2009 is the year of the Regulator: Japan caps Forex leverage at 50 and then at 25 times the collateral

Yesterday I reported that the Israeli regulators started to crack down on Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term and now Reuters reports that the Japanese FSA has decided on the proposed Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term reduction. This has been a matter which has long been discussed by the local regulators. US regulators have also recently started to take an interest in leverage reduction, according to Tom Herod.

The Japanese regulators decided to cap the leverage at 50 times the collateral beginning this month (August ’09) and to reduce it even further to 25 times a year after.

Unfortunately the Japanese regulator has now joined the US one in its unnecessary requirement decisions. Out of all the topics that should really be governed in Forex, the leverage is certainly not the most important one. While the 1:400 leverage is insane and really works against the trader, the 1:100 leverage is the typical capital markets leverage for financial instruments,such as options. These effectively cut sophisticated investors in hedging transactions.

It would have been much better if the Japanese FSA limited the leverage to unsophisticated investors only, while allowing the sophisticated ones (who must prove their level of sophistication through testing) trade at their own will. I agree with Milton Friedman on this in believing that the markets govern themselves more effectively on their own than with governmental intervention.

The latest move will certainly undermine the growth of this massive Japanese industry, which might even be larger than the US one. I have contended that Saxo Bank made a big mistake by setting up shop in Japan right before the aforementioned regulation (which has long been known) will take effect. IG Markets, which recently acquired a large Japanese broker, reported that the local market is becoming more and more competitive (reading between the lines this means that the growth is decreasing).

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