TOKYO -- Japan's Financial Services Agency plans to start setting the maximum amount of leverage corporate investors can use in foreign exchange margin trading to limit the exposure of smaller businesses to wild swings in the currency market.
The agency hopes to put the new rules in place as early as next year by amending relevant legislation. It will set separate limits for trade between different currencies, such as between the dollar and the yen or between the euro and the dollar, based on past market data.
Retail investors currently face a blanket 25:1 cap. This means that individuals can trade up to $250,000 in currencies with a deposit of $10,000. Highly leveraged positions allow investors to reap significant profits from a small investment, but even small fluctuations in the market can generate massive losses.
To mitigate risks in the foreign exchange market, where positions leveraged to the tune of 500:1 were common, the agency imposed a 50:1 cap on retail investors in 2010, then further lowered the limit to 25:1 the following year. But small businesses and other corporate investors were exempt.
Retail investors likely account for the majority of foreign exchange trading in Japan. But when the Swiss franc strengthened by about 30% against the euro in January 2015, some corporate investors ended up with losses larger than their deposits.