This day in history: July 22 2010, Japan forces FX leverage down to 1:50

Six years have passed to this day since Japan’s authorities imposed a maximum leverage limit of 1:50 on all OTC FX trading in the largest and most sophisticated FX trading market in the world. Did it affect volumes? Not one jot – in fact quite the opposite

Japan

Japan. The largest retail FX market in the world, with domestic electronic trading companies that produce trading volumes which regularly exceed $1 trillion per month, all conducted via a solely Japanese customer base.

Retail FX trading in Japan caught on very quickly and within just a few years during the middle of the last decade, the country of just 128 million people (small by Asia Pacific standards) accounted for 35% to 40% of all retail FX trading activity for the entire world, a figure that is still very much correct today.

Electronic trading giants rose to prominence, including DMM Securities, GMO Click and MONEX Group, offering OTC FX to a high-volume and very astute Japanese audience.

And then came this day six years ago.

On July 22, 2010, the Financial Services Agency (FSA), Japan’s national financial markets regulatory authority, set in place a new ruling that would restrict leverage on OTC margin FX products to 1:50, giving companies one week to implement it.

By August 1, 2010, it had become illegal for FX firms in Japan to offer margin FX trading with more than a 1:50 leverage ratio, which generated a significant concern among brokerages that volumes would decrease considerably, and that Japanese traders, already very much au fait with the methodology of FX trading, far before many other investors in many other nations, would seek trading facilities elsewhere.

Existing clients of Japanese companies had to deposit more funds in order to trade the same positions that they held at the time, and brokers became concerned that if clients did not deposit more funds to get the same result (high leverage having been a very attractive proposition to Japanese traders prior to the reduction), then volumes would decrease considerably and profits would dwindle.

The pessimism, however, was unfounded. Japanese traders actually responded very well to the rulings, and continued to trade with domestic companies with absolute confidence.

The conservative and analytical mind of the Japanese investor took precedence and in fact volumes and trading activity soared so greatly that just three years later, DMM Securities and GMO Click, the firms with the largest share of the largest retail FX market in the world were experiencing long spells of monthly volumes that exceeded $1 trillion.

Throughout the summer of 2013, both companies sustained trading volumes of over the $1 trillion threshold, that milestone having been a record for global monthly trading volumes once set, and was sustained for months.

Despite the tailing off at the end of 2013, volumes were back up to over $1 trillion very shortly after the start of 2014, and continue to be very high today.

Japan’s tours du force continue to tower above almost everyone else in the world, demonstrating the tenacity and acumen of Japan’s retail traders whom appreciate a good framework for trading environments and a regulatory structure that safeguards their exposure.

 

 

 

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