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Regulations for Margining

 As highly leveraged transactions have been widely offered since around 2007 - 2008 in foreign exchange margin transactions (hereinafter in this Page, referred to as "FX transaction"), the Financial Services Agency considered that such highly leveraged transactions could be a problem in light of:

(1)
Customer protection
Likeliness of customers' suffering unexpected losses caused by insufficient functioning of loss-cut rules;
(2)
Risk control by a financial instruments firm or registered financial institution (hereinafter in this Page, referred to as "firm, etc.")
Likeliness of influencing on the financial soundness of a firm, etc., caused by losses by customers in excess of margins;
(3)
Excessive speculation.

Based on the circumstance that the differential between domestic interest rates and interest rates in foreign countries narrowed and leverage might increase further during such period, the Financial Services Agency amended the Cabinet Office Ordinance on Financial Instruments Business, etc. (hereinafter in this Page, referred to as "F.I. Business Ordinance"), as an effort to ensure sound FX transactions business in addition to requirement for trust holding of separate customer money control, requirements for implementation of, and compliance with, loss-cut rules, to prohibit firms, etc. to allow a customer to conduct FX transactions without accepting the deposit of margins for an amount at least 4% (2% for one year after the effective date (August 1, 2010); hereinafter in this Page, the same) of the trading amount (notional amount), i.e., the upper limit of leverage was set at 50 times for one year since August 1, 2010 and 25 times on or after August 1, 2011.

→Image of measures during the traditional period

※1
 A firm is required to collect at least 4% margins at the time of establishment of new positions and at a certain time fixed by the firm at least once a day each business day.

1.Scope of transactions subject to regulations, etc.

 Regulations for margining apply only to currency-related derivatives transaction ※3 including FX transactions (in the case of currency options transactions, limited to transactions in which a customer is a seller of options; hereinafter in this Page, explanation is given only for FX transactions) with a customer who is an individual ※2, and to both over-the-counter transactions and on-exchange transactions.
These regulations do not apply to transactions to settle existing positions.

※2
 Individual referred herein means an individual (including a specific investor) who is ordinarily considered as a natural person excluding, in the case where such individual conduct currency-related derivatives transactions as an executive member, etc. of an association ((23) of Article 10.1 of the Cabinet Office Ordinance on Definitions as Provided in Article 2 of the Financial Instruments and Exchange Act) who meets the criterion referred to in (24) (b) (i) of said Article 10.1, such executive member, etc. of an association.
※3
 Which mean currency-related market derivatives transactions (Article 123.3 of the F.I. Business Ordinance), currency-related over-the-counter derivatives transactions (Article 123.4 of the F.I. Business Ordinance) or currency-related foreign market derivatives transactions (Article 123.5).

2.Outline of regulations for margining

 The following two acts were added as prohibited acts ((27) and (28) of Article 117.1 of the F.I. Business Ordinance) for regulations for margining according to the amendment of the F.I. Business Ordinance.

(a.)
In the case where the net amount on deposit ※4 of margins, etc. deposited by a customer with a margin depository at the time of entering into a contract for FX transactions is short of the amount of initial margins, ※5 an act to continue to keep such contract without requiring such customer to deposit the amount of such shortage with the margins depository immediately after entering into such contract;
(b.)
In the case where the net amount on deposit of margins, etc. for transactions as at a fixed time each business day (hereinafter in this Page, referred to as "margin ratio judgment time") is short of the amount of maintenance margins ※6, an act to continue to keep a contract for such transactions without requiring a customer for such FX transactions to deposit the amount of such shortage with the margins, etc. depository (excluding the act referred to in (a) above) in a timely manner.

The above (a) and (b) are the provisions for the time of establishment of new positions and the provisions for the margin ratio judgment time, respectively. A firm, etc. is prohibited to allow a customer to continue to trade without accepting margins for the amount at least 4% of the trading amount, depending on the respective timing, i.e., immediately in the case of (a) or in a timely manner in the case of (b).

※4
 The amount of margins after the addition of the amount of profits arising from the settlement of transactions for a customer (hereinafter in this Page, referred to as "valuation profit") or the subtraction of the amount of losses arising from the settlement of transactions for a customer (hereinafter in this Page, referred to as "valuation loss") (in the case of the amount of unpaid fee which has already been fixed is deducted from the net amount on deposit)
※5 ※6
 the amount obtained from multiplying the trading amount (so called notional principal) by 4%.
※7
 "Amount of initial margin," "amount of maintenance margin" and "amount of initial margin" and "amount of maintenance margin" are referred hereinafter in this Page as "amount of margin requirement."

