(Provisional Translation)

April 24, 2013
Financial Futures Association of Japan
Binary Option Working Group
Publication of Final Report by Binary Option Working Group
Over-the-counter binary option transactions with individuals the underlying
assets of which are currencies (currency indices) have been attracting
investors as a new type of derivatives transactions, and the number ofinvestors and the gross amount of investment are increasing significantly.
The Association set up “Binary Option Working Group (WG)” in September
2012 in order to discuss about instruments specifications necessary toencourage continuous sound growth as financial instruments transactions,
measures to protect investors and measures to gain credibility of investors
on trade prices in respect of over-the-counter binary option transactions withindividuals having inherent features such as risk type different from foreignexchange margin transactions which have already become widely popularamong investors.
The WG completed the principles of self-regulations in December 2012.
Since then, the WG has held further discussions to embody it, and came tothe conclusion.
We publish the final report “Self-Regulation ofOver-The-Counter Binary Option Transactions with Individuals theUnderlying Assets of Which Are Currencies (Currency Indices) (FinalReport)”, as attached.
The WG expects that the Association will establish self-regulations inaccordance with this final report in a timely manner and that a Member ofthe Association will pursue the implementation of the business system tocarry out over-the-counter binary option transactions with individuals.
Contact: Office of Secretariat of Association
03-5280-0881
ffaj@ffaj.or.jp* This English version is a translation of the original Japanese text. The
original Japanese text will prevail should there be any difference inmeaning between the English and Japanese versions.

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(Provisional Translation)

April 24, 2013
Financial Futures Association of Japan
Binary Option Working Group
Self-Regulations for Over-The-Counter Binary Option Transactions withIndividuals Underlying Assets of Which are Currencies (Currency Indices)(Final Report)
The Working Group has discussed about embodiment of self-regulations forover-the-counter binary option transactions mainly with individual investors
the underlying assets of which are currencies (currency indices) which aretraded continuously and repeatedly (hereinafter referred to as“over-the-counter binary option transactions with individuals”), based on“Regulatory Principles for Binary Option Transactions with Individuals”
completed on December 12, 2012 (Attachment 2: hereinafter referred to as“Regulatory Principles”).
The Working Group came to the conclusion of such discussions recently andreports the result along with the Regulatory Principles.
Overview
Over-the-counter binary option transactions with individuals aretransactions based on complex theories and are not yet widely recognized as
derivatives transactions among investors compared with foreign exchange
margin transactions as of now. Over-the-counter binary option transactions
with individuals have different characters from other types of derivatives
transactions such as foreign exchange margin transactions in terms of risks
in investment profit and loss.
Financial instruments firms should recognize their responsibilities to design
the instruments which contribute to the protection of customers andcustomers’ interests, and therefore need to offer instruments which aredesigned not to encourage customers’ excessive speculation.
Considering such character of over-the-counter binary option transactions
with individuals and financial instruments firms’ responsibilities, thefollowing measures shall be taken.

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(Provisional Translation)

Principle 1 Matters regarding “providing accurate knowledge”(1) Explanation of risk and instruments specification before trading(1) With respect to the Remarks on instruments specification and trading
risk, etc. on financial futures transactions (hereinafter referred to as“Remarks”), we have recognized them as necessary for investors tounderstand fully and made efforts to take required measures.
Self-regulations shall be provided for the following matters in order toensure thorough explanation to customers regarding instruments
specification and Remarks, considering the characteristic ofover-the-counter binary option transactions with individuals.
・ A Member shall publish the summary of transactions stated in theExplanatory Guide and the explanation (interpretation) to understandthe summary thereof to bring them to the attention of the public throughits website, etc.
・ A Member shall describe the Remarks clearly in the Acknowledgment
documents and the concrete explanation in the Explanatory Guide.
・ A Member shall clarify the concrete place of the explanation in theExplanatory Guide in the Remarks in the Acknowledgment documents.
・ A Member shall publish the Remarks and the concrete explanation
thereof to bring them to the attention of the public through its website,etc.
・ A Member shall state the following matters as the Remarks, excluding
matters inapplicable to transactions offered by the Member.
①②

The transaction has a due date;
Investment principal will be zero if the projection went wrong as
at the judgment time for long positions held by a customer.

③

The payout amount shall be paid if the projection went wrong as
at the judgment time for short positions held by a customer and suchpayout amount will exceed the amount received and result ininvestment loss.

④

The difference of the amount paid and amount received by all
customers is the source of profits of a firm.

⑤

Professional knowledge such as theoretical rationales of optionstransactions is required to make reasonable judgment.

⑥

Other matters to which particular notice shall be given.

