At a Glance: Derivatives Clearing, Exchange Trading and Collateral in Japan

Types of operations

Clearing Transactions

What categories of equity derivative transactions should be centrally cleared and what rules govern the clearing?

The scope of mandatory central counterparty clearing is currently limited to certain credit default swaps, and the rules of the Japan Securities Clearing Corporation apply to central clearing. Mandatory central clearing is not relevant for equity derivative transactions.

stock market trading

What categories of equity derivatives should be traded on an exchange 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 in accordance with the rules of the relevant exchange. Similar types of derivative transactions can also be made from an exchange.

Guarantee agreements

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

When a person trades in listed equity derivatives, they must deposit the clearing margin (which is calculated by deducting the total amount of the net value of the option from the standard portfolio analysis of risk requirements, which is calculated via a risk simulation based on current values ​​of the portfolio).

Clearing participants deposit clearing margin, which is the total amount adding together the total margin amounts of all of the clearing participant’s clients.

Warranty exchange

Do counterparties have to exchange collateral for certain categories of equity derivative transactions?

Yes, as of September 2016, certain financial institutions must, in principle, exchange collateral when engaging in OTC derivative transactions, including OTC equity derivative transactions, with other financial institutions as counterparty. This requirement to exchange collateral applies to all types of OTC derivative transactions governed by Japanese Financial Instruments and Exchanges Law. Initially, this regulation is applied to financial institutions with the largest volume of OTC derivatives and, gradually, the scope of this regulation is extended to financial institutions with smaller volumes of OTC derivatives. The collateral to be exchanged is classified into variation margin and initial margin. The amount to be traded as variation margin should be determined on a market basis and should be the current profit price a party is earning. 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 impose an obligation to exchange independent amounts.