Risk management and treasury teams check, item by item in the notice's LCR and NSFR provisions, how derivative collateral transfers and derivative assets and liabilities affect funding.

What the rules require

Liquidity rules require a bank to hold enough funds to survive 30 days of stress and also to have stable funding over the medium to long term. The first is the liquidity coverage ratio (LCR) and the second is the net stable funding ratio (NSFR). Both are liquidity rules of Basel III. The Basel Framework and Derivatives covers the overall framework of the two ratios. The treatment of derivatives is set item by item in the notice.

Derivatives affect liquidity because a change in market value triggers collateral transfers, and a rating downgrade can trigger demands for additional collateral. This funding liquidity risk is counted as a 30-day cash outflow in the LCR and as a need for stable funding against assets and liabilities in the NSFR.

Ratio Formula Minimum Where derivatives enter
LCR Eligible liquid assets counted ÷ net cash outflows 100% or more Cash outflows and inflows in the denominator; high-quality liquid assets (HQLA) in the numerator (the treatment of received collateral)
NSFR Available stable funding ÷ required stable funding 100% or more Derivative liabilities and received margin in the numerator; derivative assets and posted initial margin in the denominator

The formulas and minimums for the LCR and the NSFR are in the Financial Services Agency notice1. The numerator of the LCR, HQLA, is divided into Level 1, Level 2A, and Level 2B. The section "High-quality liquid assets and received collateral" shows how it is calculated.

The LCR and the NSFR are in the same notice, a Financial Services Agency notice issued under Article 14-2 of the Banking Act (FSA Notice No. 60 of 2014; the "Liquidity Notice" below). The formulas apply to banks with overseas business offices1. The Financial Services Agency's own material also says that the LCR and the NSFR in Japan apply to internationally active banks2.

Content Article of the Liquidity Notice
LCR formula, eligible liquid assets counted, net cash outflows Articles 2 to 4
Classes of HQLA (Level 1, 2A, 2B) and operational requirements Articles 9 to 17
Cash outflows for derivative transactions and similar Articles 34 to 44
Cash inflows for derivative transactions and similar Article 67
NSFR formula, derivative liabilities and assets, factors Article 74, Articles 79 to 80, Articles 86 to 97

"Derivative transactions and similar" in the notice means the market derivative transactions, over-the-counter derivative transactions, and foreign market derivative transactions defined in the Financial Instruments and Exchange Act, and transactions similar to them3.

Derivative cash outflows and inflows in the LCR

The denominator of the LCR is the 30-day stressed cash outflow minus cash inflows. The derivative cash outflow is the sum of seven items4.

Item What is counted Outflow rate
Contractual cash outflow The positive part of contractual payments minus receipts, net, over 30 days 100%
Outflow for market value changes Additional collateral needed because market value moves 100%
Outflow for downgrades and similar Amounts under terms that require additional collateral after a downgrade 100%
Outflow for collateral valuation changes Additional collateral to post if collateral already posted falls in value 100%
Outflow for excess collateral received The haircut-adjusted amount of HQLA received minus the amount the counterparty is obliged to post 100%
Outflow for collateral not yet posted Collateral that is owed but not yet posted 100%
Outflow for substitution of received collateral Market value of collateral the counterparty can substitute without consent Rate set for each combination of collateral (table below)

Contractual cash flows over 30 days

The contractual cash outflow is netted not by trade but by legally valid bilateral netting agreement (the netting set). For each netting set, you subtract the cash to be received over the next 30 days from the cash to be paid, and add up only the amounts above zero5. For inflows, you run the same calculation and add the absolute values of the sets that do not exceed zero (the sets with more receipts)6. The notice borrows its definition of a legally valid netting agreement from the leverage ratio notice.

Consider a hypothetical example in which Bank Q has two netting agreements. Under agreement A, it pays 8 billion yen and receives 5 billion yen over 30 days. Under agreement B, it pays 2 billion yen and receives 6 billion yen.

Agreement Payments (billion yen) Receipts (billion yen) Net (billion yen) Cash outflow (billion yen) Cash inflow (billion yen)
A 8 5 3 3 0
B 2 6 −4 0 4

The outflow is only the 3 billion yen from A, and the 4 billion yen from B is an inflow. You cannot combine A and B into a net of 1 billion yen. The netting sets are different, so the receipts under B do not reduce the payments under A.

The buffer for market value changes

The outflow for market value changes is calculated by one of two methods the notice allows7. The simple method looks at the past 24 months before the reference date. For each 30-day window, it adds, by trade, the absolute value of collateral and asset receipts minus deliveries, and it uses the total for the window where this sum is largest. The direction of the transfers does not matter, and windows with net receipts count too8.

