Keizo Goto is the senior managing director of the Financial Futures Association of Japan (FFAJ), a self-regulatory organization with jurisdiction over derivatives, financial futures as well as on- and off-exchange margin FX trade and options. He sat down with JLN’s Jessica Titlebaum to discuss the association’s mission, Japanese market reform and regulatory changes in the FX markets.
Q: Could you tell me about the Financial Futures Association of Japan (FFAJ)?
A: It was established as a public service corporation, which was a legal non-profit organization for the benefit of the public, when the Financial Futures Trading Law (FTTL) was enacted in 1989. Its purpose is to protect investors and to ensure sound growth of the financial futures industry.
FTTL and other regulatory legislation regarding financial instruments, such as the Securities Exchange Act, were integrated into a single law, the Financial Instruments and Exchange Law (FIEL) in 2007. In this new framework, the FFAJ was considered a self-regulatory organization (SRO) and recognized as a “Certified Financial Instruments Firms Association” by the prime minister of Japan.
Currently its members consist of financial institutions, broker/dealers and FX firms. It is located in Kanda, one of the oldest quarters of Tokyo. The FFAJ’s activities include – like other SROs – formulating self-regulatory rules, auditing and guidance for members within its jurisdiction. As to the solution of investors’ complaints and grievances, the FFAJ works with another non-profit organization, the Financial Instruments Mediation Assistance Center (FINAMC), and other SROs such as Japan Securities Dealers Association (JSDA).
Q: What are some of your responsibilities at the FFAJ?
A: As senior managing director elected by the board of directors, positioned under the president and vice president of the association, I’m in charge of executive matters and the daily operation of the association as a full-time, non-member director.
The current president of the association is Mr. Katsunori Nagayasu, the president of the Bank of Tokyo-Mitsubishi UFJ, Ltd., and the current vice president is Mr. Kenichi Watanabe, the president of Nomura Securities Co.
Q: What are some of the challenges you face as senior managing director of the FFAJ?
A: Soon after I started working for the association in the summer of 2008, the global market condition underwent a strong shock, as you know. I saw the large-scale regulatory change being planned. I must say the situation has been always challenging, but rewarding as well.
One of the major challenges was to enhance FFAJ’s resources, both human and budget, enough to be in line with the regulatory change. I was lucky that FFAJ members showed a positive understanding of my request for additional resources, even though it was very hard time for the financial markets.
During the three years I’ve been with FFAJ, the number of staff members has increased from about 10 to about 20 or more. I’m always trying to inform members better about FFAJ’s activities and agendas, both in the domain of regulatory operations and in the management of the association.
In 2008, there was also a substantial regulatory enhancement to the margined FX transaction. Margin FX is a leveraged transaction of currencies, both off- and on-exchange. As this meant a fundamental change to both the firms and to the investors, there was a lot for us to do as an SRO.
It was exciting to organize an entirely new sub-organization consisting of members, both in on- and off-exchange FX, and it was more exciting to work with them to formulate self-regulatory rules and other frameworks for the SRO activities. They were quite successful and I am happy to tell you that last August, the entire regulations were put into effect. We are still working to enhance the trustworthiness of the margin FX trade, particularly in over-the-counter OTC trade.
Another challenge that always exists with us is ‘Better Service.’ This is a Japanese English phrase I started using as a motto soon after I got this job, to deliver the idea that we are always looking to improve our services, to both members and staffs at the Secretariat of the Association. Having said this, though I don’t deny the axiom that ‘the more work, or better work, needs more resources’, however I personally think it is critical for us to keep the organization as compact as possible. This is a never-ending challenge.
Q: Can you tell me a little about the futures markets in Japan?
