OTC Japanese Government BondsMargin

Initial Margin for OTC JGB

Please see here for outline of each margin

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, 500 days or 1,250 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

Structure of Increasing Initial Margin

Triggering Criteria

Required Amount

Change of the contract price of 10-year JGB Futures (leading contract month contract) at closing of morning session from closing price of afternoon session on immediately previous day exceeds Market Price Fluctuation Risk Factor*1 of Interest-Bearing JGBs with remaining years to maturity of 7-10 years.

Amount of Initial Margin calculated at 11:00 and 14:00 are obtained by the following formula. Required Initial Margin Amount = (Initial Margin (POMA) + Initial Margin to cover FOS failure risk) × Increase Rate + Initial Margin to cover repo rate fluctuation risk + Market Impact Charge Increase Rate is calculated (ranging from 1.1 to 2.0, in 10 steps)*2, depending on the level of 10-year JGB Futures price fluctuation.

Please see here for Rules for Japanese Government Bonds