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 ① customer protection, ② risk control of a financial instruments business operator and registered financial institution (hereinafter in this Page, referred to as "business operator, etc.") and ③ 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.
※1The 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 ① 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, ② 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.)
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".
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."
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.(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.
（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:
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.
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."
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.:
"Currency-related over-the-counter derivatives transaction" under (21-2) of Article 123.1 means an over-the-counter derivatives transaction with underlying assets of currencies which is the transaction referred to in (1) or (2) of Article 2.22 of the Act, the transaction referred to in (3) of said Article 2.22 (limited to a transaction in which a transaction concluded as a result of the exercise of a right provided in said (3) is the transaction referred to in (1), (2) or (3) (a) of said Article 2.22) or the transaction referred to in (4) of said Article 2.22.
Act, when entering into a contract for specific currency-related over-the-counter derivatives transaction (which means over-the-counter derivatives transaction with underlying assets of currencies which is any of the transactions referred to in (1) of Article 2.22 of the Act (limited, in the case where the deadline of such transaction has arrived, to entering into, after the settlement, transaction with the same type of currency, price and number of transactions or volume as the settled transaction, or to transaction in which parties agree in advance to extend effectively the deadline of such transaction by means of extension of the deadline or other means, without settlement) ) or the transaction referred to in (2) (limited, in the case where the deadline of such transaction has arrived, to entering into, after the settlement, transaction with the same type of financial index, value and number of transactions or volume as the settled transaction, or to transaction in which parties agree in advance to extend effectively the deadline of such transaction by means of extension of the deadline or other means, without settlement), and excludes those conducted for the purpose of settlement; hereinafter in (39), (40) and Articles 117.26 to 117.30, the same), a customer (excluding individual (excluding an executive association member, etc. (which means an executive association member, etc. as defined in (23) of Article 10.1 of the Cabinet Office Ordinance on Definition as Provided in Article 2 of the Financial Instruments and Exchange Act; hereinafter in (39), the same) who meets criteria referred to in (24) (b) (i) of said Article 10.1, in the case where such executive association member, etc. conducts specific currency-related over-the-counter derivatives transaction as an executive association member, etc.), a financial instruments business operator, etc. or a person who carries out over-the-counter derivatives transaction as business in a foreign jurisdiction; hereinafter in (39), (40) and Articles of 117.26 to 117.29, the same), in the case where the amount of margins, etc. (which mean customer margins or other guarantee money; in (40) and Articles 117.23 to 117.25, the same) deposited with margins, etc. depository (which means a financial instruments business operator, etc. or financial instruments clearing organization (including its equivalence in a foreign jurisdiction); hereinafter in (39) and (40), the same) after the addition of the amount of profits for a customer arising from the settlement of such specific currency-related over-the-counter derivatives transaction or the subtraction of the amount of losses for a customer arising from the settlement of such specific currency-related over-the-counter derivatives transaction (in (40) and Article 117.26, referred to as "net amount on deposit") is short of the amount of initial margin, to continue to keep such contract without requiring such customer to deposit the amount of such shortage with the margins, etc. depository immediately after entering into such contract.
A juridical person (excluding a continuous welfare pension fund, and, in the case of a juridical person who has notified as a juridical person meeting (b), limited to the case of conducting transactions as an executive association member, etc. (which means an association member who has entered into association agreements and has been commissioned to execute the business operation of the association, a business person who has entered into undisclosed association agreements or an association member who enters into limited liability business association agreements to involve in the decision of important business operation of the association and executes the business operation or a person similar thereto under the laws or regulations of a foreign jurisdiction; in (b) and (24), the same)) who has notified the Commissioner of the Financial Services Agency as a juridical person meeting any of the following criteria:
(b)Such individual is an executive association member, etc. and meets all of the following criteria (excluding the case where (a) is applicable):
(i)the balance of securities held by such individual person is ¥1,000,000,000 or more as an executive association member, etc. in the course of invested business under such association agreements, undisclosed association agreements or limited liability business association agreements or agreements similar thereto under the laws or regulations in a foreign jurisdiction on the latest date.
An act (excluding the act referred to in (39)) to continue to keep such contract for specific currency-related over-the-counter derivatives transaction, in the case where the net amount on deposit of margin, etc. for specific currency-related over-the-counter derivatives transactions as at a certain time of its each business day is short of the amount of maintenance margin, without requiring such customer of such specific currency-related over-the-counter derivatives transaction to deposit the amount of such shortage with the margins, etc. depository in a timely manner.
Net amount on deposit under (39) or (40) of Article 117.1, amount of initial margin under (39) of Article 117.1 and amount of maintenance margin under (40) of Article 117.1 may be computed for each customer in a lump for more than one specific currency-related over-the-counter derivatives transactions. For the purpose of application of the provisions of (39) of Article 117.1 in this case, "such specific currency-related over-the-counter derivatives transactions" under (39) shall be read as "specific currency-related over-the-counter derivatives transactions conducted by such customer" and "addition, or" shall be read as "addition,".
"Amount of initial margin" under (39) of Article 117.1 and Article 117.26 shall mean the amount specified in each of the following items according to the classification of the case referred to in such item:
"Amount of maintenance margin" under (40) of Article 117.1 and Article 117.26 shall mean the amount specified in each of the following items according to the classification of the case referred to in such item:
In the case referred to in (2) of Article 117.27 or (2) of Article 117.28, if a customer makes sale, etc. of one currency which results in purchase, etc. of other currency and makes sale, etc. of such other currency which results in purchase, etc. of such one currency, the amount equivalent to or larger amount among amounts of specific currency-related over-the-counter derivatives transactions related thereto can be the amount of specific currency-related over-the-counter derivatives transactions for such one currency or for such other currency.
Securities may be used as margins, etc. under (39) and (40) of Article 117.1.
In the case where securities are used for the whole or part of margins, etc. that customers are required to deposit with a financial instruments business operator, etc. pursuant to the provisions of Article 117.23, assessment rates applicable to such securities shall be the amounts prescribed by Article 68.2 of the Cabinet Office Ordinance on Financial Instruments Exchange, etc. of one of financial instruments exchanges.