A financial institution consults the pre-contract document when it decides what to give a client, and what to confirm, between proposing a contract and the trade.

What it is for

The pre-contract document is a document whose contents and method of delivery are set by law, so that clients can decide whether to trade with an understanding of what the contract involves and its risks. When a financial institution intends to conclude a financial instruments transaction contract, such as an OTC derivative trade, it must first give the client information such as an outline of the contract and the risk of loss (Financial Instruments and Exchange Act, Article 37-3, paragraph 1)1. The duty falls on what the Act calls a "financial instruments business operator, etc." This covers financial instruments business operators, such as securities companies, and registered financial institutions, such as banks that have registered2. A bank needs this registration to trade interest rate swaps or currency options with clients as a business3.

An amendment that took effect on April 1, 2025, changed the heading of Article 37-3. The old heading was "delivery of documents before concluding a contract," and the new one is "provision of information before concluding a contract, etc." The text of the article also now requires information to be provided rather than a document to be delivered4. The term "pre-contract document" is now used by the Cabinet Office Order on Financial Instruments Business, etc. (the Cabinet Office Order) as the name of a document setting out the matters in Article 37-3, paragraph 15.

Under paragraph 2 of the same article, the institution must explain the matters provided (with some exceptions) so that the client can understand them. It must use the method and depth needed for this, in light of the client's knowledge, experience, financial situation, and purpose in entering into the contract6. This is called the duty to explain. However, if the client is a professional investor (explained in "When it need not be provided"), paragraphs 1 and 2 do not apply, and the law requires neither the information nor the explanation7. This exception concerns the statutory requirements only. Whether the supervisory guidelines or the rules of the Japan Securities Dealers Association still apply depends on how each of them is written. How to carry out the explanation is covered in Proposals and Explanations.

Besides the statutory document, institutions also give clients a document explaining what the product is and its risks, and a caution notice. The former is called a product explanation. The three documents differ as follows, and the sections below take them in turn.

Document Basis What sets the contents Main contents
Pre-contract document Financial Instruments and Exchange Act, Article 37-3, and the Cabinet Office Order The law (required items and type size) Outline of the contract, fees, risk of loss, matters specific to the type of transaction
Product explanation Supervisory guidelines The institution (including the points the guidelines list) How the product works and its risks, the loss under a worst-case scenario, early termination and the termination payment
Caution notice Supervisory guidelines and the association's rules The association's rules (items to show) and the institution Whether the rules on solicitation apply, risk warnings, contact details for dispute resolution bodies and similar

What goes in the pre-contract document

The Act sets the framework in seven items, and the Cabinet Office Order adds matters common to all contracts and matters specific to each type of transaction. A document for a derivatives transaction must cover the top three rows of the table below. A document for what the Cabinet Office Order defines as an OTC derivatives transaction contract must cover all four rows.

Basis Main required items
Financial Instruments and Exchange Act, Article 37-3, paragraph 1, items 1 to 6 The institution's name and address, its registration number, an outline of the contract, fees and other amounts the client pays, the risk of loss from changes in interest rates, exchange rates, or the like, and the risk that such a loss exceeds the margin or other amounts deposited
Cabinet Office Order, Article 82 (common to all contracts) The indicators that cause the risk of loss and why, an outline of taxation, events that end the contract, and so on
Cabinet Office Order, Article 93 (derivatives transactions, etc.) How obligations are performed and how the trade is settled, the types of margin and how it is calculated, how fees are collected, the trading procedures, and the main terms and basics of derivatives transactions
Cabinet Office Order, Article 94 (OTC derivatives transaction contracts) The name and business of the counterparty to cover trades the institution enters into to reduce its risk, any counterparty for intermediation or similar, prohibited acts, and how the client's assets are managed and where they are held

Article 82 of the Cabinet Office Order also requires the following beyond the table. The client must be told to read the document carefully. The document must state the risk of loss from changes in the business or financial condition of the institution or others, and how to contact the institution. It must also name the association the institution belongs to and the body that handles complaints and dispute resolution.

An OTC derivatives transaction contract, in the Cabinet Office Order's sense, does not mean OTC derivatives in general. It means the contracts listed in Article 16-4, paragraph 1 of the Order for Enforcement of the Financial Instruments and Exchange Act, with some exclusions. Those contracts are contracts for the transactions in item 1 of that paragraph and contracts for OTC derivatives transactions with individuals8. The OTC derivatives transactions listed in item 1 include the following9.

