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Margin Regulations of Corporate Over -The- Counter FX Transactions

 As highly leveraged transactions had been widely offered since around 2007 - 2008 in foreign exchange margin transactions (hereinafter in this Page, referred to as "FX transactions"), and it was worried that smaller differential between domestic interest rates and interest rates in foreign countries at that time might trigger increased high leverage, 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") in August 2009, in light of customer protection, risk control of a financial instruments business operator and registered financial institution (hereinafter in this Page, referred to as "business operator, etc.") and prevention of excessive speculation, to implement margin regulations which require a business operator to set the margin requirement ratio (which means the ratio of the minimum amount of margins to notional principal amount)※1 at 4% uniformly for FX transactions with the counterparties of individual customers.

※1
 The effective date is August 1, 2010 with transitional measures to set the margin ratio at 2% for the period until the day on which one year has passed since on the effective date.

 As a result, transactions for the maximum amount of 25:1 of margin requirement became available for FX transactions with the counterparties of individual customers, but there was no such margin regulations in the case of FX transactions with the counterparties of corporate customers and a business operator, etc. had been setting margin ratios at the discretion of the business operator, etc.
 Under such a background, some corporate customers suffered large losses by far in excess of margins due to significant price fluctuation of Swiss Franc in January 2015, which caused some business operators, etc. to suffer large amount of account receivables.
 Considering, therefore, that if, in the future, such risks as rapid fluctuation of the forex market prices becomes obvious and a similar event occurs for major currencies, the business operator, etc. may suffer larger amount of account receivables and significant effect on its financial soundness, and further, the scale of over-the-counter FX transaction is now so large that, if such transactions become stagnant, the market may be significantly affected, the Financial Services Agency, in light of ensuring appropriate risk control of business operators, etc. at the time of rapid change in forex market prices or for other events, amended the F.I. Business Ordinance on June 14, 2016 to implement margin regulations for over-the-counter FX transactions with the counterparties of corporate customers, too. (Effective date is February 27, 2017.)


1.Scope of transactions subject to regulations, etc.

 Margin Regulations apply only to over-the-counter FX transactions※3 with the counterparties of corporate customers※2 (hereinafter in this Page, referred to as "corporate over-the-counter FX transactions") and do not apply to currency-related over-the-counter derivatives transactions (Article 123.4 of the F.I Business Ordinance), other than over-the-counter FX transactions, such as over-the-counter currency options transactions.
 These regulations do not apply to transactions to close existing positions, either.
 Although these regulations do not apply to exchange traded FX transactions, a financial instruments exchange approved by the Financial Services Agency fixes the amount of margin requirements.

※2
 These regulations apply to a person excluding "an individual, financial instruments business operator, etc. or a person who carries out over-the-counter derivatives transaction as business in foreign jurisdiction" under (39) of Article 117.1 of the F.I. Business Ordinance.
 An 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 conducts currency-related derivatives transactions as an executive association member, etc. ((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 association member, etc.
※3
 Over-the-counter FX transactions are defined in (39) of Article 117.1 of the F.I. Business Ordinance as "specific currency-related over-the-counter derivatives transactions".

2.Outline of margin regulations

 The F.I. Business Ordinance was amended to implement margin regulations for corporate over-the-counter FX transactions, and the following two acts were added to prohibited acts ((39) and (40) of Article 117.1 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 margins depository at the time of entering into a contract for corporate over-the-counter FX transactions is short of the amount of initial margin, ※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 margin ※6, an act (excluding the act referred to in (a.) above) 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 depository 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 on each business day, respectively. A business operator, etc. is required to accept the deposit of required amount of margins depending on the respective timing, i.e., immediately in the case of (a.) or in a timely manner from a customer in the case of (b.).

 Furthermore, the minimum margin ratio is fixed at 4% uniformly for all currencies in the case of margin regulations for FX transactions with the counterparty of an individual customer, but, under these margin regulations of corporate over-the-counter FX transactions, margin ratios vary among currency pairs, and further, at least once a week revision is required. A business operator, etc. computes margin ratios internally using its internally produced prices, etc., outsources the computation work, or the Association computes and publishes values and the business operator, etc. uses such published values.

