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.
Initial Margin for OTC JGB consists 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.
（※）The total required OTC JGB Initial Margin amount contributed by all Clearing Participants was JPY790.1B (as of 30, December, 2016)
- Initial Margin (POMA)
POMA is calculated using a delta method and based on historical price fluctuations during a given period, taking into account the correlations between issues. Parameters used in calculations include a reference period of 250 days, a confidence level of 99%, and a holding period of 3 days.
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.
- Initial Margin to cover FOS failure risk
Initial Margin to cover FOS failure risk is calculated to cover the loss arising from failure of Fund Only Settlement, including the payment/receipt of variation margin or JGB coupon, due to the default of a Clearing Participant. It is calculated by averaging a certain ratio of the top settlement amounts during a certain historical period.
- 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. It is calculated by multiplying the repo trade amount needed to reconstruct the OTC JGB positions by the repo rate spread expected by JSCC. 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.
- 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. The relevant bid/ask spread is then multiplied by the position’s interest rate sensitivity.
Market Data to be Used for Calculation
JSCC determines based on the reference statistical prices for over-the-counter transactions 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 according to Credit Standing
If JSCC considers necessary in light of the credit standing of the OTC JGB Clearing Participant, JSCC may increase the Required Initial Margin Amount. For detail, please refer to the “Japanese Government Bond Clearing Business Rules” Article 29-2 and the “Increases in Required Initial Margin Amount related to JGB OTC Transaction”.