OTC Derivatives ClearingFor Clearing Participants ー IRS Clearing Service
JSCC started clearing Japanese Yen interest rate swaps (IRS) in October 2012, and 26 Clearing Participants, consisting of Japanese and global financial institutions, and more than 100 Customers (Affiliates & Clients), are currently using the service.
Table of Contents
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1. IRS Products Eligible for Clearing
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2. The Clearing Process
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3. Deposit of Margin
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4. Clearing Fund
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5. Management of Collateral Posted to JSCC - Trust Scheme
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6. Account Structure / System Structure / Operations
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7. Post Clearing Services -Compression / Cross Margining / Position Transfer
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8. Fees
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9. Clearing Participant Default
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10. Onboarding Process - Acquiring an IRS Clearing Participant Qualification
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11. Client Clearing
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12. Contact Information
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13. Regulatory Status - Overseas License/Recognitions
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14. Other
1. IRS Products Eligible for Clearing
- JSCC’s IRS clearing service covers a broad range of products including, but not limited to, the products subject to the central clearing requirement in Japan.
- List of IRS Products eligible for clearing at JSCC:
- More details of the requirements for eligible transactions is available here:
2. The Clearing Process
- Operational flow for Over-the-Counter IRS, from trade execution to clearing at JSCC, and details of the relevant clearing times, are outlined here:
3. Deposit of Margin
- The risk to cleared positions arising from interest rate fluctuations is covered by “Margin”.
- Each type of Margin is explained here:
- Details of the Deposit method, Calculation method, and Deposit Deadline for Margin are available here:
Initial Margin and Liquidity Charge
4. Clearing Fund
- “Clearing Fund” is designed to cover potential future exposures resulting from the simultaneous default of multiple Clearing Participants, under extreme but plausible market conditions (stressed conditions).
- Clearing Fund is collateral required to be posted by all Clearing Participants, and in the event of a Clearing Participant default, the Clearing Fund of non-defaulting Clearing Participants may be used if the defaulting Clearing Participant’s own collateral is insufficient.
- An illustration of the Clearing Fund calculation is available here:
- The priorities for the use of Clearing Fund resources, following a Clearing Participant default, are detailed here:
5. Management Collateral Posted to JSCC - Trust Scheme
- JSCC has established a trust scheme for the collateral posted by Clearing Participants and their Customers (Affiliates & Clients)*. The trust scheme allows collateral to be isolated (bankruptcy remote) from the default risk of JSCC under Japanese law.
*Alternatively, cash collateral can be posted in the custody of the Bank of Japan with a current account. - An overview of the trust scheme is available here:
6. Account Structure / System Structure / Operations
- JSCC has adopted a three-layered account structure, with Margin calculations and other administration functions being conducted at the 2nd layer level. An overview of the account structure is available here:
- Please contact JSCC directly for more details of the structure of JSCC’s Clearing system and operations.
7. Post Clearing Services - Compression / Cross Margining / Position Transfer
- Compression
JSCC offers “Compression” services that enable the netting and compression of outstanding cleared trades. An overview of each compression service is available here:
- Cross Margining
JSCC offers a “Cross Margining” service that enables the offsetting of risk between cleared IRS and 10-year JGB Futures positions. An overview of this service is available here:
- Position Transfer
JSCC offers a “Position Transfer” service that enables the transfer of cleared IRS to another participant of JSCC’s IRS Clearing Service. An overview of this service is available here:
8. Fees
- Details of the various fees for JSCC’s clearing service is available here:
9. Clearing Participant Default
- JSCC performs comprehensive credit risk management of its Clearing Participants, to minimize the risk of the default of a Clearing Participant. However, in preparation for a Clearing Participant default, JSCC has set out detailed default management procedures, and conducts a default management fire drill every year.
Details of JSCC’s Clearing Participant default management processes are available here:
Segregation of Customer Collateral / Position Transfer
Loss Compensation Financial Resources
Fund Liquidity Management
- Specific details of the responsive measures JSCC could take following a Clearing Participant Default in the IRS Clearing Service are available here:
10. Onboarding Process- Acquiring an IRS Clearing Participant Qualification
- Clearing Qualification Requirements
Details of the requirements for acquiring an IRS Clearing Qualification are available here:
- Application Schedule
An overview of the application process, including an estimated schedule, is available here:
Other requirements, such as a system connectivity check, would also need to be completed. Please contact JSCC directly for full details of the process for commencing clearing in JSCC's IRS clearing service.
