Trust funds in Japan have started focusing on mitigating FX settlement risk, to which they have long been exposed. This article explains the change in focus and the factors behind this.

Following 2013 guidance from the Basel Committee on Banking Supervision (BCBS) recommending the use of payment-versus-payment (PvP) settlement and netting where appropriate, Japan’s Financial Services Agency (FSA), along with the Bank of Japan (BoJ), convened Japanese wholesale FX market participants to promote PvP settlement and assist the industry in adopting CLSSettlement.

Japanese market

From an FX trading perspective, pension and investment trust funds are two of the most active fund categories in Japan. Both have increased cross-border investments over time, aiming to improve performance under the prevailing Japanese negative interest rate environment.

For instance, the Government Pension Investment Fund (GPIF), the world’s largest pension plan with JPY 169 trillion (USD 1.57 trillion) in assets under management as of December 2019, recently announced a new policy to increase foreign asset allocation from 40% to 50% (25% each for foreign bonds and equities) of its total portfolio.

However, despite the steady increase of fund FX settling in CLSSettlement over the last decade globally,[3] Japanese fund FX only started settling in CLSSettlement in the summer of 2018. Japan’s slow adoption of PvP can be attributed to market-specific factors, such as its unique fund FX structure, where trust banks act as an additional layer between an asset manager and a global custodian, as well as unique market practices in Japan such as frequent cancellation of individual FX hedge positions in case of early redemption.

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