When a customer manages margin on futures, or a securities company settles daily with the central counterparty, profit or loss is calculated every day and checked against the margin.

Margin as collateral for a trade

Futures margin is collateral deposited against losses on futures trades that have not yet been closed out. The amount of margin that must be deposited for a trade is called the margin requirement. Consider a hypothetical example in which you buy one contract of a futures product priced at 1,000. Each 1-point price move gives a profit or loss of 10,000 yen per contract. The size of this one-contract trade is 1,000 times 10,000 yen, or 10 million yen. If the margin requirement is 500,000 yen per contract, you are trading with collateral of one-twentieth of the trade size. A fall of 50 points (5%) then gives a loss of 500,000 yen, the same as the margin requirement. How futures work as a trade is covered in Forwards and Futures.

A futures trade that has not yet been closed out by resale, buyback, or final settlement is called an open contract. The quantity of open contracts is called the open position (tategyoku in Japanese)1. Margin is required against this open position.

Japan Securities Clearing Corporation (JSCC) clears the futures and options listed on Osaka Exchange, Tokyo Commodity Exchange, and Osaka Dojima Exchange. A customer who trades these futures opens a futures and options account with a securities company or a similar firm and must deposit margin by the day after the trade. However, according to JSCC, almost all securities companies require a certain amount of margin before trading starts. The margin a customer deposits is passed on through the securities company to JSCC, the central counterparty2.

A securities company or similar firm that holds a JSCC clearing qualification is called a clearing participant3. A clearing participant is also allowed to replace a customer's margin with its own cash or securities when it deposits margin with JSCC (a substitute deposit). Each securities company sets the margin it requires from customers, at no less than the amount JSCC calculates. How customers deposit margin also differs by securities company2. Margin can be deposited in securities instead of cash4.

Marking to market for daily profit or loss

Marking to market is revaluing open futures positions every day at the settlement price (for futures, usually that day's closing price)56. In the example above, if you bought at 1,000 and that day's settlement price is 995, the 5-point fall times 10,000 yen gives a loss of 50,000 yen for the day. If the next day's settlement price is 1,010, the price has risen 15 points from the previous day's 995, so that day's profit is 150,000 yen.

The settlement price is the price used for daily marking to market and margin calculations. The closing price used as the settlement price for futures includes the final quote6. For index futures, the value used for marking to market in the same way is called the settlement value, and in principle it is the last traded price of the day7.

The profit or loss on futures is the price difference multiplied by the contract unit and the number of contracts. In the example above, the 10,000 yen per price point is the contract unit. When you sell a position you bought, you subtract the purchase price from the sale price and multiply by the contract unit and the number of contracts8. For the seller, the same price move gives the opposite result: the buyer's loss of 50,000 yen is the seller's profit of 50,000 yen. Contract units and price increments (tick size) are set for each product.

Marking to market takes place every day, both between clearing participants and JSCC and between securities companies and their customers5.

Worked example: five days of marking to market and changes in margin

When losses continue on marking to market, the margin cushion shrinks, and the customer deposits the amount that falls short. Take the futures product above. A customer buys one contract at 1,000 on day 1 and holds it for five days. The customer deposits 600,000 yen of margin in cash before trading, and the margin requirement stays at 500,000 yen for all five days. Fees are ignored, and there are no receipts or payments other than the mark-to-market profit or loss.

First, the daily mark-to-market profit or loss. On day 1 the price move is measured from the trade price of 1,000, and from day 2 onward from the previous day's settlement price.

Day Settlement price Price move Profit or loss for the day (thousands of yen) Cumulative profit or loss (thousands of yen)
Day 1 (buy at 1,000) 995 −5 −50 −50
Day 2 1,010 15 150 100
Day 3 980 −30 −300 −200
Day 4 955 −25 −250 −450
Day 5 970 15 150 −300
↑ Gain　↓ LossProfit or loss, not payments (thousands of yen)Day 1Day 2Day 3Day 4Day 5−50Loss+150Gain−300Loss−250Loss+150Gain
Figure 1Mark-to-market profit or loss over five days for the customer who bought
Figure description

The amounts are those in the table above. The arrows in the figure show each day's profit or loss, not payments of money. Upward arrows are gains and downward arrows are losses, and the length of an arrow is a rough guide to the size of the amount. The cumulative profit or loss is not drawn in the figure.

Next, the changes in margin. The cumulative mark-to-market profit or loss, excluding any profit paid out, is called the calculated profit or loss. If there are several futures positions, the calculated profit or loss is the total across all of them. Total margin received is the cash and securities deposited plus or minus scheduled cash receipts and payments, such as the calculated profit or loss. While the futures position stays open and nothing else is due to be received or paid, the only amount added or subtracted is the calculated profit or loss9. In this example, when total margin received falls below the margin requirement of 500,000 yen, the difference is the shortfall.

