On Oct. 24, the Financial Services Agency of Japan released draft regulations and supervisory guidelines to govern "high speed trading" in Japanese markets, as mandated by legislation approved in May. The proposed regulations include a number of provisions that would affect firms based outside Japan that are active in Japanese markets including equity futures and options as well as cash equities.
These provisions include a minimum capital requirement of 10 million yen ($88,000), informational requirements such as a description of each trading strategy and the company's organizational structure, record-keeping requirements including seven years of order messages, and risk control requirements such as abnormal order detection and kill switches. In addition, firms will have to establish an office in Japan or appoint a local onshore agent.
On Nov. 22, FIA submitted a comment letter on the proposals. The letter, which was drafted with substantial input from the FIA Principal Traders Group, expressed support for a principles-based approach to the regulation of automated trading and commended the proposal for ensuring that market participants implement pretrade risk controls and other measures to minimize the likelihood of market disruption and "abnormal" orders.
FIA cautioned that the broad scope of the definition of high-speed trading in the proposal could capture a wide variety of market participants including trading firms, hedge funds, asset managers and brokers domiciled both domestically in Japan and overseas. Additionally, registration requirements triggered by the use of co-location may create a situation where participants will need to assess whether it is cost-effective to access Japanese financial markets in this manner, FIA said.