Clearing house of the year: JSCC

Asia Risk Awards 2021

Tetsuo Otashiro, JSCC

The Japan Securities Clearing Corporation (JSCC) has been making a raft of changes to its margining and risk management framework. These came too late to forestall a sudden spike in margins following the dramatic sell-off of equities in March last year, but it should stand the clearing house in good stead for the future.

The coronavirus equity rout served as a stark reminder as to why such an overhaul was needed. Between February 28 and March 26, margin requirements for the benchmark Nikkei 225 futures contract more than doubled, from 3.4% to 8.5% – a larger increase than was seen for the same contract at other exchanges. The Nikkei trades on the Chicago Mercantile Exchange and the Singapore Exchange, as well as JSCC.

Two of the changes that JSCC introduced to its margining model last year stand out in particular.

One was extending the margin period of risk – the length of time it takes for a CCP to return to a matched book once a member defaults – from one day to two days. The other was to change the amount of historical data that was used to calculate margin levels by extending the look-back period from one to five years and introducing an exponentially weighted moving average calculation methodology.

Shohei Yamagata, manager of JSCC’s listed products clearing service in Tokyo, says both of these changes, which were introduced in July last year, have resulted in more conservative margin levels and should avoid sudden margin spikes in the future.

Given the diversity of JSCC’s membership, introducing these changes was something of a bold move.

Shohei Yamagata, JSCC

While major global banking and financial institutions may be willing to pay more in margin for better risk management if it means they would not be on the hook for when smaller members bring the exchange down, a number of smaller domestic firms were quite content to pay less margin without proper consideration for the risk to the exchange and the Japanese financial system.

JSCC has more than 100 members, which is quite a high number for a major CCP. These include both local domestic firms and major international banks.

Yamagata recognises this problem. “There have been some difference of opinions between the big global firms and the smaller domestic firms whose clients take a rather different view but, by and large, there has been a generally positive reaction to the changes. We continue to have regular dialogue with our members and see what they have to say,” he says.

By positioning itself to be more in line with international standards, JSCC has won praise from its larger members.

“This is a good news story from our perspective, and they are in a much, much better place now that they used to be,” says a senior executive at one global bank. “They have really taken some positive steps over the past couple of years, and it is nice to see that they have listened to what some of their larger members were saying.”

The Nikkei 225 has moved from being “woefully under-margined” on JSCC, to a contract where margins are at a much more acceptable level, says the executive.

Commodities

JSCC was also able to bring robust risk management to the clearing of commodities in Japan, too.

In July, the clearing house merged with Japan Commodity Clearing House (JCCH), and found itself also having to clear commodity contracts, something that it had not done in the past.

“When we merged and when we started the clearing business for those products, we implemented our risk management policy for those cleared products,” says Tetsuo Otashiro, the JSCC’s head of clearing planning in Tokyo. “For these products the risk management policy became more conservative, more sophisticated and more streamlined.”

In particular, JSCC introduced a more “risk sensitive” approach to calculating default fund contributions, as well as a cap to additional contributions that clearing participants can be forced to make in the event of the default of a clearing participant.

“We implemented the same calculation methodology [for commodities] as we use for the financial derivatives market. This has been accepted by both our global and domestic members,” says Otashiro.

Following the merger with JCCH, the JSCC now clears products within six separate commodity segments. Yamagata says commodity clearing volumes have been healthy so far, although this can be a factor of market sentiment as much as anything.

Gold futures have in particular gained traction this year, with a daily average of 30,000 contracts being cleared. Crude oil futures have also seen healthy volumes of 20,000 contracts a day.