JAPAN Trends and Developments Contributed by: Daisuke Tanimoto and Mitsuo Shimada, Anderson Mōri & Tomotsune
Close-Out Netting of OTC Derivative Transactions Referencing Digital Assets Under the Laws of Japan The growing prevalence of OTC derivative transac - tions referencing digital assets (“OTC digital asset derivative transactions”) has led to extensive discus - sions about whether and to what extent close-out netting arrangements for such transactions would be valid and enforceable in events of insolvency under Japanese law. Article 2, Paragraph 14 of the Payment Services Act (Act No 59 of 2009, as amended; the PSA) provides the definition of crypto-assets. However, the legal nature of crypto-assets (such as Bitcoin and Ether) and other digital assets is still a fluid concept under Japanese law. Moreover, every digital asset has its own distinct characteristics. Accordingly, in a discussion of the validity and enforceability of netting arrangements in respect of OTC digital asset derivative transactions, product-by-product analysis is required. It is this context that this article summarises the basic legal framework relating to the validity and enforceability of close-out netting arrangements under Japanese law. Close-out netting under the Netting Act Close-out netting arrangements in respect of OTC digital asset derivative transactions would be valid and enforceable if the relevant requirements of the Act on Close-out Netting of Specified Financial Trans - actions entered into by Financial Institutions, etc. (Act No 108 of 1998, as amended; the “Netting Act”) are satisfied. More specifically, close-out netting will be enforceable under the Netting Act if: • at least one of the parties is a Financial Institution; • the parties have entered into Specified Financial Transactions; • the Specified Financial Transactions are governed by a Master Agreement; • the Master Agreement contains provisions on Eligi - ble Close-out Netting; and • one of the parties has become subject to a Japa - nese insolvency event.
In respect of the above, the concepts of “Financial Institution”, “Specified Financial Transactions” and “Master Agreement” are particularly relevant. Accord - ingly, we now turn to each of these concepts. Financial Institution The term “Financial Institution” encompasses the fol - lowing entities: • banks; • Type I Financial Instruments Business Operators (ie, broker-dealers); • insurance companies; • federation of co-operative banks ( shinnyo kinko rengou kai ); • Norinchukin Bank; • Shoko Chukin Bank; • Japan Bank for International Cooperation; • securities financing companies; • call loan dealers; and • Commodities Futures Transaction Dealers. A dealer that engages in the business of OTC deriv - ative transactions referencing crypto-assets as a principal, agent, intermediary or broker is generally required to undergo registration as a Type I Financial Instruments Business Operator under the Financial Instruments and Exchange Act (Act No 25 of 1948, as amended; FIEA). On the other hand, a dealer that engages in the business of trading crypto-assets as a principal, agent, intermediary or broker, providing custody services for customers’ fiat currency in con - nection with such trading, or managing crypto-assets for the benefit of others is generally required to under - go registration as a crypto-asset Exchange Services Provider under the PSA. Type I Financial Instruments Business Operators fall within the scope of Financial Institutions for the purpose of the Netting Act. Crypto- Asset Exchange Services Providers, however, do not constitute Financial Institutions under the Netting Act. Specified Financial Transactions The term “Specified Financial Transactions” includes the following transactions: • (i) OTC Derivative Transactions (as such term is defined under the FIEA);
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