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OTC Japanese Government BondsMargin

Initial Margin for OTC JGB

In order to cover exposures for OTC JGB, JSCC requires the deposit of variation margin and initial margin from all Clearing Participants.

Please see here for outline of each margin

Initial Margin is calculated three times a day (7:00, 11:00 and 14:00) andconsists of ①Initial Margin (Post Offset Margin Amount; POMA), ②Initial Margin to cover Funds Only Settlement (FOS) failure risk, ③Initial Margin to cover repo rate fluctuation risk and ④Market Impact Charge, for which calculation methods are described as follows. The component to be adopted differs depending on calculation timing and type of netting account, for each component.

(※)The total required OTC JGB Initial Margin amount contributed by all Clearing Participants was JPY764.6B (as of 30, September, 2019)

1.Initial Margin (POMA)
POMA is calculated using a delta method. Specifically, risk amount arising for the positions of JGB OTC transactions (for Subsequent Collateral Allocation Repo Transaction, the positions for which collateral has been already allocated) at the calculation timing of a day is calculated based on historical price fluctuations during a given period and the correlations between issues. Parameters used in calculations include a reference period of 250 days or 500 days, a confidence level of 99%, and a holding period of 3 days.In addition to the data from the reference period, market data at the past significant stress events are taken into consideration. This is to prevent sudden increase or decrease in Required Initial Margin Amount when significant market data fluctuations are applied to or removed from the reference period data.
Risk amount related to Inflation-Indexed Japanese government bonds is calculated, taking into account of fluctuation risk of Indexation Coefficient, in addition to fluctuation risk of price.
Additionally, in order to reflect changes in positions due to intraday DVP settlement, Adjusted POMA is calculated according to the same method at the completion of intraday settlement.
In order to reflect large historical fluctuations in the market and positions, Average POMA is calculated by averaging a certain ratio of the top POMA for a given historical period.
Though correlations between issues are used in POMA calculations, a minimum amount is set as a certain ratio of the risk before offsetting to prevent excessive offsetting.
The greatest of POMA, Adjusted POMA, Average POMA, and the minimum amount is used to determine the initial margin required to cover actual market price fluctuations.
2.Initial Margin to cover FOS failure risk
Initial Margin to cover FOS failure risk is calculated to cover the loss arising from failure of Funds Only Settlement, including the payment/receipt of variation margin or delivery adjustment money, due to the default of a Clearing Participant. Specifically, for buying/selling and Standard Repo Transaction, it is calculated by averaging a certain ratio of the top settlement amounts during a certain historical period.
For Subsequent Collateral Allocation Repo Transaction, Initial Margin is calculated based on the amount equal to variable margin deposit and the amount equal to payment of delivery adjusted money, at the timing of calculation of Initial Margin.
3.Initial Margin to cover repo rate fluctuation risk
Initial margin to cover repo rate fluctuation risk is calculated to cover the repo cost arising from executing repo transactions in the liquidation of the positions of a Clearing Participant which has defaulted. Specifically, it is calculated by multiplying the repo trade amount needed to reconstruct the OTC JGB positions by the repo rate spread expected by JSCC. The relevant risk amounts are setoff, taking into account of delivery of positions; provided, however, in order to prevent excessive setoff, the certain raio of risk amount prior to the setoff is calculated as the lower limit. As with the initial margin calculation, the greatest of the risk amount, the average of a certain ratio of the top risk amounts for a given historical period, and the minimum amount are used.
For Subsequent Collateral Allocation Repo Transaction, basket position prior to collateral allocation is subject to the calculation and the risk amount related to the relevant position is delivery amount.
4.Market Impact Charge
The market impact charge is calculated to cover the market liquidity risk arising from the liquidation of a defaulted Clearing Participant's positions. Specifically, a bid/ask spread* is determined based on a market survey of Clearing Participants for each JGB type, maturity, and terms to maturity. For actual determination of the market impact charge amount, the largest of the charge amount based on the position for which settlement is executed after the calculation day, the charge amount based on the position reflecting changes by progress of intraday DVP settlement or average of a certain ratio of the top charge amount based on the position at the timing for which DVP settlement has been completed in each day during a certain historical period.

* The relevant bid/ask spread is then multiplied by the position's interest rate sensitivity.

Market Data to be Used for Calculation

JSCC determines market price used for calculating initial margin and variation margin (market data) based on the reference statistical prices published by the Japan Securities Dealers Association as of the day (if such day falls on a holiday, such day shall be the immediately following business day) immediately following the calculation day.

Structure of Increasing Initial Margin

  • Increase by calling intraday initial margin
    When the JGB Futures market fluctuates significantly and price change of closing price of the morning session from closing price of immediately preceding day exceeds the value set by JSCC (weekly reviewed, in principle), amount of initial margin calculated for second and third times will be increased (multipled by the value, ranging from 1.1 to 2.0, depending on the price change).
  • Increase according to Credit Standing
    If JSCC considers necessary in light of the credit standing of the Clearing Participant, JSCC may increase the Required Initial Margin Amount. For detail, please refer to the the "Increases in Required Initial Margin Amount related to JGB OTC Transaction".
Please see here for Rules for Japanese Government Bonds