※4
 The amount of margins after the addition of the amount of profits for a customer arising from the settlement of transactions (hereinafter in this Page, referred to as "valuation profit") or the subtraction of the amount of losses for a customer arising from the settlement of transactions (hereinafter in this Page, referred to as "valuation loss") (the amount of unpaid fee which has already been determined is deducted from the net amount on deposit).
※5 ※6
 The amount obtained from multiplying the trading amount (so called notional principal) by the forex risk assumed ratio of such trading currency pair (which means the ratio computed in the manner prescribed by the Commissioner of the Financial Services Agency as the ratio of the amount equivalent to risks which may arise from changes in forex market prices of such currency to the principal amount). ※7
※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)Margin regulations at the time of transactions to establish new positions

 2.(a.) requires business operators, etc. to collect margins for at least amount obtained from multiplying the trading amount by the forex risk assumed ratio of such trading currency pair at the time of transactions to establish new positions.
 Although (39) of Article 117.1 of the F.I. Business Ordinance provides for prohibition of, "in the case where the net amount on deposit is short of the amount of initial margin, 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", 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 the closure such positions within the same day (intra-day trading), is not permitted.
 In this context, business operators, etc. usually adopt the advance receipt system, which is to collect 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 100.00 per $1:

The trading amount (notional principal)       ¥100.00×$10,000=¥1,000,000
If the forex risk assumed ratio of USD/JPY is 1.5%, the amount of margin requirement (amount of initial margin) is ¥1,000,000 × 1.5%     =  ¥15,000.


(2)Margin regulations at the margin ratio judgment time

 2.(b.) requires a business operator, 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.
 Each business operator, etc. may fix margin ratio judgment times at the discretion of the business operator, for example, the time of New York Closing, and may fix margin ratio judgment times for each customer. A business operator, etc. must, however, fix at least one margin ratio judgment time per business day and must keep applying 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 business operator, etc. 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 business operator, 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, however, it is prerequisite that the business operator, etc. explains about the method to, 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 changes in market prices and the decrease of valuation loss as at the time of arriving of the deadline for filling up of such shortage determined by the business operator, etc. within a period reasonably necessary ordinarily for operation processing, the business operator, etc. must take the method of either filling up the shortage once recognized by collecting margins additionally or closing a part of existing positions, or close the whole positions.

【Example】
 If a customer holds a long position of $10,000 of USD/JPY at ¥100.00 and $1 is ¥99.00 when 07:00 a.m. which is margin ratio judgment time on a certain day (referred to as X) has arrived;

If the amount of margins just equivalent to the amount of margin requirement is deposited,

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

 The business operator, 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 recovered to $1=¥101.00 when the deadline (referred to as Y) for the addition of the shortage computed at the time of X has arrived,
(¥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 the time of X.

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

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

(Relation with loss-cut transactions)
  Nothing in the laws or regulations prohibit a business operator, etc. to facilitate the loss-cut rules in the case of corporate over-the-counter FX transactions, but many business operators, etc. have loss-cut rules voluntarily.
 Even if the net amount on deposit is short of the amount of margin requirement as at a margin ratio judgment time and the business operator, etc. is in the middle of requiring the customer to deposit the amount of shortage additionally within a period reasonably necessary ordinarily for operation processing, the business operator, etc. will execute loss-cut transactions if loss-cut rules set by the business operator, etc. have become applicable because of the market price movement.


3.Computation method of margins, etc.

(Net amount on deposit) 
 Net amount on deposit means the amount of margins, etc. after the addition of valuation profits or the subtraction of valuation losses for a customer arising from the settlement of transactions. 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 is deducted from the net amount on deposit.
 Many business operators, etc. use the terms of effective margins or real margins in the explanation of net amount on deposit.
 It will be confirmed at the time of a transaction to establish new positions and once a day margin ratio judgement time that this net amount on deposit is not smaller than the amount of margin requirement or not.

(Amount of margin requirement)
 The amount of margin requirement means the amount computed by multiplying the amount of trading by the forex risk assumed ratio of the underlying currency pair of such trading. The Financial Services Agency Notification No. 25 (June 14, 2016) provides that the forex risk assumed ratio shall be computed in such a quantitative way as follows:

・Data extraction criteria
 Historical data (which mean values showing price movement actually occurred in the past) satisfying all of the following criteria shall be used.

