A stock index is an abstract number and cannot itself be delivered. Equity index futures such as Nikkei 225 Futures are therefore settled by exchanging the difference between the actual index and the agreed price1. Japan Exchange Group's glossary defines this method as settlement in which only the gain or loss fixed by an offsetting trade is paid and received, and it explains the method with the gain or loss on equity index futures fixed by an offsetting trade2. This site uses "Cash settlement" as the English heading for the method, and the English contract specifications of Japan Exchange Group also give the settlement method of Nikkei 225 Futures as "Cash Settlement"3.

Consider a hypothetical example in which a trader buys 1 Nikkei 225 Futures contract (contract unit: 1,000 times the index) at 15,000 yen. If the SQ value is 15,200 yen, the trader receives (15,200 − 15,000) × 1,000 = 200,000 yen. If the SQ value is 14,800 yen, the trader pays 200,000 yen by the same formula. Either way, no stocks that make up the Nikkei Stock Average are delivered. Settlement that delivers the real asset is called delivery settlement. In JGB futures, which deliver actual bonds, an open position not settled by the last trading day is settled on the delivery settlement date by exchanging bonds for cash4.

How "sakin kessai" and "genkin kessai" are used differs from source to source. Japan Exchange Group calls commodity futures that can be closed out only by cash settlement (Gold Mini, Platinum Mini, crude oil, and electricity) contract-month cash-settled futures5. A material from the Policy Research Institute, Ministry of Finance, describes the cash settlement (genkin kessai) of swaptions as a method that settles the difference based on the market value at the time of exercise6. A material from a Bank of Japan study group gives the settlement method of Japanese yen OIS, a kind of swap, as cash settlement (sakin kessai)7.

Notes

  1. Osaka Exchange, "契約（取引成立）から満期まで（先物）" (From contract (execution) to expiration (futures)), in "北浜投資塾" (Kitahama Investment School) (in Japanese). ↩

  2. Japan Exchange Group, "差金決済" (Cash settlement (sakin kessai)), in its glossary (in Japanese). ↩

  3. Japan Exchange Group, "Contract Specifications" (Nikkei 225 Futures, English page), the "Settlement" row. ↩

  4. Japan Exchange Group, "受渡決済" (Delivery settlement), in its glossary (in Japanese). It says that for JGB futures, a short open position not bought back and a long open position not resold by the last trading day are settled by delivery on the delivery settlement date. ↩

  5. Japan Exchange Group, "限月現金決済先物取引" (Contract-month cash-settled futures), in its glossary (in Japanese). ↩

  6. Policy Research Institute, Ministry of Finance, "債券（金利）オプション入門 ―スワップションについて―" (Introduction to bond (interest rate) options: swaptions) (Takahiro Hattori; in Japanese), "現物決済と現金決済" (Physical settlement and cash settlement). ↩

  7. Study Group on Risk-Free Reference Rates, "日本円ＯＩＳ（Overnight Index Swap）─取引の概要と活用事例─" (Japanese yen OIS (Overnight Index Swap): overview of transactions and examples of use) (information as of March 2018; in Japanese), "決済方法：差金決済" (Settlement method: sakin kessai) in the "基本的な取引方式" (Basic trading terms) section. ↩