Default ManagementLiquidity Risk Management
Liquidity Risk Management
(As of July 1,2021)
- 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 procedures for procuring necessary liquidity. JSCC will first use cash deposited as collateral by the defaulting Clearing Participant and cash withheld from payments to the defaulting Clearing Participant to perform fund settlement. In preparation for cases where these funds are insufficient, JSCC has secured yen-denominated and foreign currency denominated liquidity supplies from multiple commercial banks that have been designated as Fund Settlement Banks (Liquidity Supply Facilities) in addition to JSCC’s own cash.
- Besides, JSCC has secured Liquidity Supply Facility from its parent company, JPX to secure liquidity supply from a diverse range of entities.
- In addition to this, because a large amount of liquidity is expected to be required if an OTC JGB Clearing Participant defaults, due to the large settlement amount associated with the settlement of notional amount, JSCC has established a framework to procure liquidity via JGB repo transactions with Clearing Participants and other financial institutions.
- Furthermore, for Listed Products (Cash Products and Listed Derivatives), JSCC has a framework in place that allows for the temporary use of the Japanese yen cash portion of the clearing fund deposited by non-defaulting Clearing Participants, following settlement failure by a Clearing Participant.
- JSCC conducts daily stress tests to confirm the sufficiency of its total liquidity supply, for all settlement currencies.
- The results of daily stress testing are reported to the Chief Risk Officer (CRO), CEO and other executive directors, and the related division head. Additionally, stress testing results are reported as to the Risk Oversight Committee on a monthly basis, the Board of Directors and the Risk Committee on a quarterly and annual basis and the Advisory Committees of each clearing business on at least annual basis.
Reliability of Liquidity Providers
- JSCC diversifies its liquidity sources by receiving Liquidity Supply Facilities from 6 Fund Settlement Banks for Japanese yen. The concentration status of liquidity provider resources is monitored on a monthly basis.
- JSCC considers the Liquidity Supply Facility from each Fund Settlement Bank is sufficient for performing its commitment in proportion to the Fund Settlement Bank’s balance sheet. During the 2008 Financial Crisis, JSCC was able to access Liquidity Supply Facilities without issue.
- All Fund Settlement Banks operate under the supervision of the JFSA and have access to the fund provision operations of the BOJ. JSCC continuously monitors the financial soundness of these banks by receiving regular reports on their financial status.
- JSCC has established a liquidity framework via JGB repo transactions with Clearing Participants and other financial institutions for OTC JGBs. This framework assumes that, when procuring liquidity from the market is difficult, Clearing Participants will access the supplementary lending of the BOJ, which uses JGBs as collateral, ensuring its effectiveness.
- JSCC confirms the effectiveness of its access to the liquid resources of liquidity providers in default settlement fire drills that are conducted at least annually.
