The parties to a derivatives trade deal with each type of financial market infrastructure in post-trade work. They apply for clearing at a CCP and report the trade to a trade repository.

Clearing, settling, and recording in one place

Financial market infrastructure (FMI) is a system that participating institutions, including its operator, use together. It clears, settles, and records transactions such as payments, securities, and derivatives1. It usually has a common set of rules and procedures, technical infrastructure, and risk management arrangements for all participants. By clearing, settling, and recording in one place, it helps participants manage their own risks efficiently. In some cases it removes certain risks altogether1.

Concentration has a cost. If an FMI is not managed well, it can itself become a source of shocks, such as a shortage of liquidity or credit losses. It can also become the main channel through which such shocks spread to markets at home and abroad2.

On this site, "financial market infrastructure" means the five types covered by the Principles for Financial Market Infrastructures (PFMI), which the next section's table lists. The broader term "market infrastructure" also covers trading venues (places where trades are made, such as exchanges and trade execution facilities) and services such as portfolio compression.

The five types of FMI and how roles are divided

The PFMI divide FMIs by function and cover the following five types3. One entity can perform the functions of several types. For example, many central securities depositories also operate a securities settlement system4. The Japanese examples in the table are the main ones5.

Type Role Japanese examples
Payment system The instruments, procedures, and rules for transferring funds between participants6 The Bank of Japan Financial Network System (BOJ-NET) Funds Transfer System, the Zengin System (the Domestic Funds Transfer System among banks), and the Foreign Exchange Yen Clearing System
Central securities depository (CSD) Provides securities accounts and central safekeeping services, and asset services such as redemptions7 The Bank of Japan's report does not list any entity as a CSD (the Japan Securities Depository Center (JASDEC) is classified as a securities settlement system)
Securities settlement system (SSS) Transfers and settles securities by book entry8 JASDEC and BOJ-NET (JGB system)
Central counterparty (CCP) Interposes itself between the parties to a trade, becoming the buyer to every seller and the seller to every buyer, to ensure that the trade is performed9 Japan Securities Clearing Corporation (JSCC), Tokyo Financial Exchange, and JASDEC DVP Clearing Corporation
Trade repository (TR) Maintains a centralized electronic record (database) of trade data10 DTCC Data Repository Japan (DDRJ)

The PFMI also set additional guidance for CCPs and trade repositories that handle OTC derivatives11. How a CCP takes over a trade and becomes the obligor (novation), margin, and loss allocation are covered in Central Counterparties: JSCC, LCH, CME and Others.

The operator of an FMI can be a central bank or a private entity. The PFMI principles apply to both central bank-operated and privately operated FMIs12. In Japan, the Bank of Japan operates BOJ-NET, while JSCC and other CCPs, as well as DDRJ, are privately operated5.

The order in which a trade uses FMIs

Taking JSCC interest rate swaps as an example, a cleared trade moves through execution, matching, clearing, and settlement. Reporting to a trade repository happens separately.

PartiesCCPSettlementTRExecutethe tradeMatch andapply toclearClear andassumeobligationsTransfer onCCP ordersReport tradedata
Figure 1How a cleared trade connects to market infrastructure (an example based on JSCC materials)
Figure description

After the trading parties execute a trade, they match it and apply to the CCP for clearing. The CCP assumes the obligations, nets the receipts and payments, and then sends transfer instructions to the settlement institution. Separately, the trade data is reported to a trade repository. The arrow for reporting shows where the reported trade comes from. It does not show when the report is made.

For interest rate swaps at JSCC, both parties match the trade and apply for assumption of obligations on an overseas matching platform or trade execution platform. JSCC checks whether the trade is eligible and whether collateral is sufficient. Once it has confirmed that there is no problem for either party, JSCC then assumes the obligations. It distributes reports on the status of the assumption, margin, and other matters13. On settlement, a CCP generally sends transfer instructions to the securities and funds settlement institutions, based on the netting result14.

Reporting happens separately from clearing and settlement. In Japan, a financial institution that enters into an OTC derivatives trade has a duty to report the trade data to the Financial Services Agency. DDRJ receives the trade data reported by financial institutions and others, and reports it to the Financial Services Agency. A 2020 amendment to the Financial Instruments and Exchange Act consolidated the reporting of OTC derivatives trades into reporting to DDRJ. The change took effect on April 1, 202415.

What this section shows is one example, JSCC interest rate swaps. The difference between cleared and non-cleared trades is covered in Cleared vs Bilateral Trades.

How central clearing came to be pursued

In the global financial crisis of the late 2000s, the market infrastructure for OTC derivatives and similar products was not well developed. As a result, central clearing, in which OTC derivatives trades are cleared at a CCP, was pursued as policy16.

The G20 agreement went as follows. In 2009, at the Pittsburgh Summit, the G20 agreed that all standardized OTC derivatives should be cleared through CCPs by the end of 201217. The 2010 Toronto Summit declaration reaffirmed this commitment. It also mentioned that, where appropriate, trades should be made on exchanges or electronic trading platforms. It also said that OTC derivatives contracts should be reported to trade repositories18.

