ASIC Restricts Brokers from Signing Japanese Traders

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Exclusive: JFSA with ASIC to Prohibit Aussie FX Brokers from Accepting Japanese Residents

Protectionism hits a new peak as Japan’s financial regulator forbids Australian brokers from accepting Japanese residents. The move comes as

Japanese financial regulators have been exercising their global strength in the world of currency trading, as their latest decree plans to forbid Australian financial services providers from dealing with Japanese resident clients.

Forex Magnates has learnt that the regulator is pushing brokers to abandon Japanese-based traders.

The latest act of bureaucracy impacting the world’s most liquid asset class is expected to cause mayhem to some of the largest players operating in Australia. Under the proposed terms, Australian brokers will be held responsible if they deal with and onboard Japanese clients, the United States currently enforces the same rules with international regulators.

The exact reason of the decree is unknown, however a large number of Japanese residents trade with Australian firms and the Japanese Financial Services Agency (JFSA) leveraged restrictions which were implemented in 2020 and 2020 are now being breached by residents trading with overseas firms.

Behind the Scenes

The ordeal recently took place mid Q1 of 2020, during this period the Japanese regulator sent a letter to an FX & CFD broker which requested the firm to stop dealing with Japanese residents. The unnamed broker’s lawyer replied back stating that the firm has not actively or directly solicited clients and these traders have chosen the said firm. The regulator consequently sent a follow-up email requesting the broker to remove Japan from its list of countries in the account opening form. Following this, the Australian Securities and Investments Commission (ASIC) contacted several firms about their dealings with international clients.

In another incident, an unnamed broker commented to Forex Magnates about a recent communication with the Australian watchdog, he explained: “ASIC said they are concerned about brokers misleading international clients …and (they) require a disclaimer at the bottom of each page stating that non-Australian residents are not covered by ASIC.“

The JFSA’s actions were described to Forex Magnates by Japanese traders as showing how the regulatory organization is using its powers to clamp down on traders, who by their own free will and choice are optimizing the services offered by regulated brokerage firms.

JFSA’s Onslaught on FX

Japan along with the United States introduced a number of reforms after the formidable 2009 G20 meeting of world leaders which labelled OTC derivatives as a culprit behind the 2008 global recession. The financial watchdog tried to curb the over speculative nature of currency trading, a practice taken up by a large number of investors, including the infamous housewives or Mrs. Watanabes.

FX as an Asset Class

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FX trading has grown substantially among retail investors since the turn of the century, primarily driven by financial freedom as investors look beyond traditional brokers who were under-delivering returns. In addition, the rise of the internet and access to information has been a pivotal driver of growth in the sector. A key advantage for traders when transacting in currency derivatives is the leverage or gearing element, with a small amount of margin traders can open sizable positions which provide additional profit and loss opportunities from traditional cash instruments.

The restriction on leverage in Japan has been forcing traders to amend their trading strategies. “The new rules are a misuse of power,” explained one Tokyo-based trader who commented on the basis of anonymity.

“We can’t run certain strategies on the pitiful margin levels, the UK and Australia-based brokers are both regulated, but why are they allowed to offer greater leverage,” he added.

Japan, the world’s largest FX market, according to Forex Magnates’ research, has a developed brokerage and investor trading environment. The market has evolved in line with technological advancements and traders have taken heed of the prominence of automated and algorithmic trading, where higher leverage is a must.

“A lot of the EAs (automated systems) run on Martingale or Anti- Martingale strategies, you need to build up your position using small orders. With low leverage you need a lot of cash? Why trade margin products if it beats the purpose,” explained Cecil Francis a Karachi-based technical trader.

Australia’s Stronger Regulation

Australia’s financial regulator has recently embarked on a number of measures that aim to clean up the financial services sector. Particularly for margin derivatives brokers, a number of new initiatives included; minimum capital adequacy and rules about the use and management of client money have strengthened the broking environment.

Australian brokers have seen an influx of traders applying for both demo and live accounts since the last quarter of last year.

A major factor behind the rush in the number of Japanese traders migrating their accounts to Australia has been the high leverage, with some brokers offering up to 400:1 and the segregated accounts of client funds practice.

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Japan Net Benefactor

The compulsion to trade with a Japanese regulated broker is a tactic to bring traders back home. Furthermore, brokers who are searching for new markets will look to target Japan due to the sheer size of the investor base.