A: As Mr. Leo Melamed wrote in his books and articles, futures trading in the modern sense started in Osaka in the 17th century in the western part of Japan. It was rice commodity futures. Then it was in 1989 when financial futures and options were listed at the Tokyo Financial Exchange (TFX), then called the Tokyo International Financial Futures Exchange](TIFFE). This was several years after securities futures started trading at the Osaka Stock Exchange (OSE). The off-exchange margin FX trade was brought into Japan around the turn of the century, followed by the on-exchange margin FX trade, which was listed at TFX for the first time in 2005. It is now also listed at OSE.
Q: There have been a lot of changes to the foreign exchange (FX) market in Japan. Can you tell me about it?
A: It was in 2005, the Financial Futures Trading Law (FFTL) was revised to regulate margin FX trade for the first time, along with the OTC currency option trade. This was the legislation that also made FFAJ an SRO for those trades. The major points of the regulation at this stage are requirement of registration, capital requirement for the firms and restriction of solicitation. As to the OTC margin FX trade, unwanted or uninvited solicitation is prohibited, and as to the listed FX trade, once the solicitation is refused, no further solicitation is allowed.
Then in 2009, substantial additions were made to the regulatory framework. These changes consisted of three major stages and were put into effect step by step over a two-year period, starting from February 2010 until August 2011.
The first stage involved (1) enhancement of the segregation of the client’s deposits, by requiring all client money to be deposited into a money trust fund, and (2) mandatory loss-cut, or stop-loss agreements for all margin FX transactions. In other words, an FX firm had to agree on a mandatory stop-loss agreement before entering into a margin FX trade with clients, which involves liquidating the open interest on the account if the net present value of the deposit became less than the certain percentage of the initial margin deposit. These two policies were put into effect in February 2010.
The second stage involved putting in place (1) minimum margin requirement at two percent for all currency pairs and (2) daily mark to the market evaluation of the client’s deposit and margin call. This means that the ceiling of the leverage ratio was set at 50 times for all currency pairs, which had not been regulated. Firms were made to evaluate clients’ deposit on the daily mark-to-market basis and to make a margin call if the net present value of the deposit became less than the initial deposit. These became effective in August 2010.
In the last stage, in August 2011, the minimum margin requirement was moved up to four percent and leverage ratio was brought down to 25 times for all the currency pairs.
Q: What was the FFAJ’s role in this new regulation?
A: The FFAJ provided the self-regulatory rules and other regulatory actions to implement the new regulations. We also opened a special section on our website to inform FX investors about the regulatory changes. In November 2008, we started compiling and publishing monthly statistics, volume and open interest for the OTC margin FX.
Though it is run on a voluntary basis, we estimate it covers approximately 99 percent of the total turnover. As I said before, we have undergone substantial enhancements of the association’s resources. If our resources had not grown, the FFAJ’s activities would have been limited. Further, in 2010, we implemented risk-warning requirements for OTC derivatives products including margin FX, OTC currency options and so forth. These measures were formulated in accordance with the FSA’s enhancement of the regulation.
Q: How has FX trade been impacted by the regulation?
A: This is a difficult question to answer. Theoretically the decrease of leverage is thought to work to decrease turnover. However in August 2011, when the final margin rate was implemented, both the turnover and deposit increased on monthly statistics. The impact of the regulation is something that remains to be seen. As I said before, we have worked out and are working on several measures to enhance trustworthiness in FX trade, I hope the combination of new regulations and these measures will work for the sound increase of the investment in FX.
For your reference, the volume of the margin FX trade in the first half of 2011 was more than 800 trillion yen in the OTC and more than 80 million contracts on the two exchanges. I estimate the total notional value traded for the period exceeds 900 trillion yen.
Q: Do you work with the NFA or other equivalent international entities?
A: In September 2008, two months after I started working for the FFAJ, I had a chance to talk with Regina Thoele, senior vice president of the National Futures Association (NFA). In fact, it was John Lothian who visited our office in Tokyo with her. They were both visiting Japan to attend the annual FIA Asia Conference. Since then, the NFA has been very helpful to share with us their experience with self-regulatory activities, particularly in the FX trading domain. Since 2008, I have never visited Chicago without visiting NFA.