Japanese Binary Options Rulings Examined: A Close Look At FFAJ's Regulatory Framework

A month has passed since the binary options industry released platforms which comply with the new Japanese rules, however as

Just one month ago, Japan’s Financial Futures Association (FFAJ) finalized the lengthy and comprehensive rulings by which binary options companies are to be governed, giving way to a response from all of the technology providers which develop and supply trading platforms to the world’s binary options brokerages.

Just one week later, all of said technology providers unveiled their newly modified platforms at the Forex Magnates Tokyo Summit, all of which incorporate the features required to ensure compliance with the rulings.

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Detailed Set Of Rulings

In order to provide some further detail of importance with regard to the finer points of the rulings, Forex Magnates examined the rulings closely for those participants requiring information from outside of the Japanese domestic market.

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Whilst the vast majority of points have been covered prior to the ruling, there are some factors worthy of consideration.

One such example is that whilst it was initially anticipated that the minimum trading period permissible by a Japanese provider of binary options would be no less than two hours, the FFAJ has determined that a firm, with respect to an over-the-counter binary option transaction with individuals, must determine the base hour for a trading period and ensure that trading periods for all over-the-counter binary option transactions with individuals shall not be shorter than the base hour.

Transparency

One of the major concerns among regulators worldwide is the method by which brokers offering OTC binary options arrive at prices and how they can present this in the case of a possible complaint. This is one of the main reasons that the US National Futures Association will only allow binary options trading to take place on exchanges in its jurisdiction.

In this circumstance, Japan’s FFAJ allows companies to maintain an OTC model, but it is the responsibility of the company to increase transparency of binary option transactions with individuals and provide customers with a trading environment in which customers can trade freely until just before the judgment time, similar to that provided by exchange listed options, in order to mitigate as best possible an unanticipated loss.

The FFAJ has ruled that on-exchange binary options are completely exempt from all of these rulings, and that they only apply to OTC binary options, citing the reason as being that there has never been a binary options trade placed on an exchange in Japan, therefore rendering such rulings redundant.

The Cash-Back Caveat

The regulator has demonstrated concerns that providing gifts such as bonuses or cash back incentives alongside OTC binary option transactions insofar as that it could influence the judgment of investors, which the FFAJ considers a less appropriate method of attracting customers than the use of an affiliate advertisement. Therefore, if cash back campaign is advertised using an affiliate advertisement, the FFAJ will raise concerns, and therefore, recommends that binary options companies must take a prudent attitude towards this and should refrain from the practice of offering gifts.

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Considering the specifications of binary option transactions however, there are concerns that an affiliate advertisement under indirect contract may not be controlled fully. Therefore companies must define the content of such campaigns very carefully.

Client Suitability

A somewhat bureaucratic but important facet of the new regulatory structure surrounds the responsibility of a firm in ensuring the clients which it solicits are suited to binary options trading.

Under this premise, the FFAJ rules that companies must, in principle, classify the attributes of customers, establish criteria for the commencement of trading and trading limit for each type of financial instruments that the company offers, and judge whether trading with the customer is right or wrong as well as control trading conditions.

Companies are required to check whether a customer has necessary knowledge or not by concrete means such as examination. Such examinations can be conducted by means of providing the client with a questionnaire, the answers on which can be answered as true or false by the client.

To ensure effectiveness, companies when designing these questionnaires must avoid easy questions that provide hints to the answers, instead they must conduct an examination with quality and a series of questions in order that the scope of the examination is sufficient to measure the degree of understanding of the product being sold to each customer.

Payouts

Changes in option values during a trading period must be shown by changes in option premium (changes in trade prices).

Therefore, the method to fix trade prices and show changes in value only by payout amount should not be allowed, hence the new platforms offer a series of prices in order to be compliant.

An example of this could be that in the case of a USDJPY standard option, quoting trade prices per $1 to customers could be the principle.

Based on the structure of price calculation for binary options, on the other hand, a firm is required to quote trade prices based on the payout amount, and in order to maintain comparability of trade prices for customer under such conditions, in respect to payout amount, the units from which a customer can easily compare such as 1,000 Yen or 10,000 Yen is desirable.

The structure of fixing the investment amount of a customer such as 1,000 Yen or 5,000 Yen of trade price of options and adjusting the volume of options granted may harm the price comparability for a customer and could lead a customer to conduct excessively speculative transactions, and therefore inappropriate.

Japan’s regulations are in essence the first set of custom built regulatory rulings which have been designed from the ground up purely for the overseeing of binary options. As per many new rulings which have served to legitimize new industries, there are many considerations to take on board with these steps by the FFAJ as binary options, a very popular product in Japan, continues to evolve into mainstream markets worldwide.

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