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Default Management

(As of February 13, 2018)

  • JSCC continuously monitors Clearing Participants in order to avoid their defaults, but preparing for the worst, JSCC’s rules set out the details of the default management procedures, including the events constituting a default, the sequencing of the process and obligations of parties involved.
  • JSCC will declare that a Clearing Participant is in default if such participant is, or is likely to be, unable to perform its obligations, according to the determination of JSCC’s senior management. If a default is declared, JSCC can take actions to contain losses by halting clearing of new transactions from the defaulter and liquidating the defaulter’s positions.
  • JSCC’s methods for disposing of positions vary according to the nature of the product for each Clearing Business. Specifically, offsetting transactions are conducted in the market for listed products. When JSCC consider it necessary taking into various factors, such as composition of issues and size of the remaining positon and market conditions, JSCC may liquidate such defaulter’s position through hedge transactions and an auction. And an auction involving non-defaulting Clearing Participants is used for CDS, IRS, and OTC JGBs. In such cases, for CDS and IRS transactions, hedge transactions are to be promptly executed for the defaulter’s positions based on the advice of the related Clearing Business’s advisory committee (CDS Default Management Committee, IRS Default Management Committee), in order to prevent the increase of losses before the auction.
  • When disposing of positions, customer positions and collateral related to listed derivatives, CDS, and IRS transactions are able to be transferred to non-defaulting Clearing Participants. JSCC does not receive deposits of customer collateral for transfer in relation to the Cash Products and OTC JGBs.

    Segregation and Portability
  • JSCC uses its loss compensation financial resources according to its rules to cover losses arising in the default process.

    Loss Compensation
  • Even when a Clearing Participant default occurs, JSCC will fulfill settlement according to the regular schedule. In order to fulfill settlement in this manner, JSCC maintains Liquidity Supply Facilities for procuring necessary liquidity. Additionally, JSCC has established a framework for liquidity via JGB repo transactions with Clearing Participants for OTC JGBs.

    Liquidity Risk Management