Article 4 of the Act on the Provision of Financial Services and the Improvement of the Usage Environment (Financial Services Provision Act) sets out the important matters that must be explained when financial instruments, including OTC derivative trades, are sold. When changes in market prices or similar factors could cause a loss below the principal or a loss exceeding the initial principal, the seller explains that this risk exists, the indicator that causes it, and the important parts of how the trade works1.

Article 37-3, paragraph 2 of the Financial Instruments and Exchange Act also requires that information provided before a contract be explained using the method and depth needed for the client to understand it2. If the client is a professional investor, this requirement does not apply3. The steps for explaining a derivative when selling it are covered in the article.

Notes

  1. "金融サービスの提供及び利用環境の整備等に関する法律" (Act on the Provision of Financial Services and the Improvement of the Usage Environment, in Japanese), Article 4, paragraph 1, items 1 and 2, and paragraph 2. OTC derivative trades are covered by Article 3, paragraph 1, item 9. ↩

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

  3. "金融商品取引法" (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 45, item 2 (provisions that do not apply when the counterparty is a professional investor, except in the cases set by Cabinet Office Order under the proviso). ↩