Consider a hypothetical example in which just three of the 30-day windows in Bank Q's past 24 months are compared. Collateral received is positive and collateral delivered is negative, and the trades are grouped into two sets, A and B.

30-day window Net for A (billion yen) Net for B (billion yen) Sum of absolute values (billion yen)
Window 1 −10 3 13
Window 2 −6 −2 8
Window 3 9 5 14

Among these three windows, the largest is Window 3 at 14 billion yen, and this amount is the outflow for market value changes. In practice you choose from all the windows in the 24 months. If you looked only at a window like Window 1, where A delivers a lot and B receives, you would wrongly take 13 billion yen as the largest. The other method, the scenario method, calculates the difference between collateral received and delivered under scenarios built from financial indicators during past periods of market liquidity stress. To use it, a bank must meet the criteria for selecting stress scenarios and the quantitative and qualitative criteria9.

Outflows from downgrades and collateral terms

The remaining five items are cases in which contract terms drive collateral transfers.

The outflow for downgrades and similar covers trades with a downgrade trigger (a term that obliges a party to post additional collateral when its rating falls). It counts at 100% the cash needed in cases such as a three-notch downgrade in the obligor's credit rating11.

The outflow for collateral valuation changes applies to trades with an additional collateral clause (a term that requires more collateral if the posted collateral falls in value). It is 20% of the haircut-adjusted amount of posted collateral that is not Level 1 assets, minus 20% of the haircut-adjusted amount of received collateral that is not Level 1 assets. Only received collateral that meets the requirement in Article 15, item 4 is counted. The amount is calculated for each counterparty, and a result below zero is set to 012. The haircut-adjusted amount is the market value of the asset multiplied by the haircut set in the contract13.

Excess collateral received is the haircut-adjusted amount of HQLA received minus the amount the counterparty is obliged to post. Collateral not yet posted is the part of the haircut-adjusted amount of collateral that the bank is obliged to post but has not yet posted. Both count at 100%14.

Substitution of received collateral applies to trades with a term that lets the counterparty replace the collateral received with another asset without consent. The market value of the received collateral is multiplied by the following rates15.

Collateral received Asset the counterparty can substitute Rate
Level 1 assets Level 2A assets 15%
Level 1 assets Level 2B assets that are residential mortgage-backed securities 25%
Level 1 assets Assets that are not liquid assets 100%
Level 2A assets Assets that are not liquid assets 85%

For an example covering all seven items, suppose the following for Bank Q. The market value change is 14 billion yen, from Window 3 above. The collateral needed on a downgrade is 2.5 billion yen. For collateral valuation changes, posted non-Level 1 collateral has a haircut-adjusted amount of 40 billion yen (8 billion yen at 20%). Received non-Level 1 collateral is 25 billion yen (5 billion yen at 20%), so the difference is 3 billion yen. Excess collateral received is 5 billion yen and collateral not yet posted is 4 billion yen. A term that allows 10 billion yen of received Level 1 collateral to be replaced with Level 2A assets gives 1.5 billion yen.

Item Cash outflow (billion yen)
Contractual cash outflow (agreement A above) 3
Market value changes 14
Downgrades and similar 2.5
Collateral valuation changes 3
Excess collateral received 5
Collateral not yet posted 4
Substitution of received collateral 1.5
Total 33

When the amounts for market value changes and collateral valuation changes are already included in net cash outflows, that portion can be deducted from the contractual net amount5. The example above makes no such adjustment.

The cap on inflows

Net cash outflows are the cash outflows minus the cash inflows. Inflows are capped at 75% of cash outflows16.

Consider a hypothetical example in which Bank Q's total cash outflows are 100 billion yen (of which derivatives are the 33 billion yen above) and its cash inflows are 90 billion yen (of which derivatives are the 4 billion yen above). The cap is 75 billion yen, so only 75 billion yen of inflows can be deducted, and net cash outflows are 25 billion yen. Deducting the full 90 billion yen would give 10 billion yen, only 40% of the capped figure.

If the eligible liquid assets counted (the amount of HQLA counted) in the numerator are 30 billion yen, the LCR is 120%. The next section derives the 30 billion yen.

High-quality liquid assets and received collateral

The numerator HQLA consists of what the notice calls eligible liquid assets, divided into Level 1, Level 2A, and Level 2B. The share that can be counted is 100% for Level 1 and 85% for Level 2A. For Level 2B, it is 75% for residential mortgage-backed securities and 50% for corporate bonds, equities, and similar assets17. Level 2 assets cannot be counted beyond the equivalent of 40% of the total, and Level 2B assets within that cannot exceed the equivalent of 15%18.

