Clearing system

Function of Clearing - House

Marking - to - market

Clearing process

Clearing funds system

In the event of a default

JCCH acts as a counterparty to every transaction executed on the member exchanges, and insures performance on the terms of the contract to the benefit of all market participants.

Execution of trading among clearing participants

Execution of trading between clearing participants and non-clearing participants

Note:
*1	" novation" is exchange matches buyers and sellers,while JCCH consummates transactions with both sides. JCCH performs novation/substitution, and becomes seller to buyer and buyer to seller. In this way buyers and sellers are guaranteed their performances by JCCH. Buyers and sellers no longer have credit exposure to one another.
*2	"Commodity clearing transaction" is what makes it a condition that clearing participants (B) receive the consignment of the commodity clearing transaction from members and others of the commodity exchange (A) and making it undertake the debt based on transactions in the commodity market to the Clearing-House of commodity tradings, and making it to settled the said transaction that members and others (A) substitute for clearing participants (B).

            To secure the safety of transactions in the commodity futures market, there is a daily settlement process, whereby the accumulated profits (losses) on all open or unsettled transactions are calculated and transferred to the appropriate accounts. This process is called "marking - to - market". Under this process, clearing participants with accumulated losses must add additional capital to their accounts to secure their open position. At the same time, clearing participants with accumulated gains are able to withdraw those funds to insure prudent funds flow management.
            In the event of a default, the risk to clearing participants is thereby limited to the extent of 2 business days.
            JCCH operates under the T+1 method of pays and collects, meaning that all profits/losses (change in value) in all accounts is received or paid by clearing participants by noon of the business day following the day the change occurred.
            This entire process goes a long way to insure market integrity.

Overview of the pays and collects process

The clearing operation of JCCH is carried out under the following procedure, primarily involving the exchange member (EM):

The EM *1 executes the customer's order.

The EM designates the order as "house or customer", and "new or settlement" to the commodity exchange *2.

Each commodity exchange calculates the netted amount (the net profit or loss, the membership fee, etc.), the maintenance margin amount for transactions in customer accounts, and the margin requirement of the house account for all EM's, and notifies JCCH.

The EM who is the clearing participant, notifies JCCH with regard to the amount of the clearing margin calculated with respect to each customer, based on predetermined classification of each customer.

JCCH notifies clearing participants and the settlement bank regarding the results of the calculations outlined in steps 3&4 above.

Clearing participants pay or collect the netted amount, and any change in the required margin deposit, by the noon of the following business day (T+1).

Note:
*1	The EM here refers to those who are "Broker Members", members of exchenge with Futures Commission Merchant (FCM) licenses, and at the same time are clearing participants at JCCH.
*2	Some exchanges require EM to designates "house or customer" and "new or settlement" at the time of executing the order.

            All clearing participants are required to make a clearing fund to the JCCH. For all new clearing participants, whatever their qualification, their status as clearing participants becomes effective only after payment of the initial capital deposit. The level of the required clearing funds will be determined based upon the cumulative volume of trading cleared by the clearing participants, with additional capital being required for greater larger amounts of trading.
            The fund is separately maintained for each market of each exchange.
            If there is a loss suffered by JCCH as a result of a default by a clearing participants, the clearing funds and margin monies deposited by that clearing participants will be used to satisfy the loss. If those amounts are not sufficient to satisfy the loss, the remaining loss will be covered by the clearing funds of other clearing participants.

When a clearing participant fails to deposit funds required by JCCH by the appointed deadline, said participant is in default. JCCH considers such a clearing participant insolvent, and will no longer accept debts resulting from clearing transactions undertaken by that clearing participant. Furthermore, all open positions held for customers by the now insolvent clearing participant will be consolidated among other clearing participants in good standing.

In addition, in the event a clearing participant default, JCCH entered into an agreement concerning "Line of credit" with its designated clearing banks in order to satisfy its operations efficiently. *1
When JCCH suffers a loss by default, JCCH is compensated in each market in the following order:

(a)

The clearing margin deposits made by clearing participant in the house account for the designated commodity market; the clearing funds which the clearing participant had made into the commodity market; and any other funds on deposit by defaulting clearing participant; any clearing margin for customer account to which defaulting clearing participant has a claim of refund. *2

(b)

Any trust money which the defaulting clearing participant has on deposit with any of the designated commodity markets.

(c)

The "default compensation reserve " established by JCCH from surplus, which has been accumulated on behalf of the exchanges.

(d)

Money received by the exchange as compensation for an indemnified loss through a third party insurer or reserve funds. *3

(e)

The clearing funds of other clearing participants involved in the commodity market where the default took place which are held by JCCH.

( f )

When all the above is deplenished, the funds of all clearing participants involved in the commodity market where the default occurred.

Note:
*1	The amount designated as "Line of credit" is configured to consideration of the past clearing results.
*2	The financial resources specified above (a) in a certain designated commodity market exceeds the loss in the said market, as concerns the said exceeded part, is allotted to compensation for the loss of other insufficient market according to regulations that JCCH stipulated.
*3	This is the security reserve fund against default which the establisher of the designated market bears, the special deposit for default, and the liability insurance which insured the establisher of the designated commodity market.