17 January, 2018
Year in Review – Japan Law in 2017
Foreign Exchange and Foreign Trade Act: The amended Foreign Exchange and Foreign Trade Act came into force on 1 October 2017. The amendment introduces anew prior notification obligation for foreign investors when acquiring shares in a non-listed Japanese company which engages in sensitive sectors such as weapons, nuclear technology, aircraft and satellites, from other foreign investors. If a prior notification is required, a 30-day waiting period will apply prior to closing the acquisition, unless the period is reduced by the relevant minister.
Simplification of processes for global offerings: Previously, under the Financial Instruments and Exchanges Act (the “FIEA”), a document called an extraordinary report was required to be filed with the Japanese authorities when an international equity offering was conducted by a Japanese issuer. In February 2017, the FIEA was amended and, consequently, a report is no longer required when (a) there is concurrently a Japanese domestic offering, and (b) the international tranche is described in the Japanese prospectus. The burden of preparing an extraordinary report was not too onerous, so the amendment won’t have a huge impact in practice. However, it is good to see that the process has been simplified.
MiFID II: During 2017, many market participants in Japan assessed how their services and operations might be affected by the EU Markets in Financial Instruments Directive and Markets in Financial Instruments Regulation (“MiFID II”), which will take effect from 3 January 2018. The following are of particular interest to Japanese market participants: (i) the requirement for research to be unbundled and charged for separately, which raises issues for Japanese providers, as charging for research requires an investment advisory licence; (ii) transaction reporting requirements and, in particular, how reporting should apply to Japanese trust banks or each of their trusts separately; and (iii) questions of active intermediation by the local Japanese affiliates of EU institutions, to ensure that activities and services are construed as performed locally and therefore outside of the regulatory ambit of the EU rules.
Destination clauses in the LNG market: On 28 June 2017, the Japan Fair Trade Commission (“JFTC”) released its report on the LNG market, finding that a variety of common clauses in Delivery ex Ship and Free On Board LNG contracts may violate Japanese anti-monopoly law in some circumstances. Depending on the circumstances, such clauses will include destination clauses, diversion clauses and profit-sharing clauses that prevent LNG buyers from freely re-selling their excess supply of LNG. The JFTC has directed LNG sellers not to include clauses which restrict competition in new LNG contracts or revisions to existing contracts. In relation to existing contracts it requires sellers, as a minimum, to review and identify competition-restrictingbusiness practices in relation to these contracts.
Japan’s first solar reverse auction: In December, Japan held its first solar reverse auction, run by the Green Investment Promotion Organisation (GIPO). The GIPO tendered 500MW but only received bids for 141MW, awarding all such bids with a minimum tariff of JPY 17.20 per kWh and a maximum tariff of JPY 21 per kWh. The next reverse auction is planned for July 2018.
Year to Come – Japan Law in 2018
High frequency trading (HFT) regulations: On 17 March 2017, the bill for the amendments (“Amendments”) to the Financial Instruments and Exchange Act (“FIEA”) passed the Diet. This established a new framework for high frequent trading (“HFT”). While formerly there were no rules and regulations that specifically regulated HFT in Japan, under the Amendments, HFT operators (“HFTOs”) will be required to register with the Japanese Financial Services Agency (the “JFSA”). Unregistered HFTOs will be subject to a penalty of imprisonment of up to three years and/or a fine up to JPY 3 million. A registered Financial Instruments Business Operator (“FIBO”) is not subject to HFTO-related registration requirements, but is required to file a notification with the JFSA. The JFSA estimates the number of investors who will be classified as HFTOs to be around 70 firms including 10 registered FIBOs. The Amendments are scheduled to come into force on 1 April 2018. Those who have already been conducting HFT business as of the date on which the Amendments become effective (“Effective Date”) may continue to engage in HFT business without registration only for six months from the Effective Date.
The Amendments define HFT as satisfying the following requirements: (a) it relates to the trading of securities and derivatives or entrustment thereof; (b) decision-making is conducted automatically through electronic data processing systems (using algorithms); and (c) the information necessary for conducting such transactions (e.g., order for trading) shall be transmitted to the financial instruments exchange (“FIE”) and the person designated by the Cabinet Office Ordinance via information communication technology and in a way that minimises latencies.
The draft Cabinet Office Ordinance clarifies “minimising latencies” as referring to (i) the use of co-located servers placed in rented racks that belong to the co-location provider, and (ii) certain arrangements to prevent the transmission of trade information by HFTOs from competing with transmissions by other investors (e.g., entering into contract with a registered FIBO to use a virtual server). It remains unclear, but a user of proximity services may also be included in the definition of HFTOs in cases where the system provides them with networks at a data centre which is adjacent to an access point (physical and/or virtual) for the relevant FIE.
An HFTO applicant must satisfy the following requirements to be registered with the JFSA: (a) no reasons for disqualification; (b) sufficient human resources to conduct HFT appropriately along with compliance and other organisational structures; (c) a minimum stated capital of JPY 10 million; and (d) in the case of a foreign applicant, (i) it must appoint an attorney-in-fact in Japan and (ii) its home-country regulator needs to grant a guarantee to the JFSA to cooperate with the JFSA’s investigation under the FIEA. According to draft JFSA guidelines, an attorney-in-fact is required to have knowledge to a certain extent on HFT-related regulation under the FIEA and be able to accurately report to JFSA and to fully understand and address reporting requests by JFSA in cooperation with the foreign applicant.
In the registration process, HFTO applicants must submit a document stating the contents and methods of its business.
This must include information such as: (a) basic rules of business operation; (b) method of business operation; (c) the outline of its HFT strategies which include types of strategies (e.g., market-making, arbitrage, directional, etc.), relevant FIE where an applicant conducts HFT, scope of securities or listed derivatives covered by HFTOs and (d) name of the compliance officer, officer responsible for management of HFT, outline, place and maintenance of electronic data processing system for HFT and the necessary measures for its proper management.
A registered HFTO (“RHFTO”) is required to maintain: (i) an appropriate business operational structure (e.g., establishing internal rules, conducting internal education seminars); (ii) a risk control system (i.e., capable of preventing erroneous orders which may adversely affect a relevant FIE); (iii) preventive measures against market manipulation and other unfair trading; (iv) trading books and records; and (v) to prepare and file an annual business report with JFSA.
The following can exercise supervisory power over an RHFTO: (a) the JFSA has the power to conduct an onsite inspection of a RHFTO, require a report and information and issue a business improvement order against an RHFTO that requires remedial action; (b) the FIE can investigate an RHFTO’s compliance with laws and regulations or make administrative dispositions pursuant to the FIEA and take any necessary measures to protect investors and ensure securities and market derivatives transactions are conducted fairly; and (c) a registered FIBO which is allowed to conduct HFT business by completing notification with the JFSA is prohibited from accepting any HFT orders from unregistered HFTOs etc.
Hokkaido airports privatisation: The Ministry of Land, Infrastructure, Transport and Tourism is expected to publish formal tender guidelines in early 2018 for the seven airports in Hokkaido in April 2018, with a view that such airports begin private operation in 2020.
Integrated Resort (IR): The IR Promotion Act of 16 December 2016 provides broad principles of IRs in Japan, requiring the government to propose further definitive IR legislation. After a series of the IR Promotion Council meetings held for discussing its recommendations on such definitive legislation, the IR Implementation Bill is now expected to be submitted to the Diet by March 2018. The IR Implementation Bill will set out a detailed framework for the construction and operation of IRs, including IR area selection processes.
For further information, please contact:
John Maxwell, Partner, Linklaters
john.maxwell@linklaters.com
