Exchange-Traded vs OTC Derivatives

People who handle the clearing of derivatives, the exchange of margin, and the reporting of trade information encounter different procedures for exchange-traded and OTC trades.

Whether the trade goes through an exchange

Whether a derivative is exchange-traded or OTC depends on whether it is bought and sold through an exchange market. For example, Nikkei 225 Futures on Osaka Exchange are exchange-traded derivatives¹. By contrast, Japan Securities Clearing Corporation (JSCC), a central counterparty, clears interest rate swaps and credit default swaps (CDS) as OTC derivatives².

Japan's Financial Instruments and Exchange Act divides derivatives transactions into three groups. The first is market derivatives transactions, carried out on a financial instruments market under the standards and means set by the person that operates that market. The second is over-the-counter derivatives transactions, carried out without using either a financial instruments market or a foreign financial instruments market. The third is foreign market derivatives transactions, carried out on a foreign financial instruments market. A financial instruments exchange is an operator of a financial instruments market licensed by the Prime Minister³. The Bank of Japan also divides derivatives transactions into OTC transactions, which the parties carry out bilaterally, and exchange transactions, which go through an exchange. OTC stands for over the counter⁴.

Apply this classification to three trades. Nikkei 225 Futures matched on Osaka Exchange's trading system are traded on a financial instruments market under the standards and means set by the person that operates that market, so they are market derivatives transactions. An interest rate swap whose parties have agreed on terms such as the amount between themselves, without using either a financial instruments market or a foreign financial instruments market, is an over-the-counter derivatives transaction. A trade carried out on a foreign financial instruments market that is similar to a market derivatives transaction is a foreign market derivatives transaction³.

The difference between how forwards and futures work is explained in Forwards and Futures.

The table below sets out the differences item by item.

Contract terms: exchange specifications or agreement between the parties

For exchange-traded derivatives, the exchange sets terms such as the size of one unit, and the amount of a trade is a multiple of that unit. Osaka Exchange defines Nikkei 225 Futures as a contract whose one unit is the Nikkei 225 value multiplied by 1,000 yen. For Nikkei 225 mini the multiplier is 100 yen, and for Nikkei 225 Micro Futures it is 10 yen¹.

Consider a hypothetical example in which the Nikkei 225 is at 30,000. One unit is then worth 30 million yen for Nikkei 225 Futures, 3 million yen for Nikkei 225 mini, and 300,000 yen for Nikkei 225 Micro Futures. If you want a trade close to 100 million yen in Nikkei 225 Futures, you have to choose between 3 units (90 million yen) and 4 units (120 million yen). The exchange also sets the months in which contracts expire (contract months) and the price increments (tick size).

For OTC derivatives, the seller and the buyer agree on terms such as the quantity directly with each other⁵. Because the terms are set trade by trade, the amount can be matched to their needs, as in an interest rate swap with a notional amount of exactly 100 million yen. JSCC requires the notional amount of the yen interest rate swaps it clears to be at least 1 yen and less than 4 trillion yen⁶.

Because terms are set trade by trade, the terms of OTC derivatives vary from one trade to another. Only trades with standardized terms can be cleared by a central counterparty, and many derivatives trades are not standardized. The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) make this point⁷. JSCC sets conditions for the interest rate swaps it clears, such as the type and tenor of the floating rate, the currency, and the day count method⁶.

How the price is set and who you settle with

Figure description

This shows the relationships in a Nikkei 225 Futures trade on Osaka Exchange in which clearing participant Company A buys and Company B sells. Of the three parties, JSCC is the settlement counterparty to both Company A and Company B. Company A and Company B each deposit margin with JSCC.

Exchange-traded derivatives such as Nikkei 225 Futures on Osaka Exchange are bought and sold on the exchange's trading system⁸. Once a trade is matched, the central counterparty becomes the settlement counterparty to both the seller and the buyer. For example, if clearing participant Company A buys Nikkei 225 Futures and Company B sells them, both settle with JSCC. Even if Company B becomes unable to settle, JSCC performs the obligations it took over from Company B⁹.

A central counterparty takes over the obligations of one party to a trade, steps into the place of the original counterparty as a party to settlement, and guarantees settlement².

For an OTC derivative not cleared through a central counterparty, Company A and Company B agree on terms such as the price and quantity directly with each other and settle with each other. There is no central counterparty stepping in to become the settlement counterparty.

For OTC derivatives, the seller and the buyer also agree on the price directly with each other⁵. Unless the trade goes through a central counterparty, the settlement counterparty is simply the trading counterparty, so you have to trade while also taking into account the risk that party poses². The Bank of Japan points out that if a financial institution fails in bilateral trading, settlement failures can spread through its trading counterparties to the whole market⁹. The differences between trades that use a central counterparty and trades that do not are covered in Cleared vs Bilateral Trades.