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(Provisional Translation)(2) Disclosure of macroscopic profit and loss performance record of all
customers(2) With respect to over-the-counter binary option transactions withindividuals, it is necessary to provide investors with opportunities torecognize the risk of loss associated with transactions concretely in orderto gain the status of sound financial instruments transactions andrequirements shall be provided as self-regulations for publishing thefollowing matters regarding the state of the firm through the website, etc.
each month.
・ The ratio of the total amount of customers’ profit to the total amount oftrading value of transactions with customers.
・ The ratio of the number of customers who suffered losses to the numberof customers who made transactions.
(3) Appropriate advertisement(3) With respect to over-the-counter binary option transactions withindividuals, self-regulations shall be provided for the following mattersregarding advertisement not to give investors excessive expectation orwrong recognition through advertisements.
・ The advertisement shall aim providing knowledge necessary to conducttransactions and limiting to matters which contribute to appropriate
investment by investors, and a Member shall ensure the thoroughcompliance therewith by means of advertisement examination by theMember.
・ Representation to cause false understanding of the nature of theinstruments or risks or to lead customers to easy investment shall beprohibited, and such approach of advertising shall be restrained.
・ In using affiliate advertising, the Member shall use examination
standards similar to those applicable to advertising by the Member inrespect of contents to be used, and confirm the details fully.
With respect to representation, etc. which should not be used foradvertisement, concrete measures shall be taken such as amendment toAdvertisement Q&A prepared by the Association.

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(Provisional Translation)

Principle 2. Matters regarding “restraining of excessive trading”(1) Criteria for commencement of trading in light of knowledge, experienceand financial resources of customers(4) Self-regulations shall be provided for the following matters regarding
criteria for commencement of trading and control and update of
information of customers.
・ The matters in the following ① to ⑥ shall be recorded in a Customer
Card. A Member shall confirm with such customer at least once a year
whether there has been a change in registered information in the card.
①②

Years of investment experience regarding derivatives transactions;Level of knowledge regarding over-the-counter binary option
transactions.

③④⑤

Amount of financial assets holding and revenue.
Purpose of investment.
The upper limit of trading amount or the limit of loss declared by acustomer.

Other matters required for a Member to judge the suitability of acustomer for over-the-counter binary option transactions.
・ Criteria for commencement of trading shall include the mattersreferred to in ① to ③ and ⑥. Each Member shall establish concrete⑥

judgment criteria such as value regarding such matters and ensure
thorough enforcement of procedures prior to commencement of trading
to keep from trading with customers who fail to meet such criteria.
・ The matters referred to in ④ and ⑤ shall be used for restriction oftrading or monitoring of trading after the commencement of trading.
・ A Member shall confirm by means of question-and-answer whether thecustomer has required knowledge in order to support the judgment inrespect of ② above. (The Remarks under the Regulatory Principle 1(1) above shall be included.)
The Guidelines shall provide that hedging shall be included in the selection
to the above ④ purpose of investment.
(2)Upper limit of trading amount, amount of loss, amount of positionholding according to the attributes of customers such as financial, etc.
resources, and monitoring of trading, etc.
(5) Self-regulations shall be provided for the following matters for the5(Provisional Translation)

purpose of thorough implementation of setting and control of the upper
limit of trading amount, amount of loss and amount of position holding(hereinafter collectively referred to as “amount of trading limit”).
・ A Member shall classify customers according to the substances ofcustomers such as financial resources and determine the upper limit of
trading according to each substance appropriately.
・ A Member shall set the upper limit of trading effective in order toprevent excessive losses with investors and to prevent excessivespeculation.
・ A Member shall implement the system to control the upper limit oftrading.
・ A Member shall, in a timely manner, take necessary measures such assuspension of trading with a customer whose trading amount, amount ofloss and amount of position holding exceeds the upper limit of trading.
・ A Member shall confirm hedged assets or amount thereof in respect of acustomer whose purpose of trading is “hedge”.
The Association shall describe in the guidelines the summary of the methodof controlling the upper limit of trading in order to ensure that each Member
may implement the business system smoothly.
Principle 3. Matters regarding “instrument design to contribute to theprotection of customers and customers’ interests”(6) Self-regulations shall be provided for the following matters regarding
trading period, etc.
・ A Member shall establish a sufficient period for a trading period (theperiod for entering into transactions between the Member and acustomer).
・ A Member shall establish a sufficient period for an interval of eachtrading term for instruments with the same trading conditions.
・ A Member shall add strike prices to ensure, for the period from the timeof the addition till the trading term, the period sufficient as equivalent
to the trading period.
“Period sufficient" above shall mean two hours for the time being and shallbe shown in the Guidelines.
※ Refer to Schedule 1: “WG Opinions regarding Trading Period andIntervals of Trading Terms, etc.”
6(Provisional Translation)(7)

