This content is from: Local Insights

Financial instruments

On April 13 2007, the Financial Services Agency (FSA) published drafts of the enforcement order and cabinet office ordinances that relate to the recently enacted Financial Instruments and Exchange Law (the FIEL).

Persons, including corporations, who trade in financial instruments, including securities, as defined under the FIEL, are required to register as financial instruments firms. Under the draft order and ordinances, to register as a financial instrument trader, the registering person will now be required to satisfy several requirements. First, the entity or person must be able to properly perform its operations by having in place an appropriate organizational structure and by engaging officers and employees who have enough knowledge and experience in performing the operations. Second, there must be no possibility of any officer or employee of the registering person damaging the credibility of the financial instruments market as a whole, such as by associating with organized crime syndicates. Financial instrument firms will also be required to monitor and maintain these performance standards, and the integrity of its officers and employees, to ensure ongoing compliance with these requirements.

The draft provisions also require firms who intend to trade in beneficial interests in real estate trusts to register as general real-estate investment advisers (as announced by the FSA). The requirements applying to these firms have become more stringent than ever before.

While the registration requirements will be strengthened and tightened, minimum capitalization and guarantee requirements for financial instrument firms will be relaxed under the drafts, the extent of which will depend on each trader's type of operation. Under the FIEL, financial instruments businesses are classified into four categories: first-type financial instruments business (including a substantial portion of the securities business under the Securities Exchange Law and business related to over-the-counter derivatives), investment management business, second-type financial instruments business (including sales and solicitation of securities with lower liquidity and market derivatives) and investment advisory businesses. Under the draft order and ordinances, minimum capitalization of ¥50 million ($410,000) will be required for first-type financial instruments businesses, although lead underwriters falling within this category will be required to have minimum capitalization of ¥3 billion and other underwriters will need to have minimum capitalization of ¥500 million. Fifty million yen will be required for investment management businesses and ¥10 million for second-type financial instruments businesses that are corporate entities. Where the second-type financial instruments business receives money on deposit, stricter requirements than those for ordinary second-type financial instruments businesses will be imposed to manage the risk of loss. As such, minimum capitalization of ¥50 million will be required. With respect to guarantee obligations, ¥5 million will be required for an investment advisory business, and ¥10 million will be required for second-type financial instruments businesses that are individuals, although if the second-type financial instrument business receives money on deposit, the guarantee amount required will be ¥50 million.

Although registration is not required, under the draft order and ordinances, financial instrument firms who intend to engage in the emissions credit and derivatives business (defined by Article 2, item 6 of the Law Concerning the Promotion of Measures to Cope with Global Warming), which is similar to financial instruments trading with emissions credits in European markets by companies similar to Japanese financial instrument firms, will be required to notify the FSA to that effect. Traders involved in real-estate management or who are trusts or financial institutions acting as agents to administer wills and estates will also be subject to the same notification requirement.

Once the drafts come into effect, which is expected to happen later this year, financial instrument firms who are registered will be required to confirm compliance with, and adapt to, the requirements described above within three months of the effective date of the drafts. Persons that enter the financial instruments market after the effective date of the drafts will be required to satisfy these restrictions as they apply to their type of operation to obtain registration.

The draft order and ordinances discussed are not yet finalized and could be subject to change upon the FSA's response to public comments that were solicited after the drafts were published in April this year.

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