Companion·Question
What is LSOC, and how does it differ from omnibus segregation and individual segregation?
Codex No. 1 · Derivatives Clearing: A Comprehensive Guide
LSOC stands for Legally Segregated, Operationally Commingled. It is a segregation model, introduced by the CFTC in 2012, that does two things at once. The margin of a clearing broker’s clients is separated from the broker’s own assets as a matter of law, so that if the broker fails each client’s balance can still be identified. And the day-to-day work of calculating and moving that margin is still handled collectively across clients, for efficiency.
That pairing is what sets it apart. Under a futures omnibus model client assets are pooled, and in a default they are hard to tell apart. Under an individual segregated account — the ISA model, widespread in Europe under EMIR — each client’s assets sit in fully independent accounts at the CCP. LSOC sits between the two: identification client by client in law, shared operation underneath. What a firm is choosing between, in practice, is protection and cost.
Drawn from a book written from the clearing broker's side of the trade, for the people who run it — operations, risk, treasury and collateral, at brokers and on the buy side alike.
The families
- Futures omnibus model
- Client assets are commingled. Legal separation is weak and one client carries exposure to the others; in a default the assets are difficult to identify, which is what makes porting hard. It is the cheapest to run.
- LSOC, without excess
- Initial and variation margin are legally segregated and held at the CCP. Any excess margin the client provides is not transferred to the CCP; the clearing broker holds and manages it. So the excess is the part that cannot move quickly. This is the model in general use.
- LSOC, with excess
- The excess sits at the CCP as well. Protection and portability are higher, and so is the cost: the excess is encumbered too, which takes away the broker’s freedom to deploy those funds.
- ISA — individual segregated account
- Each client’s assets are held at the CCP in fully independent individual accounts. Separation is complete and porting in a default is prompt and straightforward. Administrative costs and fees are extremely high.
The book calls these three categories and then lists four, because LSOC divides into two variants. We have kept its count and its names.
The MapWhere the client’s margin sits
The models differ in where the dividing line is drawn, and who does the dividing.
What each one trades
| Futures omnibus | LSOC, without excess | LSOC, with excess | ISA | |
|---|---|---|---|---|
| Legal separation | Weak — client assets commingled | Strong — segregated by client | Strongest — includes excess assets | Extremely strong — fully individual accounts |
| Fellow customer risk | High | Very low | Lowest | None |
| Ease of porting | Low — assets difficult to identify | Medium to high, excluding excess | High, including excess | Extremely high |
| Capital efficiency | High — little encumbrance | Moderate | Low — excess also encumbered | Low — strict encumbrance |
| Administrative cost | Low | Moderate | High | Highest |
The book’s own comparison, from Chapter 6.
Why the model exists
Protecting client assets is not the whole purpose. The point of separating them is to make them movable: to let a client’s positions and the margin behind them be transferred to another sound clearing broker, quickly, if the broker fails. A model that cannot identify whose assets are whose cannot do that. So the choice of model is, in practice, a decision made in advance about how a default will go.
What a clearing broker is, and what fails when one fails →
Japan sits inside the ISA family
JSCC’s yen interest rate swap clearing adopts an ISA-type model: each customer account is managed individually, and one customer’s assets are never commingled with another’s. What is distinctive is not the category but the mechanism under it. A trust scheme insulates customer assets not only from a default by the clearing participant, but ring-fences them in law from a default by JSCC itself.
Exchange-traded derivatives work differently again: a gross omnibus customer account and an individual customer account are both available, and the clearing participant or the customer selects between them.
How client clearing works in Japan →
Where the book takes this further
- Chapter 6, Section 3
- The segregation models in full, with the comparison above, the two LSOC variants, and the operational cost each one puts on a clearing broker.
- Chapter 6, Section 4
- The Japanese market: JSCC’s model for OTC and for exchange-traded products, and the trust scheme behind it.
- Chapter 5, Column Q
- The default of a clearing broker: how LSOC came about, how porting actually runs, and what the record shows when it does not.
The Book
Kindle edition — USD 29.99
Published 14 September 2026. The paperback is out as well, at the same price.
509 pages, with a glossary of more than two hundred terms and an index in the print edition.
The Introduction and Chapter 1 are free to read: the sample →
Written by Shun Yanagisawa — Director, Head of Futures, Clearing and FX Prime Brokerage, Markets Sales at Citigroup Global Markets Japan Inc. He is a Representative Director and Vice President of FIA Japan and the Chair of its Operations Committee, and sits on the JSCC Interest Rate Swap Steering Committee and the advisory board of Asia Risk.