(1)Regulations for margining at the time of transactions to establish new positions

 2.(a) requires firms, etc. to collect margins for the amount at least 4% of the trading amount at the time of transactions to establish new positions.
According to the provisions of Article 117.1 (27) of the F.I. Business Ordinance, prohibition of, "in the case where the net amount on deposit is short of the amount of initial margins, an act to continue to keep such contract without requiring such customer to deposit the amount of such shortage with the margins depository immediately after entering into such contract" is provided for the purpose of preventing the exclusion of period reasonably necessary ordinarily to deposit with, for example in the case of on-exchange transactions, a financial instruments exchange or financial instruments clearing organization, and therefore it is necessary to remind that the purpose is not to allow a reprieve of time without such reasonable cause. For example, such an act to allow a customer to conduct transactions to establish new positions without depositing margins, assuming conducting transactions to close such positions within the same day (intra-day trading), is not permitted.
For your information, firms, etc. usually adopt the system of collecting the amount of margin requirement from customers prior to transactions for FX transactions.

【Example】
The case of transactions to make new purchase of $10,000 of USD/JPY at the time of 100.00 per $1:

The trading amount (notional principal)                     ¥100.00×$10,000=¥1,000,000
The amount of margin requirement(the amount of initial margins)     ¥1,000,000×4%=¥40,000


(2)Regulations for margining at the margin ratio judgment time

 2.(b) requires a firm, etc., if the net amount on deposit drops below the amount of margin requirement at the margin ratio judgment time each business day, to collect such shortage in a timely manner.
A firm, etc. may fix the margin ratio judgment time at the firm's discretion, for example, the time of New York Closing, and may fix different margin ratio judgment times which may vary from one customer to another. A firm, etc. must, however, fix at least one margin ratio judgment time per business day and must apply continuously without making a change in an arbitrary manner.

(Filling up of shortage)
 If the net amount on deposit drops below the amount of margin requirement at a margin ratio judgment time, the firm must fill up such shortage computed at such time by means of collecting margins from the customer or closing a part of the customer's existing positions or close the customer's whole positions in a timely manner (within a period reasonably necessary ordinarily for operation processing such as one business day).
If the net amount on deposit drops below the amount of margin requirement at a margin ratio judgment time, the firm, etc. could take the method to close the whole or part of the customer's existing positions compulsorily immediately without collecting additional margins. In this case, it is prerequisite that the firm, etc. explains about the method and obtains an agreement from the customer in advance.
On the other hand, it is inappropriate to take the method to wait for the recovery of market prices and the recovery of valuation loss of positions in the case where there was a shortage at a margin ratio judgment time. Even if the shortage of the net amount on deposit from the amount of margin requirement has been eliminated because of the recovery of market prices and the decrease of valuation loss as at the time of the deadline for filling up of such shortage determined by the firm, etc. within a period reasonably necessary ordinarily for operation processing, the firm, etc. must take a method either filling up the shortage once recognized by collecting margins additionally or closing a part of existing positions or closing the whole positions.

【Example】
In the case where a customer holds a long position of $10,000 of USD/JPY at ¥100.00, the trading amount is ¥100.00×10,000=¥1,000,000 and ¥40,000(4% of ¥1,000,000)is required for margins. If a margin ratio judgment time is 07:00 a.m. each business day and $1 is ¥99.00 at 07:00 a.m. of a certain day (referred to as X);

the amount of shortage is (¥99.00 - ¥100.00)×10,000=▲¥10,000.

The firm, etc. must require the customer to pay this amount of shortage ¥10,000 within a period reasonably necessary ordinarily for operation processing or fill up by closing the positions. In this case,

<Case 1>
If the market price has gone up to $1=¥101.00 as at the time of the deadline (referred to as Y) for the addition of the shortage computed at X,
(¥101.00 - ¥100.00)×10,000=+¥10,000. Even if the valuation loss has disappeared and valuation profit accrues like this, the customer is, as of Y, required to fill up the amount of shortage ¥10,000 computed at X.

<Case 2>
If the market price has moved toward the appreciation of Yen and $1 is ¥98.00 as of Y, the valuation loss is (¥98.00 - ¥100.00)×10,000=▲¥20,000. The filling up of the shortage ¥10,000 computed at X is sufficient as of Y.

(Supplement)
If, however, the market price has dropped below $1=¥99.00 at the next margin ratio judgment time (referred to as X+1) without closing the positions, the customer must deposit the amount of shortage computed at X+1 no later than the deadline for the addition for X+1 (referred to as Y+1). (For example, if $1 is ¥98.00 as at X+1, valuation loss is (¥98.00 - ¥100.00)×10,000=▲¥20,000, but the amount of shortage required to be deposited is ¥40,000 - (¥50,000 - ¥20,000)=¥10,000 because ¥10,000 of margins has been added as at Y and the amount of margins is ¥50,000.)

(Relation with loss-cut transactions)
 Even if the net amount on deposit drops below the amount of margin requirement as at a margin ratio judgment time and the firm is in the middle of requiring the customer to deposit the amount of shortage additionaly within a period reasonably necessary ordinarily for operation processing, the firm must make loss-cut transactions appropriately if the loss-cut rules has become applicable because of the price movement.
 There must be at least one margin ratio judgment time per one business day, which requires a firm to confirm that each customer deposits margins for the amount at least 4% of the trading amount as of the fixed time at least once per day and this does not mean that it is sufficient for a firm, etc. to judge once per day whether the loss-cut level has been reached or not. A firm, etc. must determine an appropriate level and loss-cut judgment interval after considering price movement risk and liquidity risk to prevent causing losses more than margins deposited by each customer, and execute loss-cut transactions regardless of a margin ratio judgment time.