Day Cumulative cash deposited (thousands of yen) Calculated profit or loss (thousands of yen) Total margin received (thousands of yen) Shortfall (thousands of yen)
Day 1 600 −50 550 0
Day 2 600 100 700 0
Day 3 600 −200 400 100
Day 4 700 −450 250 250
Day 5 950 −300 650 0

On day 3, total margin received falls below the requirement, and the customer deposits the shortfall on day 4. The price keeps falling on day 4 and a shortfall remains, so the customer deposits again on day 5, and with the price rise the total goes back above the requirement.

For the seller, the same price moves give the opposite result. For someone who sold one contract at 1,000, the calculated profit is 200,000 yen on day 3 and 450,000 yen on day 4.

From the buyer's side, on day 2 total margin received exceeds the requirement. At the customer's request, the securities company can pay out the calculated profit in cash, up to the amount above the requirement10. The customer can therefore receive the profit on day 2. The example assumes no payout.

Deposits when margin falls short

When total margin received falls below the margin requirement, the customer deposits at least the shortfall by the next day at the request of the securities company11. On day 3 of the example, the customer deposits at least 100,000 yen by the time the securities company sets on day 4. If the next day is a non-business day, the deadline moves to the following business day. If the customer is a non-resident, the deadline is the third day counting from the day the shortfall arises, excluding non-business days11.

There are two kinds of shortfall. One is the shortfall in the example above, where total margin received falls below the requirement (the total shortfall). The other is where the cash deposited falls below the cash due to be paid for mark-to-market losses and other items (scheduled cash payments); this is the cash shortfall. The customer deposits at least the larger of the two11. Margin can be deposited in securities, but the part that covers the cash shortfall must be deposited in cash4.

For example, suppose the first 600,000 yen in the example was deposited not in cash but in securities valued at 600,000 yen. Assume the value of the securities does not change and nothing else is due to be received or paid. A cash shortfall of 50,000 yen arises on day 1, so the customer deposits 50,000 yen in cash on day 2.

Day Cash deposited (thousands of yen) Calculated profit or loss (thousands of yen) Cash shortfall (thousands of yen) Total margin received (thousands of yen) Total shortfall (thousands of yen)
Day 1 0 −50 50 550 0
Day 2 50 100 0 750 0
Day 3 50 −200 150 450 50

On day 3, the larger of the cash shortfall and the total shortfall is the cash shortfall, so the customer deposits at least that amount in cash.

Unless total margin received exceeds the requirement, deposited margin cannot be withdrawn12.

Payments between securities companies and the central counterparty

The amount of profit or loss from marking to market is called the mark-to-market difference. Between a customer and a securities company, the mark-to-market profit or loss is added to or subtracted from total margin received, as in the example. Between clearing participants and JSCC, on the other hand, this difference is calculated every day and settled in cash in Japanese yen the next day1314. For exchange-traded derivatives, JSCC treats this payment as the exchange of variation margin (or the mark-to-market difference)14.

CustomerClearing part.Securities co.JSCCMarginMarginPaidReceived
Figure 2Margin and mark-to-market differences among the customer, clearing participant, and JSCC
Figure description

The figure shows the case where the securities company is a clearing participant. The profit or loss between the customer and the securities company is added to or subtracted from total margin received. The mark-to-market difference is paid and received every day between the clearing participant and JSCC, so there are two arrows for the difference, one for paying and one for receiving.

The margin a clearing participant deposits with JSCC is called clearing margin. If clearing margin falls below the requirement, the clearing participant deposits the shortfall by the next day15. The deadlines for these payments are as follows1315.

Payment From and to Deadline
Payment of the mark-to-market difference From the clearing participant to JSCC By 11:00 a.m. on the day after the difference arises
Receipt of the mark-to-market difference From JSCC to the clearing participant Promptly after 1:00 p.m. on the day after the difference arises
Deposit of a clearing margin shortfall From the clearing participant to JSCC By 11:00 a.m. on the day after the shortfall arises
Deep diveIntraday margin

JSCC also recalculates the requirement during the day for the clearing participant's own (proprietary) trades. It recalculates the requirement on the positions as of 11:00 a.m. For JGB futures, JGB futures options, and interest rate futures, it uses the positions at the end of the morning session instead. If the amount deposited falls short, the clearing participant deposits the shortfall by 2:00 p.m. that day. This is called intraday margin16.

The rules for margin that the parties exchange directly on OTC derivatives that are not cleared through a central counterparty are covered in Margin Requirements for Uncleared Derivatives.

