In futures and options traded on Japan Exchange Group markets, a customer deposits margin with the trading participant (a securities company), and the trading participant deposits trading margin with the clearing house, Japan Securities Clearing Corporation (JSCC)1. JSCC takes margin as collateral to cover, at the expense of a defaulting clearing participant, the loss arising if that participant fails2.

In futures, both the seller and the buyer deposit margin, because losses can grow for either side depending on price moves. In options, the buyer, whose loss is limited to the premium, does not need to deposit margin, and the seller does3. Margin can be replaced with securities, but when a calculated loss has arisen, additional cash is required1. Margin is a kind of collateral. Over-the-counter derivatives that are not cleared through a clearing house are also subject to a regulation under which the parties exchange margin (margin requirements for uncleared derivatives), and there margin is called variation margin or initial margin4. The procedure for being asked to post collateral is covered under margin call.

Consider a hypothetical example. The margin required for a futures position is 1 million yen, and the customer has deposited 1.2 million yen in cash. In this example, the margin held is the amount deposited plus the calculated gain or loss5. If price moves produce a calculated loss of 300,000 yen, the margin held falls to 900,000 yen, and the shortfall of 100,000 yen must be deposited with the securities company by the set deadline. Conversely, if a calculated profit of 200,000 yen arises, the margin held rises to 1.4 million yen, and up to the excess of 400,000 yen over the required amount can be paid out5.

Notes

  1. Japan Exchange Group, "証拠金" (Margin) (glossary, in Japanese), paragraphs 1 to 2 (where it is deposited, trading margin) and 4 (substitution by securities, additional cash). ↩ ↩2

  2. Japan Securities Clearing Corporation, "リスク管理 証拠金" (Risk management: Margin) (in Japanese), paragraph 1. ↩

  3. Japan Exchange Group, "証拠金とは（先物・オプション）" (What is margin (futures and options)) (in Japanese), "誰が証拠金を差し入れるのか" (Who deposits margin). ↩

  4. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 123, paragraph 1, item 21-10 (variation margin: margin deposited according to changes in the market value of non-cleared OTC derivatives) and item 21-11 (initial margin: margin deposited against the estimated future costs or losses). ↩

  5. Japan Exchange Group, "顧客が差し入れる証拠金（先物・オプション）" (Margin deposited by customers (futures and options)) (in Japanese), sections on deposit and maintenance, deadline, and payout of calculated profit. ↩ ↩2