One of the operational requirements (free disposability) for an asset received as derivative collateral to count as HQLA is that it is not held separately from other assets. No law or contract may restrict transferring it or pledging it to a third party, for example in repo-style transactions19. Conversely, an asset that is actually in use as collateral does not meet the operational requirement of free disposability and does not count as HQLA19.

Consider a hypothetical example in which, excluding amounts actually in use as collateral, Bank Q holds Level 1 assets of 21.5 billion yen and Level 2A assets with a market value of 10 billion yen. It has no repo-style transactions. The counted amounts are 21.5 billion yen for Level 1 and 8.5 billion yen for Level 2A, 30 billion yen in total. The Level 2 amount counted, 8.5 billion yen, is below about 14.3 billion yen, which is two-thirds of Level 1, so the cap does not bind. The amounts actually in use as collateral cannot be counted, so they are not included in the 21.5 billion yen and 10 billion yen in this example.

Derivative assets and liabilities in the NSFR

The NSFR treats derivative assets and liabilities on a net basis. The available stable funding factor for the excess of liabilities over assets is 0%, and the required stable funding factor for the excess of assets over liabilities is 100%.

Side Item Content Factor
Available stable funding Excess of liabilities over assets Derivative liabilities minus derivative assets (if positive) 0%
Available stable funding Margin received Amounts of received variation margin and initial margin 0%
Required stable funding Excess of assets over liabilities Derivative assets minus derivative liabilities (if positive) 100%
Required stable funding Replacement cost of liabilities The total of negative replacement costs before deducting variation margin 5%
Required stable funding Initial margin posted and default fund contributions Including amounts not on the balance sheet 85% (or a higher factor determined separately)

The factors and the classification of items are in Articles 86, 96, and 97 of the notice20.

The amount of derivative assets is the sum of the replacement costs (the positive part of market value) of each netting set. However, variation margin received in cash or in Level 1 assets free of disposal restrictions can be deducted from the amount of assets if it meets all four of the following requirements (hereafter, this special rule)21.

  • It is not segregated.
  • It is marked to market every business day, and the amount received is at least the marked-to-market amount.
  • It is in the same currency as the one specified in the contract.
  • The trades and the variation margin are covered by the same legally valid bilateral netting agreement.
YesNoWas the variation marginreceived in cash or inLevel 1 assets free ofdisposal restrictions?This specialrule does notapplyNoYesIs it segregated?This specialrule does notapplyYesNoIs the amount received atleast the value markedevery business day?This specialrule does notapplyYesNoIs it in the samecurrency as the onespecified in thecontract?This specialrule does notapplyYesNoAre the trades covered bythe same legally validbilateral nettingagreement?This specialrule does notapplyIn principle, it can bededucted from the amountof assets
Figure 1Can received variation margin be deducted from the amount of derivative assets?
Figure description

The figure takes the four requirements above, adds the type of asset received (cash or Level 1 assets free of disposal restrictions), and lists the resulting five questions in order from the first. For every question except the second, "yes" leads to the next question, and "no" means the special rule does not apply and the amount of derivative assets stays at the total. The second question runs the other way: "yes" (the margin is segregated) means the special rule does not apply. If the answer to the second question is "no" and the other four are "yes," then in principle the amount of the received variation margin can be deducted from the amount of assets. If the result of the deduction is below zero, it is set to zero21.

Consider a hypothetical example in which the requirements of Article 89 are applied to the terms of each trade below.

Case Answers to the figure's questions Determination
Bank E receives variation margin in Level 2A assets for trades covered by a netting agreement "No" to the first question The special rule does not apply, because the asset received is not cash or Level 1 assets free of disposal restrictions
Bank E receives variation margin in yen cash although the contract specifies US dollars. The other requirements are met "Yes" to the first and third questions, "no" to the second (segregation, so the figure proceeds), "no" to the fourth The special rule does not apply, because the currency is not the same as the one specified in the contract
Bank E receives cash in the currency specified in the contract, without segregating it. The margin is marked to market each business day with the amount received at or above the market value, and the trade and the margin are covered by the same netting agreement "No" to the second question (segregation), "yes" to the other four The special rule applies, and the amount of the received variation margin can be deducted from the amount of assets

Variation margin posted in cash is treated as an asset with a 0% factor, except for the portion deducted from the amount of derivative liabilities22.