  • Buying and selling currencies or other assets for delivery at a future date, where the trade can also be settled by paying the difference
  • Exchanging money based on the difference between a financial indicator value agreed in advance and the actual value in the future
  • Paying a premium for the right to bring such a transaction, or a purchase or sale of financial instruments, into effect (options)

The Cabinet Office Order also sets how the document is written. The text must be at least 8 point. At the start of the document, in plain language and in type of at least 12 point, it must state that the client should read the contents carefully, together with the particularly important matters that affect the client's decision. Immediately after that, it must set out, in a box and in type of at least 12 point, an outline of the fees, the risk of loss, the risk of a loss exceeding the margin or other amounts, and other matters. For an OTC derivatives transaction contract, the boxed matters also include the counterparty to cover trades and how the client's assets are managed (matters under Article 94)10.

When and how it is provided

The institution provides the information in advance, when it intends to conclude the contract1. In the flow of client business, this comes before trade execution (see the Trade Execution page). The explanation under paragraph 2, mentioned in "What it is for," is given at the time this information is provided6.

The information is provided either by delivering the document or by providing the items the document must contain by electromagnetic means. If the client asks for a paper document, it must be provided on paper5. To use electromagnetic means, the institution must first either show the client the method it will use and obtain consent, or notify the client of the method and of the client's right to ask for a paper document11. When a contract amends part of an existing contract and some of the required items change, the institution provides a document setting out the items that change5.

When it need not be provided

The information need not be provided in the following cases.

Case Basis
The client is a professional investor (a qualified institutional investor, the national government, the Bank of Japan, and others) Financial Instruments and Exchange Act, Article 45, item 2, and Article 2, paragraph 31
Within one year before the contract, the information was provided in writing or by electromagnetic means for a contract of the same kind Cabinet Office Order, Article 80, paragraph 1, item 1
The contract amends part of an existing contract and none of the required items change Cabinet Office Order, Article 80, paragraph 1, item 3
The institution has given concise key information and meets the other requirements (except where the client has asked for the information in writing or by electromagnetic means) Cabinet Office Order, Article 80, paragraph 1, item 4

Giving concise key information means giving the client, in a document or by electromagnetic means, a brief outline of the main matters useful for deciding on the contract, with example questions and the like, and, as a rule, explaining those matters12.

The next figure takes only two of the cases in the table above, a professional investor and provision within one year, and turns them into a sequence of checks. It does not include the case of amending part of an existing contract or the case of giving concise key information.

YesNoIs the client treated asother than aprofessional investor?No need toprovideYesNoNot already providedwithin the past year fora same-kind contract?No need toprovideAs a rule, provision isneeded
Figure 1How to check whether pre-contract information must be provided
Figure description

The first question asks whether the client is treated as other than a professional investor. If the answer is no, the information need not be provided under Article 45, item 2 of the Financial Instruments and Exchange Act. If yes, go on to the next question. The second question asks whether this is other than a case where, within one year before the contract, information was provided in writing or by electromagnetic means for a contract of the same kind. If the answer is no, the information was already provided within the year, so it need not be provided again under Article 80, paragraph 1, item 1 of the Cabinet Office Order. If yes, provision is needed as a rule. The case of amending part of an existing contract and the case of giving concise key information are checked separately, as the table shows. How the one-year period is counted depends on whether the contract is an OTC derivatives transaction contract, and is covered in the figure at the end of this section.

Whether a client is a professional investor can change by type of contract. Some corporations that are professional investors can ask to be treated as clients other than professional investors. Conversely, corporations that are not professional investors can ask to be treated as professional investors13. As a result, whether the information must be provided can differ for the same corporate client, depending on such a request.

The way the one-year period is counted differs between OTC derivatives transaction contracts in the Cabinet Office Order's sense and other contracts. For other contracts, if the client enters into a contract of the same kind within one year of the provision, the information is deemed to have been provided on that date, and the start of the one-year period moves forward. OTC derivatives transaction contracts are excluded from this deeming rule14. The next figure shows the case of a trade that is an OTC derivatives transaction contract, using Company L.

