Clearing house of the year: JSCC

When Bank of Japan governor Kazuo Ueda brought an end to more than a decade of ultra-loose monetary policy in March, the yen rates market was braced for volatility. But the Japan Securities Clearing Corporation had put in the work to ensure its members were well prepared for the historic event and the ensuing market turbulence.

JSCC conducted margin simulations and notified participants of the results before BoJ monetary policy meetings in February 2023, March 2023, July 2023 and March 2024, to prepare clearing members for potential market stress and minimise margin procyclicality.

“This proactive approach was well received by all our clearing members, as it allowed them to prepare ex ante for any BoJ policy surprises,” says Ayako Kawai, chief manager of clearing planning and over-the-counter derivatives clearing service at JSCC.

Several other JSCC initiatives from the past year have also helped reduce the amount of initial margin (IM) members will have needed to fork out around those BoJ meetings. One was the addition of new futures contracts linked to short-term JPY rates. The other was the adoption of an improved margin-calculation model for cleared listed contracts. 

JSCC started clearing the three-month Tokyo overnight average rate (Tona) futures contracts traded on the Osaka Exchange in May 2023. In March this year, it also included these short-term interest rate (Stir) futures contracts into the cross-margin universe within JSCC’s interest rate swap clearing service.

Tetsuo Otashiro, JSCC’s director of global policy and regulation and OTC derivatives clearing services, says the central counterparty (CCP) has been facilitating cross-margining between Japanese yen interest rate swaps and 10-year Japanese government bond futures for many years. He notes the addition of Stir futures to this cross-margining programme further increases opportunities for margin efficiencies through “offsetting exposures”. 

It is estimated the cross-margining could generate a 50–60% reduction in margin for a sample portfolio holding Tona overnight index swaps, three-month Tona futures and 10-year JGB futures positions. The estimated IM reduction rate for IRS is 51% for a steepener position, and 61% for a flattener position based on market data as of the end of May 2023.

JSCC believes the margin benefits will become “increasingly beneficial” for members with the cost of funding JPY IM expected to grow.

“Since the launch in May last year, open interest has been steadily growing, exceeding a milestone of 50,000 in August,” says Otashiro. “Although other exchanges have also joined the Tona futures market, the largest liquidity of this is in Japan, with Osaka Exchange and clearing at JSCC.”

From Span to VAR

In November last year, JSCC migrated its risk-calculation methodology from the Standard Portfolio Analysis of Risk – a method developed by CME Group known as Span – to value-at-risk for the purposes of determining IM on cleared futures and listed options contracts.

VAR consists of more than 1,250 data points to obtain margin requirements while Span calculates margin based on 16 highly simplified scenarios, which makes the former method more market-sensitive. The new methodology is also conducive to strengthening protections for both investors and clearing brokers by improving risk management and controlling drastic fluctuations in margin.

“We spent several years in planning how to migrate to VAR from Span. During that time, we had a lot of discussions with our members, including global and domestic ones, to design the model of VAR,” says Shohei Yamagata, chief manager of listed products clearing service at JSCC.

“Overall, we have received positive reactions and feedback on our implementation of VAR from our clearing members, due to especially the enhancement and sophistication of our robust risk management,” he adds.

Beyond these initiatives on margin, JSCC has also been working with overseas regulators so it can open its doors to more non-Japanese firms. For example, in September last year, Canada’s Ontario Securities Commission issued JSCC’s interest rate swap clearing business with an exemption from recognition, allowing Canadian banks to access swap clearing at the CCP. 

The CCP continues to press the US derivatives regulator, the Commodity Futures Exchange Commission for an exemption that would allow the US clients of clearing members to access its yen swaps clearing service.

In another project, the bank is helping members to manage the forthcoming discontinuation of the Euroyen version of the Tokyo Interbank Offered Rate (Tibor), scheduled for December 2024.

Otashiro points out that the scale of this project will be “much smaller” than that of the transition from Libor to alternative risk-free reference rates. Following the permanent suspension of JPY Libor publication at the end of December 2021, the majority of JPY OTC interest rate swaps shifted to Tona-based transactions. JSCC plans to follow the same process for the discontinuation of Euroyen Tibor. The CCP is proposing to replace all legacy contracts with floating rates linked to Euroyen Tibor with new contracts linked to the Tona plus a temporary cover for a difference in fixing between two indexes.