Consider a hypothetical example in which Bank Q has two netting agreements. Agreement S1 has a market value of +30 billion yen, and Bank Q has received 25 billion yen of cash variation margin. Agreement S2 has a market value of −20 billion yen, and Bank Q has posted 15 billion yen of cash variation margin. Bank Q has also posted 10 billion yen of initial margin. Compare the case in which the variation margin received meets the four requirements above with the case in which it is segregated and does not.

Item (billion yen) Requirements met Requirements not met
Derivative assets 30 − 25 = 5 30
Derivative liabilities 20 − 15 = 5 5
Difference between assets and liabilities (positive part) × 100% 0 25
Replacement cost of liabilities 20 × 5% 1 1
Initial margin posted 10 × 85% 8.5 8.5
Total added to required stable funding 9.5 34.5

Whether the requirements are met changes the required stable funding for derivatives from 9.5 billion yen to 34.5 billion yen. If the variation margin received is segregated, it can no longer be deducted from the amount of assets.

Margin is treated in the NSFR as follows. Initial margin posted has an 85% factor. For variation margin, whether the four requirements are met changes the amount of derivative assets, and the cash posted is at 0%, except for the portion deducted from the amount of derivative liabilities2122.

Application dates and transitional measures

The notice has applied to the LCR since March 31, 2015. The minimum was 60% from March 31 to December 31, 2015, 70% in 2016, 80% in 2017, and 90% in 2018. After the transitional period ended, it has been 100% since 201923. The NSFR has applied since September 30, 202124.

2015March 31LCR starts to apply (minimum 60%until December 31)2016LCR minimum 70%2017LCR minimum 80%2018LCR minimum 90%2019January 1LCR minimum 100%2021September 30NSFR starts to apply
Figure 2Rising LCR minimums and the start of the NSFR
Figure description

The figure lists the stepwise rise of the LCR minimum and the start of the NSFR, which came after the LCR, from oldest to newest2324. The spacing is not proportional to elapsed time.

Item Date (as of October 2026)
LCR starts to apply March 31, 2015
LCR minimum reaches 100% January 1, 2019
NSFR starts to apply September 30, 2021
Latest amendment to the Liquidity Notice starts to apply June 1, 2026 (FSA Notice No. 24 of 2026)

Differences from US rules

The US Federal Reserve Board's LCR rule (12 CFR 249) also sets outflow amounts for derivative collateral, in items close to those of the Japanese notice. The table lists the items in Section 249.32 as of September 1, 2026 that come closest to the seven Japanese items, in the order of the Japanese items. The conditions are not the same25.

Item in the Japanese notice Item in Section 249.32 of the US rule
Contractual cash outflow 30-day net derivative cash outflow for each counterparty
Outflow for market value changes Absolute value of the largest net 30-day collateral flow in the past 24 months
Outflow for downgrades and similar Additional collateral required by contract because of a change in financial condition
Outflow for collateral valuation changes 20% of posted collateral that is not Level 1
Outflow for excess collateral received Excess collateral
Outflow for collateral not yet posted Collateral not yet posted under the contract
Outflow for substitution of received collateral Substitution of received collateral

For substitution of received collateral, the US rule uses 50% when Level 1 collateral can be replaced with Level 2B assets. The Japanese notice distinguishes by type: 25% for residential mortgage-backed securities within Level 2B, and 50% for corporate bonds, equities, and similar assets2515. The EU and UK rules, and the NSFR rules of the US and other countries, are not covered on this page.

Notes

  1. Financial Services Agency, "銀行法第十四条の二の規定に基づき、銀行がその経営の健全性を判断するための基準として定める流動性に係る健全性を判断するための基準" (Standards for assessing the soundness of a bank's management in terms of liquidity, under Article 14-2 of the Banking Act, our translation; FSA Notice No. 60 of 2014; updated May 22, 2026), Article 2 (the consolidated LCR formula and the 100% minimum), Article 8 (application to the non-consolidated level), Article 74 (the consolidated NSFR formula and the 100% minimum), and Article 78 (non-consolidated). Page 13 (Article 2) and page 50 (Article 74) of the PDF (in Japanese). ↩ ↩2

  2. Financial Services Agency, "バーゼル規制の概要" (Overview of the Basel Regulations, our translation; August 2026), page 7 "Liquidity Coverage Ratio (LCR)" and page 8 "Net Stable Funding Ratio (NSFR)". Both say that the targets are internationally active banks (in Japanese). ↩

  3. The Liquidity Notice, Article 1, item 23. ↩

  4. The Liquidity Notice, Article 18, item 4, and Article 34 (items 1 to 7). The outflow rates are in Articles 35 to 44. ↩

