Type I Financial Instruments Business

FX/CFD/Securities business

Securities/FX/CFD business is classified as the Type I Financial Instruments Business in Japan.
Trading, intermediary, and other securities business related to traditional securities such as domestic and foreign stocks and public and corporate bonds, the investment trust securities is the Type I Financial Instruments Business. It is not allowed to provide such services to residents in Japan without registration, except for the foreign securities companies’ particular case.
The FX/CFD business is classified as the Type I Financial Instruments Business too. For FX/CFD businesses, it is prohibited to provide transactions to residents in Japan (with some exceptions) even without solicitation.
Securities and FX/CFD companies have been sporadically entering /withdrawing from the market for the past 10 years. As a result, it becomes more difficult for new companies to enter the retail market. However, the Type I Financial Instruments Business allows many new registrations with sufficient capital and business background.
If you are exploring entering Japan in the securities/FX/CFD business, or if you have an inquiry from the relevant Finance Bureau for your business, please feel free to contact us.

Type I Financial Instrument Business

Securities and FX/CFD business are classified as the Type I Financial Instruments Business.

The Type I Financial Instruments Business Operator is mostly “Securities Company.” However, currency-related derivatives companies who do not engage in securities-related businesses can’t claim their name as “Securities Company.”

The Type I Financial Instruments Business is defined in Article 28, Paragraph 1 of the Financial Instruments and Exchange Act. Businesses such as dealing and brokerage of highly liquid securities such as corporate bonds, stocks, investment trusts, commodity-related futures derivative transactions, over-the-counter derivative transactions, PTS, underwriting, securities management are the Type I Financial Instruments Business.

To register the Type I Financial Instruments Business, the company must be a joint-stock company with a board of directors and corporate auditors or a committee, net assets and capital of JPY 50 million or more, and capital adequacy ratio of 120% or more. In addition, it is necessary that the major shareholders should not be disqualified company/personnel and should have an organization sufficient to carry out the Type I Financial Instruments Business.

Type of Type I Financial Instrument Business

There are a wide variety of business types in the Type I Financial Instruments Business. As mentioned above, the Type I Financial Instruments Business is divided into “Securities Company” and “Derivative company.”

A Securities Company typically sells ordinary stocks, corporate bonds, investment trusts. The underwriting business, Securities Management Business, PTS are categorized as the business of Securities Company.

On the other hand, another type of the Type I Financial Instruments Business Operator mainly carries out the Derivative Business (including FX, securities CFDs, and binary options) with core profit from margin trading.

It is possible to carry out a Derivative and Securities Business parallelly.

Category of Type I Financial Instruments Business companies
The Type I Financial Instruments Business provides financial instruments with price fluctuations for investors, such as highly liquidity Securities and Derivatives transactions.

The Securities Management business receiving funds and securities from customers for Securities and/or Derivatives business is also categorized as the Type I Financial Instruments Business.

(1)Securities Company
There are new entrants to securities business from overseas to sell investment trusts managed by their affiliated companies. The sale of investment trusts that the company is not a trustor is the Type I Financial Instrument Business.

In recent years, most of the new registrations for the Type I Financial Instrument Business are related to investment trusts or crypto-assets. In addition, there are newly registered foreign-affiliated securities companies to sell overseas stocks and corporate bonds.

More Information: Japan Securities Dealers Association(JSDA)

(2)Forex Service Provider
There are only dozens of Forex operators in Japan. A new entry is not easy. It is a valuable license with high social credibility as a Type-I Financial Instruments Business Operator.

The retail Forex market in Japan is significant, and there are foreign-affiliated Forex companies that are achieving high profits.

The characteristics of the Japanese Forex industry are 3 points: Prohibition of solicitation, Trust protection of customer’s assets, and Oligopoly.

OTC derivative businesses such as Forex are prohibited by law from actively soliciting. Therefore, it has a high affinity with “Online business.” Many companies are serving online. At the same time, they offer CFD trading for securities and/or commodities (commodity futures trading business), as well as binary options trading.

Type I Financial Instrument Business Operators are obliged to manage customer assets separately in trust when providing the FX/CFD service in Japan. Therefore, abundant cash is required to develop the FX/CFD business in Japan.

The Japanese Forex industry is oligopolistic, and most companies with high trading volumes in the world. For example, GMO CLICK Securities , Inc (Tokyo) had the highest trading volume in the world in 2020.

It means that if you could enter the Japanese FX/CFD market, you can secure a reliable license and good customers at the largest market in the world.

More Information: Financial Futures Association of Japan(FFAJ)

(3)Affiliate, Introducing Broker
Companies that utilize affiliates or introducing brokers in their Forex business need to be careful. The mediation of derivative transactions is the Type I Financial Instruments Business in Japan.

Introducing brokerage business of derivative companies of FX companies is the Type I Financial Instruments Business. Introducing brokers who are not registered for the Type I Financial Instruments Business is illegal.

Therefore, affiliate advertising does not fall under “mediation” in advertising. However, it will fall under “mediation” when the affiliate solicits the customers to open an account through telephone or email. Therefore, it is necessary to register the Type I Financial Instruments Business.

The securities companies can carry out intermediate services by registering as a Financial Instrument Intermediate Service Provider.

Overseas Unregistered Company

Unregistered overseas companies are actively soliciting Japanese residents in the FX/CFD business. However, the OTC derivative transactions to general investors by unregistered overseas companies do not fall under the exclusion stipulated in the Financial Instruments and Exchange Act, even if the business operator is located overseas.

The relevant Finance Bureau will issue reporting orders and warnings to these companies. If you are an overseas financial business operator who has received an inquiry from the Finance Bureau, please feel free to contact us. Please do not promote illegal activities such as an affiliate or an agency.

Article 58.2 of the Financial Instruments and Exchange Act stipulates that
“A Foreign Securities Broker shall not conduct any act listed in the items of Article 28(8) to which a person in Japan is the counterparty; provided, however, that this shall not apply to cases where a Foreign Securities Broker conducts said act to which a Financial Instruments Business Operator engaged in Securities-Related Business is the counterparty(Except for the foreign securities company to perform the specified OTC derivative transactions or its intermediary, (excluding the securities clearing agency) or agency using the electronic information processing organization for the OTC derivative transactions ), or to any other cases prescribed by a Cabinet Order” and the details are stipulated in Article 17-3 of the Order for Enforcement of the Financial Instruments and Exchange Act.

For foreign securities companies, certain transactions are allowed if the customer (general investor) voluntarily places an order without solicitation. However, there is no provision for OTC derivative transactions such as FX/CFD. It violates the Financial Instruments and Exchange Act by simply offering (even without any solicitation) these transactions to residents in Japan.

Entry into Type I Financial Instruments Business

As mentioned above, sales of highly liquidity securities, custody of customer funds related to transactions, underwriting of securities, OTC financial futures trading (FX, Securities CFD, Binary options/crypto-assets related derivative business) are classified as the Type I Financial Instruments Business. And it is necessary to register the Type I Financial Instruments Business to start those businesses.

In the Type I Financial Instruments Business, it is necessary to join the Japan Securities Dealers Association, the Financial Futures Association of Japan, Japan Virtual and Crypto-Asset Exchange Association, the Japan Investor Protection Fund. In addition to the examination by the Finance Bureau, the investigation by the Japan Securities Dealers Association is strict too.

In the past, there were cases that registration was given up due to the failure to pass the Japan Securities Dealers Association examination, even with the in-principle consent of the Finance Bureau. In the entry of the securities industry, unlike other businesses, the investigation by self-regulatory organizations is also an uncertain factor.

Requirements

In terms of the organizational Requirements of the Type I Financial Instruments Business Operator, it requires a decent number of employees, not 2-3 employees like the Investment Advisory and Agency Business or the Type II Financial Instruments Business. The minimum staff is usually 5-6 employees subject to the business type even if outsource some staff.

In addition, it is necessary to maintain net assets of JPY 50 million. It means it is difficult to register without net assets of at least JPY100 million at the time of application. Because the relevant authority will judge the future financial position will not be stable unless there are other significant profitable businesses if net assets were slightly exceeding JPY 50 million.

Registration Requirements

Foreign corporations can register. However, it is common to establish a subsidiary in Japan.

The registration requirements for the “Type I Financial Instruments Business” for FX Trade or securities companies are

A joint-stock company with a board of directors and corporate auditors or a company with an Audit and Supervisory Committee
Net assets and capital. JPY 50 million or more,
Capital adequacy ratio of 120% or more,
Major shareholders are not disqualified company or Personnel
Having an organization with sufficient human resources to properly carry out the Type I Financial Instruments Business.
The main requirements are as below, while there are several other requirements. The purpose of the explanation is to provide an outline based on experience. Please feel free to contact us directly regarding the registration in specific cases.