Immediately after the regulator determined the leverage changes, the market contracted with a large number of providers closing down or being acquired. Client numbers and trading activity was directly affected with a considerable decline in volumes, however the last eighteen months have been a blessing in disguise for Japanese brokers as the recent turmoil in the Japanese yen has reignited the passion to trade and domestic traders have ramped up trading volumes, Japanese giants DMM and GMO Click both having posted plus $1 trillion in total monthly volumes.

A JFSA ASIC Collaboration?

Forex Magnates anticipates new rules to be deployed over the coming months by both regulators which will prevent Australian brokers from dealing with Japanese residents, similar to the steps taken by US regulators. The US’s commitment on safeguarding its flock took a new turn last Friday when the regulator received a legal injunction against Australian regulated, Halifax Investment Services.

Australian Brokers and Japan

The following table gives a snapshot of how brokers are currently operating in Australia.

The first column specifically looks at the firm’s homepage, most non-regulated US firms will have a disclaimer directly on the homepage which states that they do not accept US residents. Although AxiTrader does not have a disclaimer on its homepage it has a specific page on the new accounts page which states that it does not accept Japanese residents.

The data shows that tier-1 providers and recently established Japanese firms regulated in Australia are not dealing with Japanese clients in Australia but redirecting them to their Japanese subsidiaries.

However, of the tier-2 and tier-3 brokers, Cyprus-based IronFX, which holds an ASIC license, is quite an interesting case where the broker states on its homepage that it does not accept Japanese residents, however on its application form the country can be chosen, although there is a disclaimer which states that it does not offer any products to Japanese residents and users can not proceed on that particular page.

This is important because of the firms that state that they do not accept Japanese residents on the homepage, all have excluded the country from the account opening form, a notion the JFSA raised with one of the brokers they contacted, as stated above.

Brokers who do not allow Japanese traders have physically removed (Japan) the country from the list.

More to Come..

Cooperation between regulators is the new norm. The G20 leaders have had consequent meetings post 2009 with new laws and directives taking shape in the US and Europe. A document dated March 2020 which summarizes the G20’s developments on the supervision of OTC derivatives by the OTC Regulators Group (ODGR) stated an interesting development: “The G20 Leaders agreed, and the G20 Finance Ministers and Central Bank Governors later reaffirmed, that jurisdictions and regulators should be able to defer to each other when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, in a non-discriminatory way, paying due respect to home country regulatory regimes.”

Scratch My Back I’ll Scratch Yours!

The true intent behind the new proposals is unclear, however it could be a case of both regulators joining forces to achieve their own objectives. On the one hand, Japan will benefit from repatriating client funds and potentially signing-up new registered brokers. On the other hand, Australia shows the world that it isn’t a soft player and is serious in the way it deals with financial services.

The latter has its implications, if Sydney is keen to position itself as a regional global hub whilst competing with Hong Kong and Singapore then its needs to be more business friendly. A significant number of Chinese owned broker dealers operate in the country and any miscalculated rules could have a detrimental impact on Australia being the preferred destination for Asian brokerages setting up shop.

Forex Magnates wrote an extensive research analysis on the Australian regulatory environment in the recent QIR report.

The new rulings have their pros and cons, however with the industry hitting a glass ceiling in terms of new participants investing in the currency markets, brokers need to service traders by offering them a number of solutions, low leverage trading isn’t one of them!

*This article has been updated since initial publication.

2020: A Year of Migration for Brokers and Traders – Where did They Go?

With tightening regulation, traders and brokers moved across the globe, here’s where they went.

It goes without saying that 2020 has been an eventful and, in many regions, a challenging year for retail brokers. Tightening regulations, lower trading volumes, and shifting trends have shaped the industry these past 12 months.

In the wake of all these changes – which regions benefitted and which jurisdictions have suffered?

The rise of the offshore broker

In August of 2020, Europe was hit with a suite of regulations that reduced leverage for retail trading of contracts for differences (CFDs), placed restrictions on marketing, and more.

Although this took place last year, Europe in 2020 has been defined by these measures, which were initially implemented as temporary, and have now been made permanent across the EU.

These regulations, in particular, the reduced leverage, saw retail traders looking outside of Europe to be able to invest with higher levels of risk, and therefore, higher levels of potential return.