In Japan, JSCC started clearing interest rate swaps in October 201219. As for trade repositories, DDRJ is the only one in Japan designated by the Financial Services Agency15.

Where the PFMI fit

The Principles for Financial Market Infrastructures (PFMI) are an international standard. The BIS Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) published it in April 2012. It harmonizes and, where appropriate, strengthen the three earlier international standards (for payment systems, securities settlement systems, and CCPs). It also contains additional guidance for CCPs and trade repositories that handle OTC derivatives11.

The principles that apply differ by type of FMI. An entity that performs the functions of several types is subject to all the principles that correspond to the functions it performs20. The principle specific to trade repositories is Principle 24, on disclosure of market data by trade repositories21.

The Bank of Japan carries out oversight. It monitors the system design, risk management, and operation of FMIs in Japan and assesses their safety and efficiency22.

Where trading venues and compression fit

In general, the PFMI do not cover market infrastructure such as exchanges, trade execution facilities, and multilateral compression systems. The relevant authorities can, however, decide to apply some or all of the principles to such types of market infrastructure23. This site treats trading venues and multilateral compression systems separately from the five types formally covered by the PFMI.

The PFMI materials list the records held by a trade repository as information that is also used by complementary service providers, such as those offering portfolio compression, reconciliation, and collateral management, in addition to the parties to a trade and CCPs24.

What this page does not cover

The details of securities safekeeping and settlement operations are not covered on this page.

Notes

  1. Committee on Payment and Settlement Systems of the BIS and Technical Committee of the International Organization of Securities Commissions, "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.8 (pages 8–9) (in Japanese). The English original is CPSS-IOSCO, "Principles for financial market infrastructures" (April 2012), which uses the same paragraph numbers. ↩ ↩2

  2. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.3 (pages 6–7) (in Japanese). ↩

  3. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.9 (page 9) (in Japanese). ↩

  4. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraphs 1.11–1.12 (pages 10–11) and paragraph 1.22 (page 17) (in Japanese). ↩

  5. Bank of Japan, "決済システムレポート 2024" (Payment and Settlement Systems Report 2024; September 2024), the text and Figure 2 of "Ⅱ．わが国の金融市場インフラ（FMI）の動向" (II. Developments in Japan's financial market infrastructures (FMIs)) (pages 6–8). The Funds Transfer System and JGB system of BOJ-NET are from the text of the same section (in Japanese). ↩ ↩2

  6. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.10 (page 10) (in Japanese). ↩

  7. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.11 (page 10) (in Japanese). Figure 2 of the Bank of Japan's "決済システムレポート 2024" (Payment and Settlement Systems Report 2024) (page 8) classifies JASDEC as a securities settlement system and does not describe it as a CSD (in Japanese). ↩

  8. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.12 (page 11) (in Japanese). ↩

  9. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.13 (pages 11–12) (in Japanese). ↩

  10. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.14 (page 12) (in Japanese). ↩

  11. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.2 (page 6) and paragraph 1.6 (page 8) (in Japanese). ↩ ↩2

  12. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.23 (pages 17–18) (in Japanese). ↩

  13. Japan Securities Clearing Corporation, "金利スワップ 債務負担" (Interest rate swaps: assumption of obligations), "債務負担のワークフロー・イメージ" (Image of the assumption workflow) (in Japanese). ↩

  14. Japan Securities Clearing Corporation, "JSCCとは" (About JSCC), "「清算機関」の機能" (Functions of a "clearing organization") (in Japanese). ↩

  15. Bank of Japan, "決済システムレポート 2024" (Payment and Settlement Systems Report 2024; September 2024), "8．DTCC データ・レポジトリー・ジャパン（DDRJ）" (8. DTCC Data Repository Japan (DDRJ)) (page 19) (in Japanese). ↩ ↩2

  16. Bank of Japan, "決済システムレポート 2024" (Payment and Settlement Systems Report 2024; September 2024), "清算機関の役割の拡大" (Expanding role of CCPs) under "3．清算機関・決済システムの頑健性強化の要請" (3. Calls to strengthen the robustness of CCPs and payment systems) (page 4) (in Japanese). ↩

  17. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.26 (pages 19–20) and footnote 21 (the 2009 Pittsburgh Summit G20 declaration) (in Japanese). ↩

  18. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), footnote 15 to Box 1 (page 13; a quotation of paragraph 25 of Annex II of the 2010 Toronto Summit declaration) (in Japanese). ↩

  19. Japan Securities Clearing Corporation, "JSCCとは" (About JSCC), "沿革" (History) (in Japanese). ↩

  20. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.22 (page 17) and the note to Table 1 (page 18) (in Japanese). ↩

  21. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), the text of Principle 24 (in Japanese). ↩

  22. Bank of Japan, "決済システムレポート 2024" (Payment and Settlement Systems Report 2024; September 2024), the text after Figure 2 (oversight; page 8) (in Japanese). ↩

  23. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), footnote 2 to paragraph 1.3 (page 7) (in Japanese). ↩

  24. "金融市場インフラのための原則" (Principles for financial market infrastructures, provisional Japanese translation; April 2012), paragraph 1.14 (page 12) (in Japanese). ↩