The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Financial Instruments and Exchange Law of Japan

Kenji Kawahigashi

Clifford Chance

Q4 2006



In June 2006, the Financial Instruments and Exchange Law of Japan ("FIEL") submitted by the Financial Services Agency ("FSA") to the Japanese legislature, the Diet, was enacted, and will take effect during 2007.

FIEL represents a significant change to the financial regulatory regime in Japan, unifying existing concepts to provide a more comprehensive and uniform regulatory regime for financial products and services generally, as well as expanding the regime to cover new products and activities, such as derivatives.

Along with the introduction of FIEL (which is technically an amendment of the Securities and Exchange Law ("SEL") both in title and content), various other statutes will be amended to bring them to a more uniform standard of regulation for financial products generally, or abolished and regulation of these areas will be absorbed into FIEL.

Broader coverage

FIEL will regulate a broader spectrum of financial products and services than current under SEL.

SEL was designed to focus on the regulation of "securities" - which includes debt securities, equity securities, interests in investment trusts and derivatives on securities.

FIEL will expand these concepts to cover "financial instruments" - which includes the existing concept of "securities" as well as trust beneficiary interests, interests in collective investment schemes and certain non-securities derivatives. This is a significant expansion of the regulatory regime - for example, credit derivatives and fixed income derivatives will now be classified as "financial instruments" and traders in these derivatives may require registration under the FIEL.

However, there will be circumstances where some products, though classified as "financial instruments", will not be regulated under FIEL. For example, a structured deposit with embedded derivatives features will continue to be governed under the Banking Law, and an insurance policy which behaves more like an investment fund will continue to be governed by the Insurance Business Law, and so on. In those cases, those statutes will be amended in line with FIEL so that "financial instruments" are regulated in broadly the same manner, with the same standard of compliance being applicable.

FIEL also expands the types of regulated businesses, which are "Financial Instruments Trading Business" and "Financial Instruments Intermediary Business".
"Financial instruments trading business", essentially covers the conduct, as a business, of:
• The trading of "financial instruments"
• Sales and marketing of collective investment schemes
• Providing investment advice in respect of "financial instruments"
• Providing investment management services or trust services in respect of "financial instruments"; or
• Providing securities administration or custodial services.

"Financial instruments intermediary business", essentially covers introducing brokerage businesses in respect of:
• "Financial instruments"
• Investment management services in respect of "financial instruments"; or
• Investment advisory services in respect of "financial instruments".

Registration requirements

One of the key amendments to the current law introduced by FIEL are the new set of registration requirements for regulated businesses.

Financial instruments trading business

If a firm will be conducting "financial instruments trading business", it will need to apply for registration for the type(s) of business it will conduct. Set out below are the different registrations available, and the regulated activities which each registration will allow.

"First financial instruments trading business"
• Sale and purchase of securities (but excluding "deemed securities" such as partnership interests)
• Entering into OTC derivatives (securities or non-securities)
• Trading listed securities derivatives (but excluding "deemed securities" derivatives on markets)
• Underwriting issuances of securities
• Operation of proprietary trading systems
• Providing securities administration and custodial services

"Second financial instruments trading business"
• Sales and marketing of collective investment schemes
• Sale and purchase of "deemed securities"
• Trading listed non-securities derivatives
• Trading listed "deemed securities" derivatives

Investment advisory and agency
• Providing advice based on an analysis of financial instruments

Investment management
• Providing investment management services or other similar services in relation to financial instruments

Customer classification

FIEL provides for different rules of conduct for transactions with different types of customers.

Customers are categorised into four main types, being "professional investors", "general investors", "professional investors that choose to be treated as general investors" and "general investors who choose to be treated as professional investors".

These customer categories seek to balance the level of regulation required for investor protection while at the same time ensuring the facilitation of business. In general, conduct of business rules designed to ‘level the playing field’ between the regulated entity and its customer are not applicable for professional investor customers. For example, requirements for the regulated entity to provide documentation or information may be exempted. On the other hand, conduct of business rules which are designed to protect market integrity as a whole, such as the prohibition on investor compensation, will remain applicable to all customer types.

Non-Japanese dealers

Currently, non-Japanese firms that wish to do business in Japan can either incorporate a subsidiary in Japan and obtain the relevant licences and registrations under SEL, or establish a Japanese branch and register under the Foreign Securities Firms Law. The Foreign Securities Firms Law was legislated because a Japanese branch of a non-Japanese entity was unable to apply for licences and registrations under SEL. This will now change under FIEL so that non-Japanese firms and Japanese firms will be required to obtain the same types of registrations and be regulated under the same statutory framework. Therefore, firms which use the Japan branch structure will be regulated in exactly the same way as local firms.
Like the current law, non-Japanese securities broker/dealer firms which do not wish to establish a local presence can conduct securities business from outside Japan with certain limited Japanese institutional customers.
Offshore investment advisers which are licensed in their home jurisdiction may, without registration under FIEL, provide investment advisory services to investment managers in Japan which are registered under FIEL.
Offshore discretionary investment managers which are licensed in their home jurisdiction may, without registration under FIEL, provide investment management services to investment managers in Japan which are registered under FIEL.


