In this page, we explain leverage regulations on transactions by individual customers. If you're interested in margin regulations of corporate Over-The-Counter FX Transautions, please refer here.
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 transactions"), the Financial Services Agency considered that such highly leveraged transactions could be a problem in light of:
Based on the circumstance 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"), as an effort to ensure sound FX transactions business in addition to requirement for customer money control by means of trust holding in a separate account and, requirements for implementation of, and compliance with, loss-cut rules, to prohibit business operators, etc. to allow an individual 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 principal amount)※1, 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.
※1A business operator, etc. is required to collect at least 4% margins at the time of establishment of new positions and at a certain time fixed by the business operator, etc. at least once a day each business day.
The regulations apply only to currency-related derivatives transaction ※3 including FX
transactions (in the case of currency options transactions, only transactions in which a customer sells
options; hereinafter in this Page, explanation is given only for FX transactions) with a customer who is
an individual ※2, and apply to both over-the-counter transactions and on-exchange
transactions. (If you're interested in margin regulations of corporate Over-The-Counter FX Transautions,
please refer here.)
These regulations do not apply to transactions to close existing
positions.
※2Individual 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.※3Which 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 of Article of the F.I. Business Ordinance).
The F.I. Business Ordinance was amended to include the regulations and to add the following two acts to prohibited acts ((27) and (28) of Article 117.1 of the F.I. Business Ordinance):
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 of each business day, respectively. A business operator, 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.).
※4The 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 ※6The amount obtained from multiplying the trading amount (so called notional principal) by 4%.※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 the amount at least 4% of the
trading amount at the time of transactions to establish new positions.
According to the
provisions of (27) of Article 117.1 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, 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 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.(b.) requires, if the net amount on deposit drops below the amount of margin requirement at the
margin ratio judgment time each business day, a business operator, etc. to collect such shortage in
a timely manner.
A business operator, etc. may fix the margin ratio judgment time at the
discretion of the business operator, etc., 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 business
operator, 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 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 in a timely manner (within a period reasonably necessary
ordinarily for operation processing such as one business day), or close the customer's whole
positions.
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, it is prerequisite that the business operator, etc. explains, and obtains an agreement
from, the customer about the method 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 business operator, etc. within a period reasonably
necessary ordinarily for operation processing, the business operator, etc. must take the method
either filling up the shortage once recognized by collecting margins additionally or closing a part
of existing positions, or close 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 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 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 no later than Y+ 1 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
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
additionaly within a period reasonably necessary ordinarily for operation processing, the business
operator, etc. must make loss-cut transactions appropriately if the loss-cut rules have become
applicable because of the price movement.※8
There must be at least one margin ratio
judgment time per one business day, which requires a business operator, etc. 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 business operator, etc. to
judge once per day whether the loss-cut level has been reached or not. A business operator, 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.
※8With respect to requirements for implementation of, and compliance with, loss-cut rules,please refer to:
（Net amount on deposit）
Net amount on deposit means the amount of margins, etc. after the addition of
valuation profits for a customer arising from the settlement of transactions 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 must be deducted from
the net amount on deposit.
（Fixed amount margining method）
A business operator, etc. is allowed to define an amount of margin
requirement as "amount after changes in foreign exchange market prices are reflected appropriately," to
the amount obtained from multiplying the trading amount by 4/100, too because of the consideration of
actual practices of a business operator, etc. using so-called fixed amount method such as "¥○○,000 per
trading unit." A business operator, 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
business operator, 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 simultaneously, the business operator,
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 a lump.
（Offsetting positions, etc.）
If a customer holds offsetting positions i.e., holding both short
positions and long positions for the same currency pair, the business operator, 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. If there is more than one opposing
positions for the same currency pair, computation should be made for each of such currency
pairs.
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】
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
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
（Substitute securities acceptable as margins）
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 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.
※9An 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 ※10 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※11 of the Act) by 70/ 100 in the case of stock prices, or the amount computed by multiplying such current prices by the ratio fixed by the exchange after obtaining an approval under said Article 149.1 in the case of others.※10It 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."※11It 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. was promulgated on August 3, 2009, and 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.
Notes, etc.:
the website of the Financial Services Agency （Japanese Page）（F.I. Business Ordinance, etc.） https://www.fsa.go.jp/news/21/syouken/20090731-6.html
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.
123.3. "Currency related market derivatives transaction" under Article 123.1 (21-2) means a market derivatives transaction with underlying assets of currencies which is the transaction referred to in (1) or (2) of Article 2.21 of the Act or (3) of said Article 2.21 (limited to a transaction carrying a right if a transaction concluded as a result of the exercise of such right provided in said (3) is the transaction referred to in (a) of said (3) or a transaction referred to in (b) of said (3) (limited to a transaction related to the transaction referred to in (1) or (2) of said Article 2.21)).
"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.
123.5. "Currency related foreign market derivatives transaction" under Article 123.1 (21-2) means a foreign market derivatives transaction which is a transaction similar to currency related market derivatives transaction as defined in Article 123.3.