Japanese regulators are nannying their charges again. In this case it’s the thriving community of foreign exchange day traders, often dubbed the “Mrs Watanabes” of the country, who account for as much as 20-30 per cent of the volume of Tokyo’s entire spot currency market.
(Actually we think the FT in a March report drew a much better characterisation of this curious creature than the usual cliched image of the ol’ battle-axe housewife).
Regardless of whether they are housewives or harried salarymen, however, these FX margin traders are now facing restrictions on the amounts they can borrow to finance their bets in the currency markets. As the FT reports, a new rule on margin trading came into effect on Sunday.
It limits the amount that retail traders can borrow to 50 times the amount of collateral used — as opposed to no limit previously. From next year, the limit will be tightened further to just 25 times.
When you consider that the value of Tokyo’s spot currency market is currently averaging about Y5,000bn — or about $58bn — on any single day (JP Morgan estimate), you might wonder about the impact such a restriction could have on market liquidity.
Just about zilch, it turns out, judging by feedback from traders on Tuesday, who said volumes and total value in Tokyo’s FX market were barely changed from last week.
You might also wonder about the thriving community of small, mainly online FX brokers who cater to these individual retail investors. One analyst estimated such small operators (with fewer than 15 employees) could account for as much as 2o-30 per cent of total FX trading volume in Japan.
Some have grumbled bitterly about the new restrictions, though none would go on the record to defend their corner.
These small outfits — operating up until now largely unencumbered by restrictions and official scrutiny — are being partly blamed for what regulators saw as the rising risk that individuals are getting in deeper than they should.
These brokerages can offer retail investors leverage of as high as 400 times — and have been making a handsome living doing so. Not any more, and as of next year, when the leverage restrictions come down to 25 times, you can expect some consolidation in the industry.
Some analysts also warned that the new rules may hit liquidity in the FX market, as traders scramble to unwind yen positions which contravene the new leveral limits. However, as the FT noted, most retail investors had unwound such positions well ahead of time — a shift that traders say contributed to the yen’s climb late last week to its highest level this year.
In fact, the currency recently has been up around its strongest level against the dollar since 1995, as the FT notes in a separate report.
So where are the yen-trading housewives, salarymen, rappers and other investors going to put their money from now? The situation in Japan remains much the same, with interest rates at rock-bottom.
Junya Tanase, a currency strategist at JP Morgan Chase, told FT Alphaville that you might just see a lot more small bets in the spot currency market. The restrictions, he adds, are a good thing “because leverage of more than 200 times is just not healthy — and it distorts the market”.
In fact, the impact of the new rules on Tokyo’s FX market is likely to be much bigger next year when the limits are tightened further. Without the added leverage, some small traders could stop trading altogether, some analysts told the FT.
While wealthier traders might open accounts overseas and trade without restriction from there, the FT notes, one currency day trader, who claimed not to use leverage of more than 50 times, posted a blog post saying:
“It feels like [currency trading] will be a no-go for people who aren’t rich. It’ll become quite an investment. Well, there are probably only a few people who win in the currency markets, so a good result might be that the number of people getting indebted will drop.”
Indeed, one almost never hears about the Mrs — or Mr — Watanabes who lose big.
And if Japan’s regulators have anything to do with it, we never will.
Related links:
We’re all Mrs Watanabes now - FT Alphaville
How and why the yen is suddenly the world’s strongest currency – FT Alphaville
Mrs Watanabe and the carry trade’s comeback – FT Alphaville
South Korea set to limit currency forward trading – FT