The Japanese Financial Services Authority (JFSA) is setting up a committee that will explore the options for changes to existing retail forex trading. The body’s goal is to examine the market and the main risks for clients and determine what the best course of action is.
Japanese authorities have been worried by systemic risk and outlined earlier this autumn that they are looking to revise leverage and capital requirements for foreign exchange brokers. The size of the Japanese retail forex market is worrying authorities due to the risk of sudden losses to clients and brokers.
The move follows the news, exclusively reported by Finance Magnates in November, that the JFSA was considering a 1:10 leverage cap. The outcry from brokers and traders alike has prompted the Japanese regulator to set up the current committee.
Regulatory Review Aiming at 1:10 Cap
The review is said to have been prompted in the interest of clients. However, a more likely scenario where Japanese authorities are trying to push all FX trading onto the Tokyo Financial Exchange (TFX) appears to be taking shape. The government owns the venue and the possibility of monopolizing the massive Japanese retail FX market could be one of the reasons why authorities are looking to crack down on retail shops. Leverage on the Click 365 product that is traded on an exchange are said to remain unchanged.
Notably, the regulatory burden on the Japanese foreign exchange broking companies has been dramatically increased in recent years. In the aftermath of the global financial crisis, brokers were mandated to cut the maximum leverage to 1:50. After the execution of this rule, the cap on leverage was further reduced to 1:25 in 2011. That hasn’t stopped the Japanese retail FX market from continuing to grow with the biggest Japanese brokers being the largest in the industry by trading volume.
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The Japanese FSA committee is expected to pay special attention to reviewing the 1:10 leverage rule, which the regulator is proposing. The industry is strongly opposing the move as it considers the restrictions to go too far.
In addition to risk management, the committee will also review the risk management methodology of brokers and their capital adequacy ratios. The primary regulation that stifled the development of the US retail foreign exchange market was the introduction of a $20 million capital requirement for all brokers that are providing services to retail clients.
Should Japanese authorities introduce harsher regulations for retail forex brokers in the country, there are several risks to which Japanese residents could become exposed. In addition to trading with offshore brokers that could be operating from jurisdictions that are loosely supervised, Japanese traders are becoming more and more interested in cryptocurrencies.
While the Japanese authorities were the pioneers of regulation in the crypto sphere, its legislative framework is mainly designed to prevent money laundering, and is not geared toward trading.
As pointed out by Finance Magnates a few days ago, Japanese retail FX traders have become very interested in speculating with cryptocurrencies and the country’s residents are said to be responsible for about 40 percent of transactions on the Bitcoin market.
Not only is a prospective action from the JFSA effectively shutting down opportunities for retail clients, but it is driving risk to frequently unsanctioned firms offshore. Unregulated forex brokers have been targeting Japanese residents for years as it is challenging to control online trading services offered from overseas.