Japan’s potential leverage cap at 25:1 for institutional FX is a reminder of SNB crisis

Rick Steves

Japan’s Nikkei Asian Review reported that the Financial Services Agency (FSA) is thinking of changing its leverage policy, taking effect only in 2017, by setting a leverage cap at 25:1 for institutional FX traders when there is none at the moment. In 2010, the regulator focused in capping the FX trading leverage for retail investors, […]

Japan’s potential leverage cap at 25:1 for institutional FX

Japan’s Nikkei Asian Review reported that the Financial Services Agency (FSA) is thinking of changing its leverage policy, taking effect only in 2017, by setting a leverage cap at 25:1 for institutional FX traders when there is none at the moment.

In 2010, the regulator focused in capping the FX trading leverage for retail investors, at 50:1, and then lowered it to 25:1 in 2011 in a bid to protect traders from themselves. But institutional FX remained exempt from restrictions.

The Swiss peg crisis in 15 January 2015, however, shocked some authorities as even reputable FX firms such as FXCM went bust, ending up with losses larger than their deposits with the 30% rally of the Swiss Franc against the Euro, and having to restructure the business from inside out.

Five days after the incident, reports of regulators and currency-dealing firms considering tougher requirements on borrowed money indicated that leverage policy would be an issue for the rest of the year. The US National Futures Association (NFA) had a meeting on February 19, but no change was made, maintaining the 50:1 leverage cap.

The same cannot be said about Turkey that saw a series of margin changes for small accounts in the anniversary of the Swiss peg crisis. With Turkey’s Capital Markets Board (CMB) decision, accounts smaller than TRY 20,000 have been restricted to 50:1 leverage for the EUR/USD, USD/TRY, EUR/TRY and Gold, and limited to 25:1 leverage for the GBP/USD, GBP/CHF, USD/CHF, among others. Accounts greater than the TRY 20,000 threshold will enjoy maximum leverage of 100:1 and 50:1, respectively.

Restricting corporate investors in Japan to a maximum leverage of 25:1 would apply further pressure on the country’s FX trading volumes that have been weakening as regulatory requirements piled up. The amended legislation should be in place as early as next year and separate limits for trade between different currencies, based on past market data.

Most countries don’t have legislative restrictions to leverage brokers can offer their clients. The US, however, changed its requirements to 50:1 in 2010, Russia changed similarly in 2015 but with the decision being made before the Swiss peg crisis, and Poland limits leverage at 100:1.

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