  5. The Liquidity Notice, Article 35, paragraphs 1 to 4. The parenthetical in paragraph 2 cites the definition of a "legally valid bilateral netting agreement" in Article 8, paragraph 2 of the leverage ratio notice (FSA Notice No. 11 of 2019). Paragraph 3 allows the amounts in Article 34, items 2 and 4, to be deducted from net cash outflows. ↩ ↩2

  6. The Liquidity Notice, Article 67, paragraphs 1 and 2 (the total of the absolute values of amounts that do not exceed zero). ↩

  7. The Liquidity Notice, Article 36, paragraphs 1 and 2 (the simple method or the scenario method). ↩

  8. The Liquidity Notice, Article 37, paragraph 1. Paragraph 2 of the same article allows several trades to be treated as a single trade, for example when the collateral is limited to liquid assets. ↩ ↩2

  9. The Liquidity Notice, Article 38, paragraphs 1 to 5 (the selection criteria are in paragraph 3, the quantitative criteria in paragraph 4, and the qualitative criteria in paragraph 5, items 1 to 4). ↩ ↩2

  10. The Liquidity Notice, Article 39, paragraph 3. ↩

  11. The Liquidity Notice, Article 40, paragraphs 1 and 2. ↩

  12. The Liquidity Notice, Article 41, paragraph 1 and paragraph 2, items 1 and 2. Item 1 has an adjustment for the case in which the collateral posted exceeds the contractual amount, which this example does not cover. ↩

  13. The Liquidity Notice, Article 44, paragraph 7 (the haircut-adjusted amount, defined as the market value of the asset multiplied by the haircut) and Article 1, item 24 (haircut). ↩

  14. The Liquidity Notice, Article 42, paragraphs 1 and 2 (excess collateral received) and Article 43, paragraphs 1 and 2 (collateral not yet posted). ↩

  15. The Liquidity Notice, Article 44, paragraphs 1 and 2, table. In the table, substitution of Level 1 collateral with Level 2B assets under Article 11, paragraph 1, item 1 is 25%, and with those under items 2 to 4 is 50%. Substitution of Level 1 collateral with assets that are not liquid assets is 100%, and of Level 2A collateral with such assets is 85%. ↩ ↩2

  16. The Liquidity Notice, Article 4. When inflows exceed 75% of cash outflows, 75% of cash outflows is deducted. ↩

  17. The Liquidity Notice, Article 9, paragraph 1 (Level 1, 100%), Article 10, paragraph 1 (Level 2A, 85%), Article 11, paragraph 1, item 1 (residential mortgage-backed securities, 75%), item 3 (corporate bonds and commercial paper, 50%), and item 4 (equities, 50%). ↩

  18. The Liquidity Notice, Article 3, paragraphs 1 to 3 (item 4 is the "adjustment for the 15% cap on Level 2B assets" and item 5 is the "adjustment for the 40% cap on Level 2 assets"; our translation). ↩

  19. The Liquidity Notice, Article 15, item 1 (not provided as collateral) and item 4 (requirements for collateral received in derivative transactions and similar). ↩ ↩2

  20. The Liquidity Notice, Articles 79 to 80 (amounts of liabilities), Article 86, paragraph 1, items 2, 4, and 5 (0%), Article 96, item 1 (85%), and Article 97, items 1 and 8 (100% and 5%). Pages 53 to 63 of the PDF. ↩

  21. The Liquidity Notice, Article 89, paragraph 1, items 1 to 4, and paragraph 2. ↩ ↩2 ↩3

  22. The Liquidity Notice, Article 91, item 6 (variation margin posted in cash, 0%). ↩ ↩2

  23. The Supplementary Provisions of the Liquidity Notice (the application date in Article 1; the transitional measures for the minimum in Article 2). ↩ ↩2

  24. The Supplementary Provisions of the Liquidity Notice (FSA Notice No. 14 of March 31, 2021), Article 1 (applies from September 30, 2021). Page 8 of the Financial Services Agency's "バーゼル規制の概要" says, "In Japan, implemented from the September 2021 period" (our translation). The latest amendment applies from June 1, 2026 under the Supplementary Provisions (FSA Notice No. 24 of May 22, 2026). ↩ ↩2

  25. 12 CFR § 249.32 Outflow amounts (eCFR, version as of September 1, 2026), paragraph (c) (net derivative cash outflow amount) and paragraphs (f)(1) to (f)(6) (collateral outflow amount). Paragraph (f)(6)(iii) sets 50% when Level 1 collateral can be replaced with Level 2B assets. ↩ ↩2