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Introduction of Requirement for Trust Holding of Separately Controlled Customer Money

 More than one firm engaged in foreign exchange margin transactions (hereinafter in this Page, referred to as "FX transactions") has gone bankrupt since summer 2007. There were firms unable to return margins to customers because of a failure of compliance with the Financial Instruments and Exchange Act (hereinafter in this Page, referred to as "F.I. Act"), which requires separate control ※1 of customer money, such as losses of margins deposited by customers as a result of misuse of customer money by firms or losses arisen from covering transactions or trading for firms' own accounts.
Further, the risks on a failure of a covering party have come to the surface since the financial crisis in summer to autumn 2008. Based on such circumstances, the Cabinet Office Ordinance on Financial Instruments Business, etc. (hereinafter in this Page, referred to as "F.I. Business Ordinance") was amended to require a financial instruments firm or registered financial institution (hereinafter referred to as "firm, etc.") to keep margins deposited for FX transactions only by means of separately controlled money deposit with trust corporations or financial institutions engaged in trust business (hereinafter in this Page, referred to as "trust bank, etc.") in order to keep margins deposited by customers safe in the event of a failure of a firm or covering party.

※1
Keeping customer assets separate from properties of a firm, etc.

1.Scope of transactions for which trust holding is required

 Article 143.1 (1) of the F.I. Business Ordinance requires trust holding of separately controlled customer money for currency-related derivatives transactions, etc. including FX transactions (hereinafter in this Page, explanation is made only for FX transactions), and the requirement applies to both on-exchange FX transactions and over-the-counter FX transactions ※2, and to the case where a firm acting as an intermediary keeps customer margins.

※2
If transactions are conducted by a juridical person engaged in the foreign trade or other business regarding foreign exchange transactions in order to reduce the risk of loss arising from the fluctuation of exchange rates which may affect adversely on the juridical person's assets and liabilities, and the financial instruments firm, etc. confirms that such transactions are conducted in order to reduce the risk of loss, such transactions are not subject to such requirement.

2.Outline of trust holding of separately controlled customer money

 The F.I. Business Ordinance was amended in 2009 to require a firm, etc. (trusting person), with respect to margins deposited by a customer (beneficiary) for FX transactions to compute appropriately each day the amount of individual customer separate money ※4 and the required amount of separately controlled customer money ※5 each day after the addition or subtraction of realized profit or loss, valuation profit or loss and swap profit or loss ※3 and the subtraction of unpaid fee (excluding those related to unconcluded transactions) if any and to place the amount corresponding thereto with a trust bank, etc. (trustee) as money trust within the stipulated time (within two business days ※6 from the computation date).
 The appointment of a proxy for beneficiaries ※7 is required for such money trust. At least one of such proxies must be a lawyer, etc. ※8 In the event of a failure, etc. of a firm, etc., ※9 only such proxy for beneficiaries who is a lawyer, etc. exercises the power for the preservation of customer assets in order to facilitate smooth return of customer assets. (If such proxy for beneficiaries allows other proxy for beneficiaries to exercise the power, however, such case is excluded.) An internal controller, etc. who is an officer or employee of a firm, etc. is usually appointed as a proxy for beneficiaries who performs the control, etc. of the state of trust during an ordinary period.

※3
Profit and loss arising from swap points (amount of adjusted interest rate differential between currencies).
※4
The amount of margins deposited by each customer after the addition or subtraction of the amount of realized profit or loss, valuation profit or loss and swap profit or loss of the customer and, in the case where there is unpaid fee (excluding those related to unconcluded transactions), after the subtraction of the amount of such unpaid fee.
※5
The total amount of each customer's separate control amounts.
※6
A business day referred herein means a bank business day.
※7
A person appointed in the case, among others, where there are many beneficiaries and it is practically impossible for a beneficiary to make supervision over the trustee or make decisions.
※8
A lawyer, legal professional corporation, certified public accountant, auditing corporation, certified public tax accountant, tax accountant corporation or a person designated by the Commissioner of the Financial Services Agency.
※9
Event of a failure, etc. of a firm, etc. in this Page means those referred to in Article 143-2.1 (4) of the F.I. Business Ordinance.

