Derivatives clearing, exchange-trading and collateral in Japan

Types of transaction

What categories of equity derivatives transactions must be centrally cleared and what rules govern clearing?

The scope of mandatory clearing central counterparties clearing is currently limited to certain credit default swaps, and the rules of Japan Securities Clearing Corporation are applied to central clearing. Mandatory central clearing is not relevant to equity derivatives transactions.

What categories of equity derivatives must be exchange-traded and what rules govern trading?

Nikkei 225 Futures, Nikkei 225 Options, TOPIX Futures, TOPIX Options, JPX-Nikkei Index 400 Futures, JPX-Nikkei Index 400 Options and other listed derivative transactions may be traded on a financial instruments exchange according to the relevant exchange’s rules. Similar kinds of derivative transactions may also be made from an exchange.

Describe common collateral arrangements for listed, cleared and uncleared equity derivatives transactions.

When a person effects a listed equity derivatives transaction, he or she must deposit clearing margin (which is calculated by deducting the total amount of the net option value from the Standard Portfolio Analysis of Risk Requirement, which is calculated via a risk simulation based on current portfolio values).

Clearing participants deposit clearing margin, which is the aggregate amount summing up the total margin amounts of all customers of the clearing participant.

Must counterparties exchange collateral for some categories of equity derivatives transactions?

Yes, starting from September 2016, certain financial institutions must, in principle, exchange collateral when engaging in OTC derivatives transactions, including OTC equity derivatives transactions, with other financial institutions as counterparty. This obligation to exchange collateral is applied to any type of OTC derivatives transactions governed by the FIEA. Initially, this regulation is applied to the financial institutions with the larger volume of OTC derivatives and, gradually, the scope of this regulation is extended to the financial institutions with smaller volumes of OTC derivatives. The collateral to be exchanged is categorised into variation margin and initial margin. The amount to be exchanged as variation margin must be determined on a mark-to-market basis, and must be the current profit price that one party obtains. The amount of initial margin reflects the expected size of the potential future exposure to the other counterparty.

There are no statutes or laws that mandate an obligation to exchange independent amounts.