How margin is calculated for Japanese exchanges

Since November 6, 2023, JSCC has calculated margin for futures and options with the VaR method. The VaR method builds price-move scenarios, calculates the portfolio's profit or loss in each scenario, and estimates the loss that the open positions could produce17. Because the requirement is calculated from the positions and market data, it is not always the same every day, unlike in the worked example. When positions are very large, JSCC raises the requirement under its rules18.

Deep diveHow the requirement is calculated with the VaR method

JSCC moved from the SPAN method it had used until then to the VaR method. The VaR method comes in two forms: the historical simulation method (HS-VaR method) and the alternative simulation method (AS-VaR method). The HS-VaR method is used for index futures (except dividend index futures), JGB futures, interest rate futures, and others. The HS-VaR method builds scenarios from past market data and other information, calculates the profit or loss for the portfolio in each scenario, and finds the amount that covers 99% of those profits and losses17.

A customer's margin requirement is based on the loss estimated with the VaR method from the customer's open positions (which JSCC's rules call the Expected Loss Amount). If the customer has option positions, their value is subtracted or added. JSCC judges whether positions are large enough to raise the requirement in light of liquidity and how concentrated the positions are18.

Notes

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

  2. Japan Securities Clearing Corporation, "先物・オプション取引に係る取引証拠金" (Clearing margin for futures and options, in Japanese), the opening paragraph and "顧客が差し入れる証拠金" (Margin deposited by customers). An English version is available: "Margin on Futures and Options," "Customer Margin." ↩ ↩2

  3. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (Outline of the margin and settlement systems for futures and options, in Japanese; as of November 6, 2023), page 4, the remarks to Ⅰ.2 (a non-clearing participant is a trading participant that does not hold a clearing qualification of the clearing house). An English reference translation of the same version is available: "Futures/Option Contracts - Margin and Settlement Framework Overview" (as of November 6, 2023); its page numbers differ from the Japanese version. ↩

  4. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 4, Ⅰ.1.(5) "証拠金の有価証券等による代用" (Deposit of securities in place of margin). ↩ ↩2

  5. Japan Exchange Group, "値洗い（用語集）" (Glossary: marking to market, in Japanese). ↩ ↩2

  6. Japan Exchange Group, "清算値段（用語集）" (Glossary: settlement price, in Japanese). ↩ ↩2

  7. Japan Exchange Group, "清算数値（用語集）" (Glossary: settlement value, in Japanese). ↩

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

  9. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 3, Ⅰ.1.(2) "受入証拠金の計算方法" (Calculation of margin received), notes 1 and 2 on pages 1–2, and the remarks on page 1. ↩

  10. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 4, Ⅰ.1.(8) "計算上の利益の払出し" (Payout of calculated profit). ↩

  11. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 3, Ⅰ.1.(3) "証拠金の差入れ・預託及び維持" (Deposit and maintenance of margin) and (4) "証拠金の差入れ・預託時限" (Deadline for depositing margin), continuing to the top of page 4. ↩ ↩2 ↩3

  12. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 4, Ⅰ.1.(7) "証拠金の引出しの制限" (Restrictions on withdrawing margin). ↩

  13. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 12, Ⅱ.1.(1) "清算参加者とクリアリング機構との間の値洗いに係る差金の授受" (Settlement of mark-to-market differences between clearing participants and the clearing house), and the remarks on pages 12–13. ↩ ↩2 ↩3

  14. Japan Securities Clearing Corporation, "リスク管理 証拠金" (Risk management: margin, in Japanese; as of December 18, 2024), the second paragraph and note 1 for futures and options in "各清算業務における証拠金算出スケジュール" (Margin calculation schedule for each clearing business). An English version is available: "Margin" (as of December 18, 2024). ↩ ↩2

  15. Japan Securities Clearing Corporation, "先物・オプション取引に係る取引証拠金" (in Japanese), the two "取引証拠金の追加預託" (Additional deposit of clearing margin) items under "清算参加者が預託する証拠金" (Margin deposited by clearing participants). ↩ ↩2

  16. Japan Securities Clearing Corporation, "先物・オプション取引に係る取引証拠金" (in Japanese), "日中取引証拠金" (Intraday margin), and Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 11, Ⅰ.5 "日中取引証拠金" (Intraday margin). ↩

  17. Japan Securities Clearing Corporation, "新証拠金計算方式（VaR方式）とは" (What is the new margin calculation method (VaR method)?, in Japanese), the opening paragraph, "VaR方式の概要" (Outline of the VaR method), and "各計算方式の対象商品" (Products covered by each calculation method). An English version is available: "Margin Calculation Method (VaR Method) for Futures and Options." ↩ ↩2

  18. Osaka Exchange and Japan Securities Clearing Corporation, "先物・オプション取引に係る証拠金及び決済制度の概要" (in Japanese), page 2, Ⅰ.1.(1) "証拠金所要額" (Margin requirement) and its remarks. ↩ ↩2