April 1,2026Company L receives the information.Start of the one-year periodOctober 1,2026Same-kind trade. Within one year,so no provision is needed; the startdoes not moveMay 1,2027Third trade. Over a year since thestart, so it must be provided again
Figure 2The start of the one-year period for an OTC derivatives transaction contract
Figure description

Consider a hypothetical example in which Company L receives the information on April 1, 2026, for a trade that is an OTC derivatives transaction contract. When it enters into a trade of the same kind on October 1 of the same year, that is within one year, so no provision is needed, and the start of the period stays at April 1, 2026. When it enters into a third trade on May 1, 2027, more than a year has passed since the start, so the information must be provided again. If the trade is not an OTC derivatives transaction contract, the October 1 trade moves the start of the period to that date, and the third trade also needs no provision.

Product explanations and caution notices

For OTC derivatives, it is the Financial Services Agency's (FSA's) supervisory guidelines that call for product explanations and caution notices (caution notices also appear in the association's rules). The provisions of the "Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc." (the FSA's supervisory guidelines for financial instruments business operators) apply, with the necessary changes, to registered financial institutions as well15. The institution decides what goes in a product explanation, and includes the points the guidelines list in the next paragraph.

For OTC derivatives such as currency options and interest rate swaps, the institution explains what the product is and its risks, along with early termination and the termination payment, for example by giving the client a document that sets these out in specific, easy-to-understand terms. Examples of the points to explain include the maximum loss under a worst-case scenario and, for trades where early termination gives rise to a termination payment, an estimate of that payment15. For banks, the "Comprehensive Guidelines for Supervision of Major Banks, etc." (the FSA's supervisory guidelines for major banks) have an item to the same effect. It applies both where derivatives are part of a loan transaction and where the institution trades derivatives on their own, and lists, as a point to check, whether the bank has set a policy of explaining by giving a document that includes examples16.

The caution notice is a short, clear document given when the institution enters into OTC derivatives. One of the items it covers is how the rules on unsolicited solicitation apply. Unsolicited solicitation means soliciting a client who has not asked to be solicited, by visiting or calling them. Article 38, item 4 of the Financial Instruments and Exchange Act prohibits this for the contracts in Article 16-4, paragraph 1 of the Order for Enforcement, mentioned in "What goes in the pre-contract document," except in cases specified by the Cabinet Office Order17. This prohibition does not apply if the person solicited is a professional investor7. The notice also sets out risk warnings and contact details for dispute resolution bodies and the like in case of trouble, in clear, large type.

The institution gives this notice in line with the rules of the Japan Securities Dealers Association and the Financial Futures Association of Japan, and explains it in a way suited to the client18. Under the Japan Securities Dealers Association's rules, before concluding a contract for the derivatives and other transactions the rules list, a member gives the client a caution notice and explains its contents so that the client understands them. For derivatives contracts, the member need not give the notice again if it gave one for a transaction of the same kind within the past year19.

Confirming and recording that the explanation was received

The institution confirms with the client that the client received the explanation described in the previous section, and keeps a record of this in writing. What is confirmed is that the client received the explanation, not that it received the documents. Under the FSA's supervisory guidelines for financial instruments business operators, this explanation covers what the product is and its risks, early termination and the termination payment, and, for trades whose purpose is hedging, that the trade works effectively as a hedge. One example of how to confirm this is to obtain a written acknowledgment of explanation from the client and keep it20. For banks, the FSA's supervisory guidelines for major banks have the same item21. A written acknowledgment of explanation is separate from the trade confirmation, in which both sides confirm the terms of the trade after execution.

The Japan Securities Dealers Association's rules set two occasions on which a member obtains a written acknowledgment of explanation (called a "confirmation" in the rules) from the client. The first is when the client first enters into a contract for the derivatives and other transactions the rules list. The member confirms that the client understands the risks, fees, and other information provided under Article 37-3, paragraph 1, and will trade on its own judgment and responsibility. The second is when the member intends to conclude a contract for OTC derivatives or similar transactions, and it is not limited to the first contract. The member confirms that the client understands the following matters and will trade on its own judgment and responsibility22.

  • The contents of the important matters of the contract
  • That the terms of the contract are ones the client can take on, even in light of the expected loss (including the estimated termination payment on early termination)
  • For contracts whose purpose is hedging (unless the client is an individual), that the trade will work as an effective hedge until it ends and will not make the client's business outlook harder to manage
  • For clients with a lending relationship (other than individuals), that declining the solicitation will not affect future lending

Besides the duty to explain under the Financial Instruments and Exchange Act, there is also the Act on the Provision of Financial Services and the Improvement of the Usage Environment (Financial Services Provision Act). A financial institution that is a financial instruments seller, etc. under that Act must also explain the important matters in Article 4, paragraph 1 of that Act. The explanation must use the method and depth needed for the client to understand them, in light of the client's knowledge, experience, financial situation, and purpose in trading23.

