Breaking: Retail FX Leverage in Japan to Remain Intact

As Europe is getting more stringent on Margin Requirements for retail traders, Japanese authorities are reportedly ending discussions on the matter. The country already has mandated a minimum of 1:25 in the aftermath of the Great Financial Crisis in 2008.

Some months ago reports by local newspapers created ripples across the margin FX trading industry in Japan, reporting that the regulators were discussing a 1:10 leverage cap. After months of deliberations, the Japanese Financial Services Agency (JFSA) has decided on the matter, effectively scrapping the plan, sources with knowledge of the matter confirmed to Finance Magnates.

To mitigate risks for traders, the JFSA is likely to employ stress tests on local brokers to ascertain whether they are capitalized well enough to withstand unexpected financial shocks. One such shock was the removal of the floor from the EUR/CHF rate in 2015, an event that prompted numerous brokers to file for insolvency.

Carry Trades

Margin FX trading in Japan is a source of income for a number of retail traders who are used to betting against the local currency in carry trades. The local central bank is currently expanding its balance sheet at the fastest pace amongst major central banks across the globe.

A depreciating currency has been at the core of the carry trade for years as Japanese housewives, commonly referred to as Mrs. Watanabe, have been trading currencies in their spare time. Reports about some local banks seeking council from top retail investors circulated across the media some years ago.

The plan was abandoned in the face of resistance on the part of both brokers and traders, the source shared with Finance Magnates.

In a recent interview with Finance Magnates, the CEO of the largest Japanese retail brokerage, GMO Click, shared that the discussions at a regulatory level are far from over. Today’s news puts an end to months of speculation about the introduction of a new cap on Leverage in Japan.

Contrast to Europe

While the Japanese regulators have been mindful of the interests of both traders and brokers, their European counterparts have been less caring about the consequences of their actions. Traders who want to use higher leverage in Europe will have to either seek brokers regulated outside of the EU (or unregulated) or reclassify to professional investors.

This last step is likely to greatly reduce the protections which retail investors are enjoying. The step has been consistent with the regulatory approach which regulators globally have imposed on the industry, albeit European restrictions CFDs leverage have gone further than most other watchdogs.