Under the current law, there is a "self-marketing exemption" to registration requirements for securities business. This has been used by an issuer which is marketing securities it will issue - this is not an activity that is regarded as a regulated business itself.

This exemption has led to a practice for funds to be set up as limited partnerships, with the general partner being the fund manager. The fund manager, being the general partner and therefore part of the partnership itself, can then use the "self-marketing" exemption and sell the fund without being registered for that otherwise regulated activity.
FIEL will introduce registration requirements for the self-marketing of funds. As such, the offering of interests in collective investment schemes (shudan toushi schemes), such as self offering of interests in NK (nini-kumiai), TK (tokumei-kumiai) and Japan Investment Limited Partnerships will fall within the new FIEL registration requirements. The party to be registered will be the managing partner of an NK, the TK operator or the general partner of a Japanese Investment Limited Partnership.
While an objective of FIEL is to enhance protection for fund investors, FIEL similarly provides for exceptions where such investors are qualified institutional investors ("QII"). In such circumstances, only a notification requirement to FSA arises, there being no registration requirements mentioned immediately above. A similar exception applies to self-marketing to a "certain limited number of persons". This number is to be determined by Cabinet Order.

Another current exemption under SEL, which will be subject to the new registration requirement under FIEL, is the "self-management exemption". For example in a Japanese Investment Limited Partnership the general partner (who is at the same time, the managing partner) is managing assets co-owned among the said general partner and other partners, and SEL provided exemptions for registrations requirements in such asset management by the general partner. This exemption no longer applies under FIEL, though the QII exception, together with limited persons exception, will be applicable.

Closing comments

While the new law has been passed in the Diet, there are many details which will be fleshed out at a later stage in the form of Cabinet Office orders or FSA regulations (drafts of which have not yet been produced), but it is clear that FIEL will bring a wider scope of financial regulation while recognising the need to facilitate business.

It is hoped that this combination of changes will establish a better financial market with improved investor and market protection as well as increased business activity and innovation.

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Partners
    7. Opportunities at AIMA
    8. AIMA’s 25th anniversary in 2015
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Private Placement Regime
        1. Canada
        2. Dubai
        3. Finland
        4. Germany
        5. Hong Kong
        6. Japan
        7. Saudi Arabia
        8. Sweden
        9. United Arab Emirates
      6. Systemically Important Financial Institutions ('SIFIs')
      7. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      8. Shadow Banking
      9. Volcker Rule
      10. Other
      11. Systemic Risk Reporting
      12. Dealing Commission
      13. Corporate Governance
      14. Securitisation
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Capital Markets Union
      3. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      4. High Frequency Trading
        1. EU automated trading
          1. ESMA Guidelines
          2. Germany
          3. MiFID II / MiFIR - HFT
        2. US automated trading
          1. SEC Regulation SCI
          2. CFTC Automated Trading
        3. IOSCO
        4. Flash Crash
      5. Insurance Regulation
        1. Solvency II
      6. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      7. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      8. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      9. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking - SFT reporting & transparency
      10. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Securities Settlement
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
        3. REMIT
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FIN 48 and IAS 12
      5. Financial Transaction Tax (FTT)
      6. UK Investment Management Exemption (IME)
      7. UK Offshore Funds Regime
      8. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. Bank/Capital Regulation (including NSFR)
        4. BEPS
        5. CFTC Registration and Exemptions
        6. Corporate Governance
        7. Dealing Commission
        8. Derivatives
        9. FTT
        10. High Frequency Trading
        11. MiFID / MiFIR
        12. Other Hot Asset Management Topics
        13. Other Hot Markets Topics
        14. Other Hot Tax Topics
        15. Position Limits
        16. Trading
        17. UCITS
        18. UK Partnership Tax Review
        19. US State and Local Taxes
        20. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Glossary
  8. Events
    1. AIMA Events
      1. AIMA Annual Conference
        1. AIMA 25th Anniversary AGM & Annual Conference
      2. AIMA's Global Policy and Regulatory Forum
        1. 2015 Forum - Review
        2. 2015 Forum - Photos
        3. 2015 Forum - Agenda
        4. 2015 Forum - Sponsors and Supporting Organisations
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites