81( (0) timaeda@tmi.gr.jp Practice Area General Corporate Legal L Practice / M&A / Corporate Finance / Structured Finance / Project Finance / Securitization, Liquidation and REIT / Derivative Tranaction / Reall Etate Invetment / Solar Power and Other Source off Natural Energyy / Banking, Securitie, Inurance and Trut / Fund Memberhip Tokyo Bar Aociation (2005) Attorney-at-Law (Bengohi) Akihiro Tukamoto Direct phone number +81( (0) atukamoto@tmi.gr.jpp Practice Area General Corporate Legal L Practice / M&A / Corporate Finance / Structured Finance / Project Finance / Securitization, Liquidation and REIT / Pharmaceutical, Medical Care, Health Care and Biotechnology / Derivative Tranaction / Real Etatee Invetment Memberhip Daini Tokyo Bar Aociation (2007) Thi article i for generall guidance only and doe not contitute definitive legal advice. Thi article expree the opinion of the author andd doe not necearily repreent r the view of the partner and attorney of orr the firm a a whole. For F more information pleae contact Takenobu Imaeda and Akihiro Tukamoto. C In order to prevent inefficiencie reulting from duplicative regulatory margin acro multiple juridiction, margin in Japan are exempted when the margin requirement of another juridiction which i recognized a being equivalent to thoe in Japan would apply (Article 123, Paragraph 10, Item 5 and Article 123, Paragraph 11, Item 6 of the Ordinance). It i expectedd that the juridiction in whichh thi exemption claue would apply will be dieminated by public notice iued byy The Commiioner of the JFSA, following thee JFSA evaluation of equivalence in relevant juridiction, to t be conducted by the JFSA in due coure