Self-regulations shall be provided for the following matters regarding
strike prices
・ A Member shall determine strike prices to be used commonly by all
customers before the commencement of each trading period. (It is notallowed to use such method as using the foreign exchange rate as at thereceipt of an order to determine a strike price each time of the receipt ofan order from a customer.)・ Addition of strike prices shall be allowed as an exception only when
trading with a customer cannot be conducted smoothly by using any ofstrike prices already released, although adding strike prices is notprohibited.
・ A Member shall not, during the trading period, change strike prices

already determined.
・ A strike price shall not differ from the foreign exchange rate at the timeof determination of the strike price significantly.
(8) Requirements shall be provided as self-regulations for conducting
over-the-counter binary option transactions with individuals by choosing
either of the following methods in order to delete trading conditions giving
only the firm an advantage and enhance fairness of trading
・ Method to provide a customer with the opportunities to make purchasetransactions to establish new positions and sale transactions toestablish new position simultaneously in respect of instruments having
the same underlying assets, trading period and strike price.
・ Method to conduct transactions with customers by using the structurethat delete conditions to result in the state that all customers suffer loss
(method to prevent so called “winner (firm)-takes-all”).
(9) Self-regulations shall be provided for the following matters in order toconduct transactions at a fair price throughout the trading period・ A Member shall conduct transactions at fair trade prices determinedbased on reasonable grounds.
・ A Member shall arrange quoting both purchase price and sale pricesimultaneously and facilitate the system to enable customers to confirm
them.
・ A Member shall keep the payout amount at a fixed amount during a
trading period and show any change in option value by trade price.
・ A Member shall respond to a request for transactions (including7

(Provisional Translation)transactions to close open positions of customers) by customers to theextent possible until the trading term.
Principle 4. Matters regarding “providing appropriate trading conditions(1) Disclosure of grounds for computation, etc. of trading conditions(10) Self-regulations shall be provided for the following matters in order toensure that investors understand trade prices fully and enable customers
to make investment with reasonable judgment.
・ A Member shall describe reasonable grounds for trade prices as a partof the summary of transactions in the Explanatory Guide and explain tocustomers about the details thereof fully.
・ A Member shall explain to customers about grounds for determinationof strike prices and judgment prices as a part of the summary oftransactions in a similar manner as the above.
Self-regulations shall provide that a Member shall publish the summary oftransactions to bring it to the attention of the public through its website, etc.
and the Guidelines shall clarify the method for explanation (for example,using tables and charts) that, among others, the summary of transactions
shall include the providing of interpretation, etc. to enable customers tounderstand fully about trade prices.
(2)

Informing all customers regarding suspension of trading (so called,“sell-out”) and monitoring(11) Although trading should not be suspended in principle because itmeans discontinuation of services and suspension of liquidity supply tocustomers, self-regulations shall be provided for the following mattersconsidering the influence on investors because it is difficult to exclude
such suspension completely.
・ A Member shall not suspend or delay trading with customers without
reasonable cause.
・ A Member shall assume special reasons which may force the member tosuspend or delay trading with customers, and explain to customers
about the summary thereof and judgment criteria in the case ofsuspending trading in advance.
・ If trading has been suspended or delayed, a Member shall publish
through its website, etc., and explain to customers, about the fact and8

(Provisional Translation)

the reason therefor, and retain documents of such suspension or delay.
・ Each time when trading has been suspended or delayed, a Member
shall require a division other than a division in charge of the trading tofind out the reason therefor and monitor the appropriateness thereof
and ensure prevention of reoccurrence.
(3) Retention of Data regarding trading conditions and monitoring(12) Considering, with respect to over-the-counter foreign exchange
margin transactions, the fact that self-regulations have been provided forthe retention of data of distributed prices and verification to maintain theappropriateness of prices, similar self-regulations shall be provided for thefollowing matters in respect of over-the-counter binary option transactions
with individuals.
・A division other than a division in charge shall verify theappropriateness of trading prices.
・ A division other than a division in charge shall verify that judgment
prices are not determined by false value distributed by mistake orfraudulent value created arbitrarily.
・ A Member shall apply self-regulations for foreign exchange margintransactions to over-the-counter binary option transactions withindividuals and retain trade prices and other necessary data for threeyears.
Other Maters in Final Report
Establishing self-regulations for trading period or other specifications ofover-the-counter binary option transactions with individuals as described in
the Regulatory Principle 3 “Instruments design contributed to the protectionof customers and customers’ interests” meets the purpose of the articles ofincorporation of the Financial Futures Association of Japan, and obtaining
understanding from investors and business operators and stableself-regulatory activities are required.
For such reason, we would like to express our desire that suchself-regulations for instruments specifications shall be covered by theFinancial Instruments Act and regulations to provide for concrete operating
method within the scheme of the Financial Instruments Act and relatedregulations.
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Financial Futures Association of Japan
Binary Option Working Group
Members
FXTrade Financial Co., Ltd (Chair)
Matsui Securities Co., Ltd
Rakuten Securities, Inc.
GMO CLICK Securities, Inc.
TRADERS SECURITIES Co., LTD
Monex, Inc.
Saxo Bank FX Securities K.K
IG Securities Limited
FX PRIME CORPORATION
Central Tanshi FX Co., Ltd.
GAITAME.COM CO., LTD.
CyberAgent FX, Inc.
Hirose Tusyo Inc.
MONEY PARTNERS Co., LTD.
Kakaku.com Financial, Inc. (First and Second)Observers
Financial Services Agency
Tokyo Financial Exchange Inc.
Osaka Securities Exchange Co., Ltd.
Japan Securities Dealers Association (Fourth to Tenth)Administration
Financial Futures Association of Japan10