- Documents to be Submitted
For full details of the documentation to be submitted as part of the application, as well as other requirements, please contact JSCC directly.
11. Client Clearing
- Client Clearing Service
JSCC offers a Client Clearing (*) service where a Clearing Participant can provide "Brokerage for Clearing" of IRS for an unaffiliated Customer (a Customer not in the same Corporate Group as the Clearing Participant) ("Client").
(*) Enabling clearing at JSCC of trades for the Customer of a Clearing Participant as “Brokerage for Clearing of Securities, etc.” Please note that JSCC’s Client Clearing service may not be used if a Customer falls under the CFTC’s definition of a “U.S. Person”. - Approval Process to become a Clearing Broker
For a Clearing Participant to handle Client Clearing, it must put in place an operational structure to support Client Clearing. JSCC has implemented the "Guidelines for Client Clearing Authorization in Interest Rate Swap Clearing Service" for the authorization of any Clearing Participant that wishes to provide a Client Clearing service.
- Conditions on JSCC Client Clearing
For a Client to begin clearing at JSCC as a Client, the following conditions must be satisfied:
(1) Execute a "Clearing Brokerage Agreement" (*1) with a Client as the Clearing Broker;
(2) Submit a "etter of Undertaking" prepared by the Client to JSCC (*2); and
(3) Ensure the Client is capable of using a trade affirmation platform / electronic trading platform (*3) designated by JSCC.
Please see here for details.
(*1) For the Clearing Brokerage Agreement, please use the format prescribed as Exhibit Form 3-2 (English) to the "Handling Procedures of Interest Rate Swap Business Rules."
(*2) For the Letter of Undertaking, please use the format prescribed as Exhibit Form 4-2 (English) to the "Handling Procedures of Interest Rate Swap Business Rules."
(*3) Currently, the trade affirmation platforms / electronic trading platforms with direct connections to JSCC are;
MarkitWire, Bloomberg VCON, and Bloomberg ETP. - Customer Buffer
At JSCC, a "Customer Buffer" framework is available, under which an allocation of collateral posted by a Clearing Broker for such purpose is allowed to be used to cover a Customer's collateral shortfall (either an Affiliate or Client). Please see here for details.
- Client Additional Margin
For diversification of Clearing Brokers' customer risk management options, JSCC makes available a "Client Additional Margin" framework, under which a Customer's Initial Margin requirement can be increased pursuant to a prior agreement between a Clearing Broker and a Client. For outlines of this framework and handling of Clearing Fund when this framework is used, please see here.
- Exceptional Treatment of Prohibition of Assignment of Claims.
In JSCC's IRS clearing business, Clearing Brokers and Customers are prohibited, in principle, from assigning, pledging, or otherwise disposing of their rights set forth in the Business Rules (e.g., the right to claim return of margin from JSCC) and the rights under the Clearing Brokerage Agreement. However, to make the management of exposure to each Customer in the Clearing Broker's entire group more effective, the Clearing Brokers and Customers may assign, pledge, or otherwise dispose of such rights, with prior approval by JSCC.
In addition, the documents that a Clearing Broker is required to submit to JSCC when onboarding a new client for Client Clearing are listed here:
[Reference] The page containing information for Clients is here:
12. Contact Information
- OTC Derivatives Clearing Service (IRS), Japan Securities Clearing Corporation
Telephone: +81-50-3361-1794
E-mail: otc@jpx.co.jp
For inquiries related to the documentation in sections 10. and 11. to be submitted to the Risk Monitoring Division, please contact: - Risk Monitoring Division, Risk Management Department, Japan Securities Clearing Corporation
Tel: +81-50-3361-1789
E-mail: risk-mo@jpx.co.jp
13. Regulatory Status - Overseas Licenses/Recognitions
- In line with each country’s initiatives towards central clearing of OTC derivatives transactions since the financial crisis in 2008, JSCC has obtained authorization from overseas regulatory authorities (U.S., EU, Australia, Hong Kong, Switzerland, Canada, and UK) to offer clearing services to non-Japanese entities.
This allows users to comply with the central clearing requirements in each jurisdiction through JSCC’s IRS clearing service. Please see here for full details:
14. Other
- List of Clearing Participants and Customers (Affiliates & Clients) using JSCC’s IRS clearing service:
- Rules and Public Notices related to JSCC’s IRS clearing service:
- IRS clearing performance data is available here:
- Disclosures under the Principles for Financial Market Infrastructures: