Recent speculation that Japan is contemplating more leverage changes for the retail FX market has been rampant. However the reality of the state of the industry is different, the CEO of GMO Click, Hiroyasu Kito, shared in an exclusive interview with Finance Magnates.
While the local regulators have been considering a cut in leverage to 1:10, the reason for that has been a worry about the settlement risks, which retail brokers are facing. As a result, the Japanese Financial Services Agency established a council of experts to investigate deeper into the issue and find the best possible solutions to address the worries of the watchdogs.
Below you can find the extensive interview with the CEO of GMO Click Securities, Hiroyasu Kito.
There has been rampant speculation in the Japanese FX industry that there is an upcoming change in maximum leverage for retail brokers to 1:10. Is there any truth to this speculation and what is your opinion on the matter?
In December last year, Japan’s Financial Service Agency (FSA) established a “Council of Experts on Managing Settlement Risks of Foreign Exchange (FX) Transactions for Over-the-Counter (OTC) FX Brokers”, which I myself, also serving as a director of the Financial Futures Association of Japan (FFAJ), attend as an observer. The primary purpose of the Council is to minimize the settlement risks of FX transactions for OTC FX Brokers, and the council members have been discussing this issue from all perspectives to achieve this goal. Implementing a leverage restriction is one possible measure that could be taken. However the objective is not to specifically implement this from the outset, and it is simply one of the possible solutions at this stage.
Looking comprehensively at the issue, I believe the most effective and high priority means to minimize these risks are to develop more enhanced stress testing methods and to establish a reporting system to the FFAJ and the FSA to ensure the fairness and transparency of OTC FX transactions and so forth. Additionally, based on the opinions raised at the council meetings, my understanding is that the FSA are considering regulations such as the enhancement of stress testing and the establishment of reporting systems for improving the transparency of transactions, more so than the introduction of leverage restrictions.
Regarding the direction of financial regulation, Mr. Imai, a member of the House of Representatives, who has been exchanging opinions with the FSA, shared a similar perspective in his interview with Diamond Financial Research, in that the FSA is discussing how these risks should be managed and the various options which are on the table.
Do you see the Japanese regulator attempting to force all FX trading to exchange-traded instruments with a prospective step to limit leverage to 1:10 for retail clients?
The FSA’s focus is on OTC FX transactions and not exchange-traded transactions at present. As I mentioned earlier, the FSA have been discussing various options as solutions to minimize the settlement risks for OTC FX brokers. In the council meetings, there were some members who insisted that a lower maximum leverage restriction should be introduced. However, this was not the majority opinion. I also feel disappointed when I see news reports that the FSA are to implement leverage restrictions as if it has already been confirmed, as there is clearly a large gap between these reports and what has been discussed at the council meetings.
On the State of the Market
Trading volumes across Japanese yen crosses have declined over the past years as volatility has dropped, how is this impacting your business and do you see a return to the record numbers from the post-Abenomics era?
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We have made efforts to improve the profitability of our FX business by utilizing big data analysis and deep learning since March 2017. Although low market volatility suppressed our customers’ FX trading volumes last year, our revenues were relatively solid as some of the initiatives we implemented based on our analyses took effect. We still have more ideas and plans to boost our profitability, and I believe we have established the foundation and processes to improve profitability, which will enable us to expand our revenues and market share to promote sustainable growth regardless of market conditions.
During the first quarter of 2018, we have seen immense volatility in the stock market. Has your firm been able to capitalize on this opportunity and do you see increased client activity in Q1 related to index trading?
GMO CLICK Securities reviewed its pricing strategy and revised margin trading commissions and interest rates in January 2018, which led to an improvement in profitability during Q1 2018. Now, we are working on projects to improve our services with the objective of expanding our market share. We have also had opportunities to grow our trading volumes and revenues in Futures and CFDs amid the high level of volatility in the market.
Have you been considering to expand your global operations amid the news about a potential cut in maximum leverage in the country to 1:10 and what do you see as the best way to diversify your geographic exposure away from Japan-centered operations?
We’ve been working to expand our operations globally since 2012 when we first launched FX trading services in Hong Kong, and we now also have offices in London and Bangkok. Considering the changes in demographics and declining population in Japan, we recognize that expanding our overseas businesses globally is an important management issue. There is not a straight-forward solution or approach. However, I believe that optimizing our marketing strategy to suit the local market is the key to success for our overseas businesses.
Is your firm actively engaged in offering cryptocurrency trading and what are the main trends with these instruments in Japan since the start of 2018 and the subsequent collapse of Bitcoin prices?
The cryptocurrency part of the business is an area we have been focusing on in addition to the FX side of the business. Our consolidated subsidiary, GMO Coin, which was established in October 2016 and launched its full-scale cryptocurrency exchange services in May 2017, has been growing steadily and achieved profitability on a quarterly basis in Q3 2017 (quarter ended December 31, 2017). GMO Coin still has some issues to be resolved. However, we believe that GMO Coin holds considerable growth potential by continuing to improve its services.
In Japan, cryptocurrencies are used mostly as a means of investment at the moment. However, we believe that the usage of cryptocurrency as a payment method will increase once market liquidity improves, and prices are stabilized. For that to happen, the sound development of the industry is necessary. Therefore, establishing rules designed to enable the sound development of the industry is the main topic of discussion in the Japanese cryptocurrency market today, and enhancing the management system and security to protect customer assets and preventing fraudulent transactions such as money laundering are important issues. Additionally, a new industry association was established recently, and GMO Coin’s Managing Director was appointed as a Director of the association. The industry is about to make a concerted effort to establish voluntary regulations, and so forth for a better trading environment, and we are determined to do all we can to lead and contribute to the development of the industry as a responsible player.
What are the regulatory restrictions/requirements for Japanese brokers to be able to legally offer cryptocurrency trading to their clients?
Japan is one of the most advanced countries regarding cryptocurrency trading. The amended Payment Services Act took effect on April 1, 2017, in which the cryptocurrency exchange service provider registration system was introduced. Cryptocurrency Exchange Service Providers are obliged to disclose detailed information to customers, to segregate customer funds, to undergo an audit at least once a year, and to carry out identity verification at the time transactions are made (a measure to prevent money laundering), and so forth. We believe that establishing a business environment with regulations set by the FSA and voluntary restraints will increase confidence in the Japanese cryptocurrency industry and promote the industry’s sound and steady growth as it was once in the FX industry.