Protectionism In The Largest FX Market: Is Japan Extinguishing Overseas Competition?

Since the Japanese FSA released new strict guidelines to FX firms in May this year, an underlying bete noire has

Subsequent to the introduction of new supervisory rulings by the Japanese Financial Services Agency (FSA) in May this year, which encompassed the monitoring of capital adequacy by the authorities as well as an overhaul of the method by which financial instruments are overseen, a degree of discourse has begun to surface among market participants in Japan.

Despite the increasingly high volumes and FX companies in Japan continuing to showcase their businesses as a tour de force this year, overseas companies operating in Japan, the world’s largest retail FX market, are receiving a firm hand from the Japanese regulatory authorities.

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Whilst domestic companies such as GMO Click and DMM Securities have been achieving stratospheric monthly volumes, transgressing the $1 trillion mark more than once over recent months, overseas companies rely on introducing brokers to provide them with their share of what is a mainly domestic firm-dominated market.

Japanese FSA Issues Warning To Unregistered Firms

After the May introduction of the new guidelines, there was silence abound among Japanese industry executives and traders alike, but on June 25 the list of unregistered Forex brokers that are operating in Japan was issued by Japanese FSA, which included a series of well known non-Japanese companies


Mark Paul, Japanese Desk Manager at Formula FX today spoke out to Forex Magnates as he is witnessing a noticeable dynamic to this effect. “This action by the Japanese FSA as a part of its new regulatory policy has caused reaction on the one hand close to panic, and on the other a degree of resentment among our clients”.

“Some of them have become afraid that it will be impossible not only to continue the trading of their existing accounts, but also to withdraw funds” explained Mr. Paul.

He further demonstrated the view from within insofar as that “a couple of traders that I have spoken to are blaming the Japanese government for turning country into a communist state. This of course is an exaggeration, but quite demonstrative one.”

“While some participants have demonstrated fear, the others see conspiracy in the new measures and stated that the idea of instigating them was lobbied by Japanese Forex brokers, that apparently could not or were not willing to continue competition with foreign companies due to the obligatory limit on leverage in Japan.”

“In addition, some of the brokers which appeared in the list have already submitted to the demands of Japanese FSA and refused to accept new clients from Japan. This situation has also endangered well-developed IB industry that was generally built on cooperation with foreign brokers.”

Mr. Paul is currently engaged in a small-scale investigation of various Japanese forums related to the FX industry and how it operates in Japan.

The purpose of Mr. Paul’s investigation is to understand how the Japanese FSA chooses which brokers to warn or ban from operating.

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“I have just read interesting post in which there is a dialog between Japanese trader and representative of the Japanese FSA” explained Mr. Paul.

“Apparently every broker that supports the Japanese version of its website is a candidate for a warning. However in continuation of the dialog with the second representative new details have been revealed that only brokers that are advertising in Japanese are subject to warnings and further measures, because Japanese support can be aimed to Japanese clients residing abroad.”

Extending The Obstacles Overseas

Furthermore, the Japanese FSA was one of the most active proponents of ensuring that traders residing in the market over which it has jurisdiction do not trade with overseas companies based outside Japan, as explained to Forex Magnates by Archer Consultants‘ executives Lior Shmuely and Joshua Sneider last week.

The Japanese FSA made a series of complaints to Cypriot regulator CySEC that it must not accept Japanese clients without prior authorization, citing that CySEC’s mandate is outside of Japan’s jurisdiction and only applies to Europe, and alleging that Japan’s oversight of financial markets is superior to that of CySEC. Given Mr. Paul’s analysis, this could be construed as a further attempt to protect Japanese FX firms and ensure all business goes their way.

“I know for sure that one of my clients had to close his account at TusarFX while other traders were overly concerned about their existing accounts and demanded guarantees from our side that we will ignore the ruling of Japanese FSA” explained Mr. Paul.

Mr. Paul certainly believes that many international brokers will simply go in the same direction, completely or partially removing their Japanese banners but continue to work in the highly lucrative Japanese market without officially stating their withdrawal.

As far as introducing brokers within Japan are concerned, most of them are keen to continue a form of cooperation with foreign brokers despite the fact that such actions can be regarded as crime or at least complicity to a crime. On the other hand one of Formula FX’s introducing brokers has refused to sign an official contract due to concerns over the consequences.

Mr. Paul stated that “at my disposal I have the personal reactions of traders, including their grim projections for the whole Japanese FX market.”

“Japanese clients, if the FSA follows its own logic, should be banned from using international banks as well, because this also constitutes financial services provided by unregulated foreign institutions ” being a major criticism by one particular client.

Mr. Paul confirmed that there have been some more moderate responses which compare the new regulation with the one existing in the US, and that despite this, the industry is still able to survive and evolve.

“However I haven’t experienced any clear reaction in favor of new rules, despite the fact that their main purpose as stated by Japanese FSA is to protect Japanese traders from fraud and scams, so there should be some gratitude from their side. On this basis it somehow supports the conspiracy theory, which I prefer not to believe” is Mr. Paul’s conclusion.

Here is the full list of unregistered brokers, compiled by the Japanese FSA.

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