The higher of the value for the period of the latest 26 weeks or the value for the period of the latest 130 weeks shall be employed;
The value is not a value computed by multiplying each value by its assessment rate;
The value is updated at least once per week.
 The Association will compute, and publish, corporate over-the-counter FX transactions margin ratios in a manner satisfying the above criteria.
 Member business operators, etc. of the Association may use the ratio published by the Association instead of computing the forex risk assumed ratio using their internally produced prices, etc.
 The Association aims to ensure member business operators, etc. to respond to these regulations appropriately and smoothly, contribute to the creation of the environment where customers can trade with easy minds, and, in addition, by computing and publishing margin ratio, etc. from a place of a third party, provide wide public investors with opportunities to recognize volatility in each currency market, provide opportunities to recognize fluctuation risk in each currency market, and ensure the decrease and relaxation of asymmetric nature of information between business operators, etc. and investors.
 With respect to publication by the Association, please refer to

(Timing of change in amount of margin requirement)
 The amount of margin requirement may be changed once a week depending on market conditions or fixing method adopted by the business operator, etc. because the Financial Services Agency Notification requires business operators, etc. to update the forex risk assumed ratio at least once a week, which determines the amount of margin requirement.
 There is, however, usually at maximum one week of get-acquainted period in the application of updated data to actual transactions.
 For example, assuming that the base date is X (Friday), the forex risk assumed ratio for the past 26 weeks and the past 130 weeks from such base date are computed by using respective historical data, and the higher value is employed. If there is one week get-acquainted period, the application will begin from the Monday after the next.

【Change in, and example of application of, amount of margin requirement】
Change in, and example of application of, amount of margin requirement



 The above explanation is for normal time, and there is different treatment for emergency time.

(Computation method of amount of margin requirement for more than one transaction)
 In computing the amount of margin requirement in the case where a customer is conducting more than one transaction simultaneously, the business operator, etc. is allowed to use both of the method to compute for each transaction and the method to compute for each customer in a lump for more than one transaction (method to compute amounts of margins by multiplying each currency by respective forex risk assumed ratio for each currency pair, and aggregate such amounts).

Articles 117.26, 117.27 and 117.28 of the F.I. Business Ordinance

(Offsetting positions, etc.)
 If a customer holds offsetting positions i.e., both short positions and long positions for the same currency pair, the business operator, etc. may, with respect to margins, etc. for such portion, compute the amount of margin requirement based on the larger of the amount for short positions or the amount for long positions. If there is more than one opposing position for the same currency pair, computation is made for each currency pair.
 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. Only if there are opposing positions for the same currency pair, the same or larger amount can be the basis for such portion.

117.29 of the F.I. Business Ordinance

【Example】
If a customer holds offsetting positions of $10,000 of USD/JPY long at ¥100.03 and $30,000 of USD/JPY short at ¥100.00:
 The basis is the larger of the amount of short position or the amount of long position. Therefore:
  Long:  ¥100.03 × 10,000 = ¥1,000,300
  Short:  ¥100.00 × 30,000 = ¥3,000,000
 The basis is the trading amount of ¥3,000,000 for $30,000 of USD/JPY short position, and assuming the forex risk assumed ratio is 1.5%:
 The amount of margin requirement should be ¥3,000,000×0.015=¥45,000.

(Substitute securities)
 Some business operators, etc. accept margins in the form of securities for the whole or part of margins that customers are required to deposit with the business operators, etc. Assessment rates applicable to such securities must be the amounts※8 prescribed by Article 68.2 of the Cabinet Office Ordinance on Financial Instruments Exchange, etc. of one of financial instruments exchanges.

Articles 117.23 and 117.24 of the F.I. Business Ordinance

※8
 An amount not to exceed the amount computed by multiplying the current prices as of the base date determined by a financial instruments exchange after obtaining an approval under Article 149.1 ※9 of the Financial Instruments and Exchange Act (hereinafter in this Page, referred to as "Act") (in the case where the 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 ※10 of the Act) by 70/ 100 in the case of stock prices, or by the ratio fixed by the exchange after obtaining an approval under said Article 149.1 in the case of others.
※9
 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."
※10
 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.Effective date, etc.

 The Cabinet Office Ordinance to amend a part of the Cabinet Office Ordinance on Financial Instruments Business, etc. containing these regulations will be promulgated on June 14, 2016, and take effect on February 27, 2017.


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 retail 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 F.I. Business Ordinance.
  2. The actual operation of each business operator, etc. may not coincide with the explanation in this Page completely to the extent not to depart from the purposes of regulations. In making transactions actually, you should confirm the statement furnished prior to entering into a contract (Explanatory Statement) or other materials furnished by the business operator, etc. with whom you are going to trade.