Many financial instruments firms or registered financial institutions engaged in foreign exchange
margin transactions (hereinafter in this page, referred to as "FX transactions") (hereinafter
referred to as "firms, etc.") have had loss-cut rules to effect loss-cut transactions ※1
at the predetermined level agreed with a customer since the early days. Despite existence of
loss-cut rules, however, the rules have sometimes failed to operate properly.
If loss-cut rules
fail to operate as agreed with a customer, such customer may suffer unexpected losses, which could
be considered as a failure of the customer protection.※2
In the light of risk control of a firm, etc., there was a case that an FX firm itself has suffered
large amount of losses from transactions with customers and gone bankrupt due to a price movement in
the reverse direction because of the failure of effective functioning of loss-cut rules for
transactions with customers, despite of unwinding of covering transaction at the time of an abrupt
change in market prices.
After considering such customer protection and risk control of firms, etc. as explained above, the
Cabinet Office Ordinance on Financial Instruments Business, etc. (hereinafter referred to as "F.I.
Business Ordinance") was amended in 2009 to make loss-cut rules requisite (it was an option of a
firm, etc. before the amendment) and to require firms, etc. to prepare loss-cut rules, implement the
execution control system of loss-cut transactions and to comply with agreements with customers
regarding the execution of loss-cut rules.
※1"Loss-cut transaction" means a compulsory transaction by a firm, etc. to close a customer's position when the amount of losses that the customer will suffer from the closing of positions has reached the amount computed by the method agreed with the customer in advance.※2Loss-cut transaction does not limit the amount of losses to an agreed amount. Procedures for such closing transaction begin usually when the amount of losses has reached the level of the amount of losses agreed in advance (hereinafter referred to as "loss-cut level"). Therefore, the actual amount of loss may be larger than the loss-cut level. Even if a loss-cut transaction was conducted in accordance with the loss-cut rules, the customer may suffer the amount of loss larger than the amount of margins deposited by the customer depending on the market conditions.
Only currency-related derivatives transactions including FX transactions (hereinafter in this Page, explanation is made only for FX transactions) ※4 with customers who are individuals ※3 are subject to loss-cut requirements.
※3Individual referred herein means an individual (including a specific investor) who is an ordinarily considered as a natural person excluding, in the case where such individual conducts 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.※4Which 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 123.5of the F.I Business Ordinance).
Article 40 (2) of the Financial Instruments and Exchange Act (hereinafter referred to as "F.I. Act") requires firms, etc. to carry out business to keep the state of business management from likeliness of being inconsistent with the public interest or constituting a failure of the protection of investors. The following two items were added to "the state of business management likely inconsistent with the public interest or constituting a failure of the protection of investors" (Article 123 of the F.I. Business Ordinance):
These provisions explicitly require firms, etc., before offering FX transactions to customers, to prepare loss-cut rules, implement the system to execute the loss-cut rules and conduct loss-cut transactions in accordance with the rules so actually prepared.
The Comprehensive Supervisory Guidelines for Financial Instruments Firms, etc. ※5 (hereinafter referred to as "Supervisory Guidelines") added, as remarks, requirement for accountability to customers concerning loss-cut transactions in the case of currency-related over-the-counter derivatives transactions including:
These provisions require firms, etc. to make appropriate explanation to customers of the details of loss-cut transactions and risks thereof in a written statement furnished prior to entering into a contract.
※5Prepared by the Financial Services Agency to produce a comprehensive supervisory system concerning fundamental concepts for the supervision over financial instruments firms, etc., supervisory valuation and remarks on administration, and published to encourage firms, etc. to make a voluntary effort.
The Supervisory Guidelines added, as remarks on the implementation of a risk control system and carrying out business operations for loss-cut transactions in the case of currency-related over-the-counter derivatives transactions:
※6This does not mean to absolutely preclude the possibility of causing the amount of losses exceeding the amount of margins.※7The level of the execution of loss-cut transactions does not necessarily coincide with the level at which loss-cut transactions are actually concluded. In this provision, each firm, etc. is required to take procedures for loss-cut transactions immediately when the positions of a customer have met the conditions to execute loss-cut transactions as determined by the firm, etc.
Although the amended F.I. Business Ordinance took effect on August 1, 2009, a firm engaged in the business as of such date is subject to the transitional measures for 6 months until January 31, 2010 and the amendment has become applicable to existing firms as from February 1, 2010.
【Notes, etc.:】
the website of the Financial Services Agency （Japanese Page）
（F.I. Business Ordinance, etc.） https://www.fsa.go.jp/news/21/syouken/20090703-2.html
（Supervisory Guidelines） https://www.fsa.go.jp/news/21/syouken/20090703-4.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.