【Example of Trust Scheme】
平常時
平常時


(Trusting person, trustee, beneficiary)

A firm, etc., trust bank, etc. and customer must be a trusting person, trustee and beneficiary, respectively.


(Proxy for beneficiary)

  •  A proxy for beneficiaries means a person appointed in the case, among others, where there are many beneficiaries and it is practically impossible for a beneficiary to make supervision over the trustee or make decisions. In the case of FX transactions, it is required to appoint proxies for beneficiaries at least one of which must be a lawyer, etc. because it is assumed that there are usually many customers who become beneficiaries.
  •  A proxy for beneficiaries is supposed to be liable for taking a role of assessing the valuation amount of the principal of trust properties and the amount required for separate control. Therefore, it is required to appoint the same proxy for beneficiaries because, in the case where there are more than one trust agreement and more than one person is appointed as a proxy for beneficiaries for each trust agreement, it is difficult to obtain the amount required for separate customer money control.
  •  In the event of a failure, etc. of a firm, etc., a proxy for beneficiaries who is a lawyer, etc. will become only proxy for beneficiaries to exercise the power for the preservation of customer assets. There is an exception, however, if it is possible to return customer assets smoothly and the lawyer, etc. approves explicitly because of a lack of necessity to appoint a lawyer, etc. as a proxy for beneficiaries.

(Method of investment of trust properties)

  •  Methods of investment of trust properties in the case of separate customer money control money trust are limited to methods with small risk for a loss of principal. ※10 There is no limit on investment in money trust of trust banks with guarantee of principal.
  •  The valuation amount for securities, in which trust properties of a money trust is invested, is computed at the current value. (If the principal of a money trust is compensated for, however, the amount of principal of trust properties must be valued at the amount of principal because, even if the investment results in a loss of theprincipal, the trust bank, etc. will compensate for the principal).
※10
If an event of a loss of the principal resulted in a failure of the fulfillment of the amount required for separate customer money control, a firm, etc. must make an addition to trust properties to fulfill the amount required for separate customer money control.

(Deadline for the addition of deficit amount of trust properties to trust)

  •  If the valuation amount of the principal of trust properties becomes less than the amount required for separate customer money control, such shortage must be filled by addition to trust properties within two business days after the day immediately following the day of such becoming short. The deficit amount of a trust must be computed each day.

【Example】
The computation of the amount required for separate customer money control for transactions from 07:00 a.m. in a specific day (A) in Japan time until 07:00 a.m. in the immediately following day (hereinafter referred to as "computation date") assuming that the base time is 07:00 a.m. in the computation date.
If (A) is Monday, the computation date is Tuesday. The addition of the deficit amount of the trust must be made within two business day after the day (Wednesday) immediately following the computation date, i.e., no later than Thursday. A business day herein means a so-called bank business day.

【Image of trust deadline】

 The system to require trust holding of separately controlled margins for FX transactions as explained in this Page does not mean the system to guarantee the full return of margins deposited by customers in any circumstances because of the time differential between the computation of the amount required for separate control and the deadline for the addition to the trust.


(Cancellation of contract)

 Cancellation of the whole or part of a contract for separately controlled customer money trust may be made only if "the valuation amount of the principal of trust properties exceeds the amount required for separate customer money control and cancellation of the whole or part of the contract for the separate customer money control trust is made within such excess amount" and "cancellation of the whole or part of the contract for the separate customer money control trust is made for the purpose of trusting as trust properties for other separate customer money control trust" (in both cases, trust properties subject to such cancellation must belong to the firm, etc. which is a trusting person.), which is considered that there is little possibility of a problem in light of the preservation of customer margins.


(Event of failure, etc. of firm, etc.)

  •  In the event of a failure, etc. of a firm, etc., a proxy for beneficiaries who is a lawyer, etc. will become only proxy for beneficiaries to exercise the power for preservation of customer assets. There is an exception, however, if it is possible to return customer assets smoothly and a lawyer, etc. approves explicitly because of a lack of necessity to appoint a lawyer, etc. as a proxy for beneficiaries.
  •  In the event of a failure, etc. of a firm, etc., the firm is not allowed to direct a trustee (such as a trust bank, etc.) on investment of trust properties, unless a proxy for beneficiaries who is a lawyer, etc. approves explicitly because, in the event of a failure, etc. of a firm, etc., it is necessary to suspend the investment of trust properties and preserve the customer assets.
  •  The beneficial right on the principal for a contract of a separate customer control trust must be exercised by a proxy for beneficiaries for all customers in a lump if a proxy for beneficiaries who is a lawyer, etc. determined that it is necessary, because, in the event of a failure, etc. of a firm, etc., properties of a separate customer money control trust must be returned to customers in an equitable and certain manner. If beneficial rights of customers have been exercised by such proxy for beneficiaries in a lump as a result of a failure of a firm, etc., such trust contract for such beneficial rights can be terminated because of a lack of reasons to continue such trust contract after such exercise.
  •  The amount of money payable to each customer subsequent to the exercise of beneficial right by a customer must be computed, in light of the fairness among customers, the amount of trust properties (only the portion of the principal) for separate customer money control trust after the conversion into cash (if the principal of such separate customer money control trust is compensated for, the amount of principal) (hereinafter in this Page, referred to as "principal amount after conversion into cash") in proportion of the amount required for the separate control for each customer. If it exceeds the amount required for separate control for each customer, the return to each customer to the extent of the amount required for separate control is sufficient.
  •  If the principal amount after conversion into cash exceeds the amount required for separate customer money control, it means that the whole of such customer margins is preserved and the excess portion belongs to the firm, etc. which is a trusting person.

(LG scheme after the introduction of requirement for trust holding of customer margins)

 Even if a letter of guarantee, etc. (hereinafter in this Page, referred to as "LG") is issued to a covering party by a trust bank, etc. which is a trustee of a separate customer money control trust and payment has been made based on LG, the amount of trust properties must be larger than the amount required for separate customer money control.
 A contract must clarify that customers have a priority because it may be impossible to maintain the amount required for separate customer money control trust if a separate customer money control trust terminates as a result of a failure, etc. of a firm, etc. and the payment to a covering party is made in preference over the payment to customers.


3.Transitional measures

 The amended F.I. Business Ordinance took effect on August 1, 2011. There are measures for six month transitional period until January 31, 2010 for firms which carried out the business as of that time, and the amended F.I. Business Ordinance became applicable to existing firms on and after February 1, 2010.


Notes, etc.:

  1.  Some statements in this Page may be different from actual clauses of the F.I. Business Ordinance or the Supervisory Guidelines as this Page aims to explain about the outline of the recent amendment to regulations for FX transactions in a manner for general investors to understand easily. Please note, further, that this Page does not cover the whole of such clauses completely. Please refer the clauses of the relevant F.I. Business Ordinance, Supervisory Guidelines, etc. to the website of the Financial Services Agency.

      the website of the Financial Services Agency (Japanese Page)
       (F.I. Business Ordinance, etc.)     http://www.fsa.go.jp/news/21/syouken/20090703-2.html
       (Supervisory Guidelines)            http://www.fsa.go.jp/news/21/syouken/20090703-4.html

  2.  The actual operation of each firm, etc. may not coincide with the explanation in this Page completely to the extent not to depart from the purposes of regulations. Please confirm the written statement furnished prior to entering into a contract (Explanatory Statement) furnished by the firm, etc. with whom you are going to trade.