Clearing and collateral

For exchange-traded derivatives, clearing participants deposit margin with the central counterparty as collateral, and the central counterparty revalues the trades every day. Each clearing participant deposits margin with the central counterparty as collateral, so that losses from the participant's default are covered at that participant's expense. Revaluing trades that have not yet been settled at the latest prices and calculating the profit or loss is called mark-to-market. JSCC marks to market at least once a day. It does so not only for exchange-traded derivatives but also for the CDS and interest rate swaps it clears, and it exchanges variation margin and similar amounts¹⁰.

OTC derivatives were originally settled mainly between the parties to the trade. Central counterparties were traditionally used to clear exchange-traded derivatives, and their use later spread to OTC trades¹¹. In Japan, a clearing obligation has applied since November 2012. Financial instruments business operators and others that enter into OTC derivatives trades designated by the Commissioner of the Financial Services Agency must clear them through a central counterparty. The designated trades include interest rate swaps and CDS¹¹¹².

For OTC derivatives that are not cleared through a central counterparty, there is an international minimum standard that requires the two parties to exchange margin. It applies to financial institutions and systemically important non-financial entities that enter into uncleared derivatives trades. These firms exchange initial margin and variation margin according to the credit risk of their counterparties¹³.

Closing out a trade before maturity

A futures position in exchange-traded derivatives can be closed out by an offsetting trade by the last trading day. A buyer sells the position, and a seller buys it back¹⁴. Consider a hypothetical example in which you buy 1 unit of Nikkei 225 Futures with the Nikkei 225 at 30,000. If you sell it at 31,000, your profit is (31,000 − 30,000) × 1,000 yen = 1 million yen. If you sell it at 29,000, you lose 1 million yen.

Some derivative products that financial institutions sell to their customers cannot, as a rule, be terminated before maturity. Financial institutions explain to customers, for example, that such products cannot be terminated as a rule, and that terminating early may require a cancellation settlement payment¹⁵.

Publication and reporting of trade information

For exchange trades, the exchange publishes daily prices and trading volume for each contract. For example, Osaka Exchange publishes, for each trading day, the four prices (open, high, low, and close) and the trading volume of each index futures contract¹⁶. An exchange publishes the total daily trading volume and, for each contract, the daily high, low, and last prices, among other things¹⁷.

Information on OTC derivatives trades is reported to trade repositories and others under the trade reporting rules. Central counterparties and financial instruments business operators and others provide trade information to trade repositories and others. A trade repository is a body designated by the Prime Minister to perform trade repository services, that is, collecting and storing trade information¹⁸. The Financial Services Agency began collecting OTC derivatives trade data with the data for April 2013¹⁹, and it publishes aggregated figures based on the reported trade information²⁰.

The G20 agreement and OTC derivatives reform

Japan's rules on OTC derivatives were put in place following the reforms agreed at the G20 Pittsburgh Summit in September 2009¹¹¹⁹. The financial crisis was triggered by the collapse of Lehman Brothers in September 2008. According to a Bank of Japan report, it was pointed out that during the crisis, risks in the OTC derivatives market had been hard to see, had built up, and had spread easily. Meanwhile, trades that went through central counterparties were generally processed in a stable manner during the crisis¹¹.

OTC derivatives and repo trades at that time were bilateral trades that did not go through an exchange, their terms were not standardized, and they were not centrally cleared. Information on individual trades was not always properly stored and accumulated either²⁴.

The G20 agreed on the following four reforms in 2009²⁵.

1. All standardized OTC derivatives should be traded on exchanges or electronic trading platforms, where appropriate.
2. All standardized OTC derivatives should be settled through central counterparties.
3. OTC derivatives should be reported to trade repositories.
4. Derivatives not settled through central counterparties should be subject to higher capital requirements.

In 2011, margin requirements for derivatives not cleared through central counterparties were added²⁵. The Financial Services Agency lists its rules for OTC derivatives as mandatory clearing, trade reporting, electronic trading platform rules, and margin requirements²⁶.

Notes

1. Osaka Exchange, "指数先物取引制度要綱" (Outline of the index futures trading system, in Japanese; as of April 13, 2026), page 2, I.1(2) "Large取引、Mini取引及びMicro取引" (Large, Mini and Micro contracts). ↩ ↩²

2. Japan Securities Clearing Corporation, "JSCCとは" (About JSCC, in Japanese): the opening description, the history (the integration of the clearing of exchange-traded derivatives of Osaka Securities Exchange in July 2013), and "「清算機関」の機能" (The functions of a clearing house). ↩ ↩² ↩³

3. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 2, paragraph 14 (financial instruments market), paragraph 16 (financial instruments exchange), and paragraphs 20 to 23 (the three groups of derivatives transactions). ↩ ↩²

4. Bank of Japan, "「デリバティブ取引に関する定例市場報告」の解説" (Explanation of the Regular Derivatives Market Statistics, in Japanese), note 3 to 1(1) (explanation of OTC). ↩

5. Japan Exchange Group, "相対取引（用語集）" (Bilateral trading: glossary, in Japanese). ↩ ↩²

6. Japan Securities Clearing Corporation, "清算対象取引（金利スワップ）" (Transactions eligible for clearing: interest rate swaps, in Japanese), items 4 (type of floating rate), 5 (floating rate period), 7 (currency), 10 (notional amount), and 11 (day count fraction). ↩ ↩²