(1) A joint-stock company with a board of directors and corporate auditors or a company with an Audit and Supervisory Committee
To be registered as the Type I Financial Instruments Business, the company must be a joint-stock company with a board of directors and corporate auditors or a company with an Audit and Supervisory Committee in principle. In practice, most companies will meet the requirements by establishing a board of directors and corporate auditors. However, please note that the terms of directors and corporate auditors are not allowed the extend their term by the articles of incorporation of the company (the Type I Financial Instruments Business Operator), and it will be the same principles as the Companies Act.

As a composition of the Board of Directors, the representative director in charge of actual management should have sufficient experience at a Financial Instruments Business or a registered financial institution (in light of their background and capability, they can manage financial instruments business reasonably). In addition, it is required at least one full-time compliance professional in the board of directors (with their knowledge and experience sufficient to understand the contents of business management indicated in rules and regulations and supervisory guidelines in the Financial Instruments and Exchange Act with adequate knowledge and expertise regarding compliance and risk management necessary for the fair and accurate execution of the Financial Instruments Business).

There is no issue with non-residents, including foreigners, and board of directors and employees of the parent company taking office as part-time directors unless there are specific adverse effects such as conflicts of interest.

(2) Net assets and capital.
Regarding net assets and capital of JPY 50 million, it isn’t easy to register with JPY 50 million equity only. It is necessary to maintain net assets and capital of JPY 50 million. It is a minimum level, and it will be a reason for canceling registration once the net assets and capital are lower than JPY 50 million.

Therefore, it is necessary to explain to the relevant authorities that “in principle, our net assets will not fall below JPY 50 million in the future.”

It could be financial support that the parent company or shareholders can provide as necessary, the profitability of the core business, or the sufficient cash on hand. It is required to explain to the relevant authority clearly that “Why the net asset will not fall JPY 50 million, who will take responsibility and how to solve it if it happens.”

(3) Capital adequacy ratio
Regarding the capital adequacy ratio, this is the same minimum requirement as net assets and capital, and the relevant authorities may not accept the minimum limit of 120%. Even if the Financial Instrument Business Operator registered, once the capital adequacy ratio falls below 140%, it is necessary to notify the relevant authorities. Therefore, it is essential to proceed with the registration with a sufficient margin.

The capital adequacy ratio is the percentage of current assets available for expenses and losses that are possible to happen in the future, calculated based on a specific calculation method. In other words, it shows the margin of funds whether the money can be paid to the business partner properly without shorting the funds in any case.

Therefore, the Capital Adequacy Ratio will be increased if you could secure a certain number of current assets, mostly cash, for the expenses and risks on hand. Therefore, incorporating fixed assets (such as real estate) into the company assets is meaningless because the capital adequacy ratio remains low.

In general, the capital adequacy ratio will be higher if you keep all your company assets in your bank account rather than holding assets in kind. Therefore, it is the way to register to keep all your assets in bank deposits.

(4) Major shareholders
A typical practical issue with major shareholder regulations is a foreign company. If the parent company is a foreign financial company and has carried out unregistered business with domestic residents, it would harm the registration process. In particular, it will be extremely difficult for the company that has been issued a warning letter by the relevant authorities due to unregistered business and posted at the Financial Services Agency’s website, even if they wish to register with their subsidiary.

Among the unregistered overseas companies, it would be fine and able to register as the Type I Financial Instrument Business if the company immediately corrects this and takes necessary measures once they receive an inquiry from the relevant Finance Bureau. We believe that the relevant authorities can’t expect to carry out legal business for those who have received a warning letter but ignored or resisted the authorities.

(5) Having an organization with sufficient human resources
Regarding the organization and HR Resources sufficient to carry out the Type I Financial Instruments Business, the supervisory guidelines clearly state as follows. The point is that “there are multiple employees who have more than 3 years of experience in the Type I Financial Instruments Business that they intend to do.”
For example, suppose you want to provide FX. In that case, it is necessary to secure at least 2 employees who have at least 3 years of experience in the currency-related OTC derivative business. Besides, it is essential to assign personnel with practical compliance experience, internal audit, and sales in the Financial Instruments Business.

It will depend on the scale of the business, but taking into account the employee in charge of classification and segregation management, it will need at least 5 or 6 full-time employees to register the Type I Financial Instruments Business, even in the small start.

Registration of the Type I Financial Instruments Business is a significant project compare to other types of registration procedures. Therefore, it is necessary for a detailed consultation and business planning to proceed with the registration. If you are exploring to register as the Type I Financial Instruments Business, please feel free to contact us. We have abundant experience in the registration of the Type I Financial Instruments Business.