※8
 With respect to requirements for implementation of, and compliance with, loss-cut rules,please refer to:

3.Computation of margins, etc.

(Net amount on deposit) 
 Net amount on deposit means the amount of margins, etc. after the addition of valuation profits arising from closing of transactions for a customer or the subtraction of valuation losses arising from closing transactions for a customer. Valuation profits or valuation losses include valuation profits or valuation losses of swap points (amount of adjusted interest differential between currencies). Unpaid fee which has already been fixed must be deducted from the net amount on deposit.

(Fixed amount margining method) 
 A firm is allowed to define an amount of margin requirement as the amount obtained from multiplying the trading amount by 4/100 "to which changes in foreign exchange market prices are reflected appropriately," because of the consideration of actual practices of a firm, etc. using so-called fixed amount method such as "¥○○ per trading unit." A firm, etc. is allowed to use, for a certain period, an amount of margin requirement computed based on foreign exchange rates as at a specific time to the reasonable extent in accordance with a certain rule. In the case of an amount of margins under the fixed amount method, a firm, etc. must note that, in light of the purpose of the newly introduced system, an amount of margin requirement must always be kept at least the amount obtained from multiplying the trading amount by 4% during any review and change in amount of margins instead of establishing rules to review when the amount of margin requirement drops below the trading amount×4%.

(Computation method of margins for more than one transaction) 
In computing the amount of margins in the case where a customer is conducting more than one transaction at the same time, the firm, etc. is allowed to use any of the method to compute the amount of margins for each transaction and the method to compute more than one transaction for each customer in lump.

(Offsetting positions, etc.)
 If a customer holds offsetting positions i.e., both short positions and long positions for the same currency pair, the firm, etc. is, with respect to margins, etc. for such portion, allowed to compute the amount of margin requirement based on the larger of the amount for short positions or the amount for long positions.
 For example, in the case of €10,000 of EUR/JPY long and €10,000 of EUR/USD short, it is not allowed to use BOE (Bank of England) method, i.e., recognizing this position as USD/JPY long and multiplying the margin ratio for the computation of the amount of margins purpose. Only if there are opposing positions for the same currency pair, the same or larger amount can be the basis for such portion.

【Example】
Offsetting position of $10,000 of USD/JPY long at ¥100.03 and $30,000 of USD/JPY short at ¥100.00:
The larger of the amount of short position and the amount of long position is the basis. Therefore:
  Long: ¥100.03×10,000=¥1,000,300
  Short: ¥100.00×30,000=¥3,000,000
 4% of the trading amount of ¥3,000,000 for $30,000 of USD/JPY short position:
 The amount of margin requirement should be ¥3,000,000×4%=¥120,000

(Securities acceptable as margins)
 Some firms, etc. accept securities for the whole or part of margins required to deposit with firms, etc. The values ascribed to such securities must be the amount prescribed by Article 68.2 of the Cabinet Office Ordinance on Financial Instruments Exchange, etc. ※9 of either a financial instruments exchange conducting the transactions in the case of domestic on-exchange transactions or any of financial instruments exchanges in the case of over-the-counter transactions and foreign exchange transactions.

※9
 An amount not to exceed the amount calculated by multiplying the current prices as of the base date determined by a financial instruments exchange after obtaining an approval under Article 149.1 ※10 of the Financial Instruments and Exchange Act (hereinafter referred to as "Act") (in the case where a financial instruments exchange prescribes, by the articles of incorporation or clearing rules, that the financial instruments exchange causes other financial instruments clearing organization to carry out financial instruments liability assumption business for the whole or part of market derivatives transactions on an on-exchange financial instruments market operated by the financial instruments exchange, approval under Article 156.-12 11 of the Act) by 70/ 100 for stock prices, or the amount calculated by multiplying such current prices by the ratio fixed by the exchange after obtaining an approval under said Article 149.1 for others.
※10
 It provides that "a financial instruments exchange shall, in order to amend the articles of incorporation, clearing rules or customer service contract rules, obtain an approval from the Prime Minister."
※11
 It provides that "amendment of the articles of incorporation or the clearing rules of a financial instruments clearing organization shall take effect only if the Prime Minister has granted an approval."

4.Transitional measures

 The Cabinet Office Ordinance to amend a part of the Cabinet Office Ordinance on Financial Instruments Business, etc. was promulgated on August 3, 2009, took effect on August 1, 2010. There were transitional measures to set the margin ratio at 2% from the date of taking effect until the day on which one year has passed since the date of taking effect.


経過措置日程

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 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/20090731-6.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 statement furnished prior to entering into a contract (Explanatory Statement) furnished by the firm, etc. with whom you are going to trade.