Seeing this movement, many brokers followed the demand and set up offshore entities where investors could trade with higher leverage and not be subject to the EU regulation. As Finance Magnates reported , some of the main destinations to benefit from this was Vanuatu, Labuan in Malaysia , Belize, the Bahamas, and more.

The Bahamas has become brokers’ Holy Grail

Speaking to Finance Magnates on these changes, Tal Itzhak Ron, Chairman and CEO at legal firm Tal Ron, Drihem & Co. and Genia Gurevitz, who heads the Banking and Payments Services at Tal Ron, Drihem & Co said: “In the passing year, the regulatory winds have changed their course, forcing our bigger clients operating under the sought-after ASIC, FCA and CySEC regulations to shift and diversify their courses of action. Australian and European FX/CFD operations alike started operating within less mainstream regulations that are more enabling to run their business in, such as Estonia, Vanuatu, and the recent Holy Grail – the Bahamas – as their favorable jurisdictions.

“This, seeing that self-regulated financial operations, registered in Marshall Islands (still popular), or in St Vincent (which was common two years ago and virtually disappeared since then) are very problematic nowadays for receiving payments from traders (though pay-outs are still possible).

“These new courses of action, combined with Asia-Pacific banking solutions especially in Singapore, either directly (which requires a visit to the bank) or through disruptive EMIs (Electronic Money Institutions), provides brokers and operators, who wish to remain compliant at all cost, the exact solutions they were longing for. The demand is growing exponentially in a way that our firm had to hire full professional staff at these jurisdictions.”

Offshore regions are becoming more legitimate

It is important to highlight that a few years ago, heading offshore was seen – even in the often less than scrupulous retail trading industry – as an indicator of dubious business practices on the part of a broker.

However, with more jurisdictions opening up to brokers and new regulations pushing them away from Europe, heading offshore is a more reasonable step for a business to take than it was two or three years ago.

Genia Gurevitz, Head of the Banking and Payments Services at Tal Ron, Drihem & Co

“We haven’t encountered wild-west-like behavior. The FX/CFD brokers moving to those jurisdictions are very focused on maintaining their reputation, giving their clients good trading service and experience, so they aim for the long-run,” explained Tal Itzhak Ron and Genia Gurevitz.

“Not only that, reliable brokers migrated not only for industry-related reasons. For instance, ASIC regulated operations migrated for political and public-opinion changes that took place; in practice, nothing has changed for these brokers in the way they operate, because working in highly-regulated environment is already part of their DNA.”

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Brexit and ESMA: the struggles of Europe and the UK

It will come as no surprise to many market participants that during 2020, traders and brokers moved away from these regions, more than they flocked to them. The European Securities and Markets Authority’s (ESMA) tightening regulations, Brexit, and an increasingly difficult environment have all led to this change.

The effect of the changes can be seen by looking at the financial performance of some of the top brokers in the region. As Finance Magnates reported , brokers such as IG Group, Saxo Bank, and CMC Markets have all struggled with low forex and CFD trading volumes, which have weighed heavily on revenues. For Saxo Bank, in particular, the multi-asset broker has recorded some of the lowest trading volumes in years .

This is also illustrated in the graph below, which details the trading volumes achieved by brokers covered in our Quarterly Intelligence Reports in Europe and the United Kingdom. As can be seen, volumes dipped significantly from the first and second quarter of 2020 – which were the only two quarters of 2020 to be exempt from ESMA’s regulations.

Retail traders go down under

Australia started 2020 on solid footing. As Finance Magnates reported , during the end of 2020, the land down under appeared to largely benefit from ESMA’s product intervention, as volumes surged during the second and third quarter of 2020.

This is because Australia offered retail traders an environment where they could trade using higher leverage within a well-regulated environment. This trend then continued into 2020.

Thanks to the Finance Magnates Intelligence Department we have a visualisation of how much flow migrated to Australia in 2020, which has continued into this year. The theme we see is undoubtedly confirming the regulatory migration across the industry. Clients who have maintained their risk appetite have figured out a way to find what they need – leverage in a secure, regulated environment.

However, although 2020 may have been a good year for Australia, 2020 might paint a different picture for the country, as the local regulator, ASIC, is looking to implement its own regulations, which largely mirror that of ESMA .

