Customer Protection - Self-regulatory

To make the Japanese commodity futures market more reliable and established, it is essential for the Japanese commodity futures industry to ensure that all margin deposits and other assets deposited by customers are protected and segregated as properties belonging to customers.

For this purpose, the former margin depositary system was reviewed under amendments to the Commodity Exchange Law enforced on May 1, 2005, and all customer margin deposits and other assets must now be deposited directly with Japan Commodity Clearing House Co., Ltd. (JCCH).

In addition, the new regulations stipulate a new customer protection fund, National Futures Protection Fund, to secure customer assets against losses from the default and insolvency of futures commission merchants (FCMs). Under these regulations, all FCMs are obliged to contribute money to the new customer protection fund, contrary to the voluntary participation in the former fund. If an FCM fails to pay customer assets due to default or insolvency, up to JPY10 million will be returned to the entitled customer through subrogation from the National Futures Protection Fund (pay-off scheme).

These new customer protection systems, including the direct margin deposit system with JCCH and the establishment of the National Futures Protection Fund, enable the Japanese commodity futures industry to secure nearly the same level of protection systems as that in the securities industry.

Japanese FCMs are now in a severe business environment characterized by such changes as the liberalization of brokerage commission rates. However, to develop the commodity futures market in Japan, it is vital for the commodity futures industry to ensure a stable environment in which participating customers can feel secure in trading commodity futures through brokers with the knowledge that they will not be exposed the to the risk associated with the nonperformance of a broker.

The new systems that will come into effect upon the revision to the Commodity Exchange Law will no doubt meet the needs of market participants and make a significant contribution to the development of the Japanese commodity futures market.

Customer Protection System