Quiz: OTC Derivatives Regulation

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5 questions to check your understanding of the chapter “OTC Derivatives Regulation”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.

1. Question 1

   As of October 2026, under the Cabinet Office Order on the Regulation of Over-the-Counter Derivatives Transactions, which condition must an interest rate swap transaction meet to be subject to the clearing obligation?

   1. A.Both parties are clearing members of the same clearing organization, and each has an average notional amount of 300 billion yen or more
   2. B.Both parties are parties that prepare trade information, and the notional amount of a single transaction is 300 billion yen or more
   3. C.Both parties are parties that prepare trade information, and each has an average notional amount of 300 billion yen or more
   4. D.One party is a party that prepares trade information, and its average notional amount is 300 billion yen or more
   Answer and explanation

   Answer: C

   For interest rate swap transactions, the parties subject to the obligation are limited to parties that prepare trade information (financial instruments business operators that carry on Type I financial instruments business, and registered financial institutions such as banks and insurance companies). A transaction is in scope when both parties are such parties and the average of each party's notional amount is 300 billion yen or more. The average is not the amount of a single transaction. It is the total notional amount of OTC derivative transactions at the end of each month, averaged over 12 months.

   An exclusion for a party that is not a clearing member of the same clearing organization, when there is a reasonable ground, exists for credit default swap (CDS) transactions, but not for interest rate swap transactions. A transaction in which only one party is a party that prepares trade information (the counterparty is not one) is also excluded, as is a transaction between a parent, etc. and a subsidiary, etc. Trust account transactions are judged trust asset by trust asset against the same average.

   Learn more: Mandatory Clearing

2. Question 2

   As of October 2026, under the Cabinet Office Order on Financial Instruments Business, etc., when is an uncleared OTC derivative transaction between Type I financial instruments business operators subject to initial margin, in terms of the conditions a party must meet?

   1. A.The party's average notional amount exceeds 1.1 trillion yen, and the group's total average notional amount is 300 billion yen or more
   2. B.The party's average notional amount is 300 billion yen or more, and the group's total average notional amount exceeds 420 trillion yen
   3. C.The party's group's total average notional amount exceeds 1.1 trillion yen
   4. D.The party's average notional amount is 300 billion yen or more, and the group's total average notional amount exceeds 1.1 trillion yen
   Answer and explanation

   Answer: D

   Initial margin applies to parties whose average notional amount of OTC derivative transactions is 300 billion yen or more and whose group's total average notional amount also exceeds the threshold amount. The threshold amount has come down with each phase of application, and since September 1, 2022 it has been 1.1 trillion yen.

   Variation margin is judged only by the 300 billion yen test, so looking only at the group's total does not state the condition for initial margin. The 300 billion yen applies to the party's own average, and 1.1 trillion yen applies to the group's total, so swapping them is also wrong. 420 trillion yen was the first threshold amount, on September 1, 2016, not the current level after the phases lowered it. Transactions between companies in the same group are excluded from both variation margin and initial margin.

   Learn more: Margin Requirements for Uncleared Derivatives

3. Question 3

   As of October 2026, under the Cabinet Office Order on Financial Instruments Business, etc., how must a financial instruments business operator, etc. that has received initial margin manage it?

   1. A.By setting up a trust or a similar method, and not investing even cash initial margin
   2. B.By setting up a trust or a similar method, and not pledging or lending it
   3. C.By setting up a trust or a similar method, and not returning it even on a close-out event
   4. D.By setting up a trust or a similar method, and not using it even if the counterparty defaults
   Answer and explanation

   Answer: B

   Initial margin received is managed by setting up a trust or a similar method. The firm does not pledge or lend it. Initial margin in cash, however, can be invested in a safe way incidental to its management, so the statement that it cannot be invested at all is wrong.

   The trust or similar method exists so that the margin can be used without delay if the counterparty fails to perform its obligations, and so that it returns to the counterparty if a close-out event occurs for the party that received it. Statements that it is not returned or not used run against this purpose.

   Learn more: Margin Requirements for Uncleared Derivatives

4. Question 4

   As of October 2026, under the Cabinet Office Order on the Regulation of Over-the-Counter Derivatives Transactions, what is the deadline for a financial instruments business operator, etc. to provide trade information to a trade repository after it makes an OTC derivative transaction that is subject to provision?

   1. A.Within 3 business days counting from the day after the day the trade is concluded
   2. B.Within 3 business days counting from the day the clearing organization, etc. assumes the obligation
   3. C.Within 3 business days counting from the day the trade is concluded
   4. D.By the end of the business day after the day the trade is concluded
   Answer and explanation

   Answer: C

   A financial instruments business operator, etc. provides trade information within 3 business days counting from the day the trade is concluded. When a reporting item changes after provision, it also notifies the change or provides trade information that reflects it within 3 business days counting from the day of the change. "Counting from" treats the day the trade is concluded as day 1, so the deadline is 2 business days after that day.

   Counting from the day after the trade is concluded would push the deadline back by 1 day. Counting from the day a clearing organization, etc. assumes the obligation is the deadline when the clearing organization, etc. provides the information, not the deadline for a financial instruments business operator, etc. A deadline of the business day after the trade is the US deadline, as of October 1, 2026, when a swap dealer or similar party is the reporting party. When it cannot be met for unavoidable reasons, provision can be postponed with the approval of the Commissioner of the Financial Services Agency.

   Learn more: Trade Reporting

5. Question 5

   As of October 2026, under the Financial Instruments and Exchange Act and the Cabinet Office Order on Financial Instruments Business, etc., which yen interest rate swap transaction designated by the notice of the Commissioner of the Financial Services Agency is excluded from the obligation to use an electronic trading platform? Assume that no other exception applies.

   1. A.A transaction in which one party is a business company that is not a Type I financial instruments business operator or similar entity, and the other has an average of 8 trillion yen
   2. B.A transaction in which both parties are Type I financial instruments business operators, with average notional amounts of 8 trillion yen and 7 trillion yen
   3. C.A transaction in which both parties are banks, each with an average notional amount of exactly 6 trillion yen
   4. D.A transaction in which both parties are Type I financial instruments business operators, each with an average of 7 trillion yen, and a single-transaction notional amount of 10 billion yen
   Answer and explanation

   Answer: A

   The obligation arises for a transaction in which both parties are Type I financial instruments business operators or similar entities whose average notional amount of OTC derivative transactions is 6 trillion yen or more. If even one party is not a Type I financial instruments business operator or similar entity, the transaction is excluded, however large the other party's average is.

   In the other three, both parties are Type I financial instruments business operators or similar entities and both averages are 6 trillion yen or more, so they are in scope. Exactly 6 trillion yen is not "below 6 trillion yen." The average is the average of the total notional amounts at the end of each month over the 12 months fixed when the contract is made. It is not the amount of a single transaction.

   Learn more: Electronic Trading Platform Mandate