Unlike ESMA, ASIC will not distinguish between major and minor currency pairs. Instead, the watchdog proposes a single leverage ratio limit for all currency pairs 20:1. For equity indices, ASIC suggests a ratio of 15:1, commodities excluding gold 10:1, Gold 20:1, crypto-assets 2:1, and equities 5:1. The measures have yet to be put into place.

Did Japan lose its dominance?

Another interesting trend that was noticed by Finance Magnates this year was Japan losing its dominance in terms of FX trading. Historically, Japanese brokers had led the way when it came to having the highest forex trading volumes.

The leaders, in particular, were GMO Click, who has consistently topped the volumes ranking in past years, and DMM.com has long been a close second. Both of these are Japanese brokers.

However, according to Finance Magnates Intelligence – there’s a new player in town – Australian retail forex and CFD broker IC Markets. The Aussie broker had previously been taking the third spot in global rankings. However, IC Markets has managed to surpass the others and enjoyed the highest FX trading volume in both the second and third quarter of this year.

Not only that, but Japanese brokers have struggled with lower FX trading volumes across the board. Kabu, GMO Click, Gaitame, among others , largely reported larger trading volumes on an annual comparison.

Australian Securities and Investment Commission ASIC

The Forex broker companies that are under the supervision of ASIC are among the best-regulated companies. The ASIC is in charge of the securities and investment market in Australia.

What They Do

The protectors of the Australian financial market ensure a fair and transparent conduct of business with the support of experienced consumers and investors. They are also an independent government organisation that mostly operates under the Corporations Act passed in 2001.
Their main duties include:

  • Maintenance and improvement of the financial system and entities that are part of that system
  • Promotion of participation in the market by informing and encouraging investors and customers
  • Effective law enforcement with minimal procedural requirements
  • Law implementation
  • Information storage and processing
  • Publish information on companies and other bodies for the public

Who is under the Regulation of ASIC

ASIC is monitoring Australian companies, financial markets, investment dealers and advisers, financial services agencies, insurance companies and credits.
Regarding consumer credit, they issue licences to people and business organizations, i.e. banks, brokers, credit unions, mortgage brokers, finance companies, etc.). They assure that the licenced fulfil the criteria and abide by the law.
The ASIC takes on two roles as the markets regulator and the financial services regulator.
They monitor and evaluate if the financial markets comply with the law (e.g. transparency, fairness, etc.) and give proposals to the Minister to authorize new markets.
As the authority on financial services, they ensure a fair, transparent and efficient business operation protecting consumers and customers. These companies mostly deal in superannuation (Australian pension fund programs), shares, securities, derivatives, insurance, etc.
Form 2020 ASIC’s responsibilities were widened including supervision of futures market, derivatives and domestic licenced equity.
On a legal basis, they have free hands to:

  • Licence companies, as well as investment schemes
  • Grant domestic credit licenses
  • Register liquidators and financial auditors
  • Keep registers available to the public about companies, financial services and credit licensed persons
  • Keep market integrity
  • Investigate in case or suspicion of illegal actions requiring companies to provide records and information
  • Suspend persons from credit and financial services dealings
  • Ask courts to issue penalties
  • Prosecute regarding specific aspects

The ASIC is a strong organization with a lot of power over financial issues and the capital market. They grant security and safety to consumers and clients.

Consumer Protection

The ASIC provides educational resources and materials to clients giving advice on smart investment, money borrowing, risk, scams, etc.
They also have a list of unlicensed companies and warn people publicly to stay away from them. They emphasize that a company needs to be ASIC licensed. They also call and encourage people to report any loan and credit scamming they know about. They especially warn about overseas companies which are unfortunately out of their jurisdiction and cannot be taken action against, if Australians engage in business with them.

ASIC Registered Brokers

ASIC requires brokers to have the AFS licence (Australian Financial Securities Licence) in order to be able to do legal business in Australia.
The application for the license can be submitted online via the eLicensing System created for that purpose. After filing an application, ASIC assesses your capability to deal with financial services, your capital and financial assets, and capability to fulfil the requirements of the AFS license (dispute resolution, legal compliance, training and more).
The AFC requirements include sufficient cash, responsible and adequately qualified managers and key staff, training and supervision of representatives, risk management, adequate and sufficient human and technological resources, conflicts of interest management, compensation arrangements and dispute resolution. All of these criteria must be met prior and after getting ASIC and AFC approved.

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