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Forex

Japan looking to tamp down leverage in forex trades

Regulator seeks to reduce risks of financial crisis

Lowering the leverage cap on foreign exchange margin trading would help mitigate the fallout from sudden market volatility.   © Reuters

TOKYO -- Japan is considering lowering the maximum leverage permissible in foreign exchange trading on grounds that both retail and institutional investors are facing greater risks should the market face sudden fluctuations.

Foreign exchange margin trading in Japan amounts to roughly 5 quadrillion yen ($44.2 trillion) annually. The lower cap would reduce the risk of a crisis originating in Japan, but will likely be met by resistance from industry players.

The Financial Services Agency has begun discussions with the Financial Futures Association of Japan on changing the rule. The leading proposal would reduce the maximum leverage ratio from 25 to 10. The cabinet could issue an order as early as next year to place the new ceiling into effect.

In order for retail investors to take a trading position of 1 million yen, they currently need a deposit of 40,000 yen. Drawing down the maximum leverage ratio to 10 would increase the necessary deposit to 100,000 yen. The agency believes this would be more appropriate to ensure that any losses can be covered by the deposit.

The FSA is also looking to increase the required capital ratio for foreign exchange brokerages. The agency issues an order to improve business practices to any that fall under 120%. Stress tests show that several of these institutions would hit the threshold if their trading partners go under.

(Nikkei)

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