7. Basel Committee on Banking Supervision and International Organization of Securities Commissions, "中央清算されないデリバティブ取引に係る証拠金規制 ＜要旨＞（仮訳）" (Margin requirements for non-centrally cleared derivatives: executive summary, provisional Japanese translation by the Financial Services Agency), page 3, "中央清算されないデリバティブ取引に係る証拠金規制の目的" (Objectives of margin requirements for non-centrally cleared derivatives) (in Japanese). ↩

8. Osaka Exchange, "指数先物取引制度要綱" (in Japanese), page 2, I.2(2) "立会方法" (Trading session method). ↩

9. Bank of Japan Payment and Settlement Systems Department, "清算機関（CCP）を巡るグローバルな対応について" (Global responses concerning central counterparties, in Japanese; August 2017), page 1, "１－１．清算機関（CCP）の役割" (The role of central counterparties) and the note to Chart 1. ↩ ↩²

10. Japan Securities Clearing Corporation, "証拠金" (Margin, in Japanese; as of December 18, 2024), the opening description. ↩

11. Bank of Japan Payment and Settlement Systems Department, "清算機関（CCP）を巡るグローバルな対応について" (in Japanese; August 2017), the "要旨" (Summary) at the beginning (page 3 of the PDF), and page 2, "１－２．G20ピッツバーグ・サミットでの清算集中義務の導入" (Introduction of mandatory clearing at the G20 Pittsburgh Summit) and "１－３．清算機関の重要性の高まり" (The growing importance of central counterparties). See also footnotes 3 and 4 of the same document. ↩ ↩² ↩³ ↩⁴

12. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 156-62. ↩

13. Basel Committee on Banking Supervision and International Organization of Securities Commissions, "中央清算されないデリバティブ取引に係る証拠金規制 ＜要旨＞（仮訳）" (provisional Japanese translation by the Financial Services Agency), page 6, key principle 2 (in Japanese). ↩

14. Osaka Exchange, "決済方法（先物）" (Settlement methods: futures, in Japanese; Kitahama Investment School), "反対売買による決済" (Settlement by offsetting trade). ↩

15. Financial Services Agency, "デリバティブ商品を契約するときのポイント" (Points to check when entering into a derivative product, in Japanese), front page, "説明事項（主な例）" (Items to be explained: main examples) and the examples on early termination and cancellation settlement payments. ↩

16. Osaka Exchange, "指数先物取引制度要綱" (in Japanese), page 13, VIII.1 "相場情報システムで伝達する情報" (Information distributed through the market information system). For the meaning of the four prices, see Japan Exchange Group, "四本値（用語集）" (Four prices: glossary, in Japanese). ↩

17. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 130. ↩

18. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 156-63, paragraph 1 (central counterparties), Article 156-64, paragraph 1 (financial instruments business operators, etc.), and Article 156-67, paragraph 1 (designation of an entity to perform trade repository services). Trade repository services are the services of collecting and storing trade information (Article 156-63, paragraph 1). ↩

19. Bank of Japan Financial Markets Department and Financial Services Agency Policy and Markets Bureau, "店頭デリバティブ取引データ等の整備と活用" (Development and use of OTC derivatives trade data, in Japanese; Bank of Japan Review, June 2021), page 2, the paragraph on the G20 leaders' discussions and "わが国におけるデータ整備等の取組み" (Data development in Japan), and footnote 2 on page 7. ↩ ↩²

20. Financial Services Agency, "店頭デリバティブ取引情報" (OTC derivatives trade information, in Japanese). ↩

21. Bank of Japan Financial Markets Department and Financial Services Agency Policy and Markets Bureau, "店頭デリバティブ取引データ等の整備と活用" (in Japanese; Bank of Japan Review, June 2021), page 2, "データの特徴をふまえた分析" (Analysis based on the features of the data). ↩

22. The same document, page 3, the note to Chart 6 and the explanation of name matching. ↩

23. The same document, page 4. ↩

24. The same document, page 1, "2000年代後半の国際金融危機の教訓" (Lessons from the international financial crisis of the late 2000s). ↩

25. Basel Committee on Banking Supervision and International Organization of Securities Commissions, "中央清算されないデリバティブ取引に係る証拠金規制 ＜要旨＞（仮訳）" (provisional Japanese translation by the Financial Services Agency), pages 1–2, "背景" (Background) (in Japanese). ↩ ↩²

26. Financial Services Agency, "店頭デリバティブ取引規制関連" (OTC derivatives regulation, in Japanese), the description of "金利指標改革（LIBORの恒久的な公表停止）に伴い参照金利の変更等を行ったレガシー契約に係る店頭デリバティブ取引規制の経過措置の適用等に関するQ&A" (Q&A on the transitional measures of the OTC derivatives rules for legacy contracts whose reference rate was changed because of the permanent cessation of LIBOR). ↩