Notes

  1. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 37-3, paragraph 1 (items 1 to 7 and the proviso). ↩ ↩2

  2. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 34 ("金融商品取引業者等（金融商品取引業者又は登録金融機関をいう。以下同じ。）", defining a financial instruments business operator, etc. as a financial instruments business operator or a registered financial institution). ↩

  3. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 33-2, item 3 (derivatives transactions, etc. other than securities-related derivatives transactions, etc.). ↩

  4. The revision history of the "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese) on e-Gov Law Search. In the version in force from November 21, 2024, Article 37-3 is headed "契約締結前の書面の交付" (delivery of documents before concluding a contract). From the version in force from April 1, 2025 (as amended by the "金融商品取引法等の一部を改正する法律," an act partially amending the Financial Instruments and Exchange Act, etc.), it is headed "契約締結前の情報の提供等" (provision of information before concluding a contract, etc.). ↩

  5. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 79, paragraph 1 (item 1(a) defines "契約締結前交付書面," the pre-contract document; item 1(b) covers the document for a contract that amends part of an existing contract). ↩ ↩2 ↩3

  6. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 37-3, paragraph 2. ↩ ↩2

  7. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 45 (item 1 disapplies Article 38, items 4 to 6 and other provisions when the person solicited is a professional investor; item 2 disapplies Article 37-3 and other provisions when the counterparty is a professional investor). ↩ ↩2

  8. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), the parenthetical in Article 79, paragraph 5, item 2 (definition of "店頭デリバティブ取引契約," an OTC derivatives transaction contract). ↩

  9. "金融商品取引法施行令" (Order for Enforcement of the Financial Instruments and Exchange Act, in Japanese), Article 16-4, paragraph 1, item 1(a) to (d) and item 2. ↩

  10. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 79, paragraphs 3 to 5. ↩

  11. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 79, paragraph 2 (item 1 covers consent; item 2 covers notice). ↩

  12. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 80, paragraph 1, item 4, and paragraph 3. ↩

  13. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 34-2, paragraph 1 (requests by professional investors under Article 2, paragraph 31, item 4) and Article 34-3, paragraph 1 (requests by corporations that are not professional investors). ↩

  14. "金融商品取引業等に関する内閣府令" (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 80, paragraph 1, item 1, and paragraph 2 ("店頭デリバティブ取引契約を除く," excluding OTC derivatives transaction contracts). ↩

  15. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.) (October 2026), IV-3-3-2(6)① and ② (pages 164–165). Application to registered financial institutions is in VIII-1 (page 428) (in Japanese). ↩ ↩2

  16. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026), III-3-3-1-2(2)①イ, items a and b (pages 217–218) (in Japanese). ↩

  17. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 38, item 4 and the proviso. ↩

  18. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.) (October 2026), IV-3-3-2(3) (page 163). Application to registered financial institutions is in VIII-1 (page 428) (in Japanese). ↩

  19. Japan Securities Dealers Association, "協会員の投資勧誘、顧客管理等に関する規則" (Rules on investment solicitation and customer management by association members), Article 6-2 (giving caution notices, etc.), paragraphs 1 to 4 (in Japanese). The one-year exception is the proviso to paragraph 1. Paragraph 4, which treats concluding a contract of the same kind as giving the notice, is limited to the transactions in paragraph 1, items 1 and 3, and excludes OTC derivatives transactions, etc. ↩ ↩2

  20. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.) (October 2026), IV-3-3-2(6)① to ④ (pages 165–166) (in Japanese). ↩

  21. Financial Services Agency, "主要行等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Major Banks, etc.) (October 2026), III-3-3-1-2(2)①イ, item d (page 219) (in Japanese). ↩

  22. Japan Securities Dealers Association, "協会員の投資勧誘、顧客管理等に関する規則" (Rules on investment solicitation and customer management by association members), Article 8 (obtaining written confirmations from clients), paragraph 1 and paragraph 2, items 1 to 5 (in Japanese). ↩

  23. Financial Services Agency, "金融商品取引業者等向けの総合的な監督指針" (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc.) (October 2026), III-2-3-2-4(1) (page 57) (in Japanese). ↩