A securities firm uses the formulas in this rule when it sets limits on its derivative positions and when it checks its net capital ratio each day.

What the rule requires

The net capital ratio is a ratio that the Financial Instruments and Exchange Act (FIEA) requires of a financial instruments business operator engaged in Type I financial instruments business. The operator takes the total of its capital stock, reserves, and similar items, subtracts fixed assets and similar items, and divides the result by the total amount corresponding to the risks that can arise from price changes in the securities it holds and similar events. It reports the ratio to the Prime Minister at each month-end and in other cases, and it must not let the ratio fall below 120%1.

The Financial Services Agency (FSA) describes the purpose of the rule in its supervisory guidelines. An operator's business is easily affected by changes in the market, so its financial soundness must be kept even if market conditions turn suddenly and revenue falls or the value of its assets drops. To that end, the operator must hold liquid assets that can absorb losses when the various risks materialize, which means unencumbered capital2.

A bank's capital adequacy ratio is a separate rule. It is set by a notice issued under the Banking Act, and its denominator is risk-weighted assets (RWA).

Item Net capital ratio under the FIEA Bank capital adequacy ratio
Legal basis Articles of the FIEA, a Cabinet Office Order, and an FSA notice A notice issued under the Banking Act
Covered entities Financial instruments business operators engaged in Type I financial instruments business Banks
Numerator Unencumbered capital Capital (three ratios under the international standard)
Denominator The sum of three risk equivalents Risk-weighted assets (RWA)
Minimum level 120% 4.5%, 6%, and 8% under the international standard

The bank column describes the international standard, in which the minimum level is set for each type of ratio3.

The content of the rule is set at three levels: the FIEA, the Cabinet Office Order on Financial Instruments Business, etc. (the Business Order), and a notice of the Commissioner of the FSA.

Provision What it sets
FIEA Article 46-6 The definition of the ratio, reporting at each month-end and in other cases, the 120% minimum, and public inspection of the quarter-end ratio
FIEA Article 53 Orders to operators whose ratio is below 120%, and a business suspension order and registration revocation for a ratio below 100%
Business Order Articles 176 to 180 Capital, deducted assets, the types of risk equivalent, the reporting levels and deadlines, and the items to be disclosed for inspection
FSA notice (No. 59 of 2007) The amount of deducted assets and the standards for calculating the three risk equivalents
Supervisory guidelines IV-2 The points the authorities look at for the accuracy of the ratio and the response when it falls below a level (not the rule itself)

The report goes to the Commissioner of the FSA for special financial instruments business operators and similar firms, and to the director-general of the finance bureau that registered the operator, or a similar official, for all others. The Business Order calls this authority the "competent Commissioner of the FSA, etc."4.

This page uses the consolidated version of the notice that the FSA publishes. The amendments to the notice that applied from November 1, 2024, and May 1, 2025, change only the definitions article5.

This page reflects the versions published as of October 22, 2026 (the latest amendments took effect on August 12, 2026, for the FIEA and on August 3, 2026, for the Business Order).

Who is covered

The rule covers financial instruments business operators engaged in Type I financial instruments business. Conducting OTC derivative transactions as a business is one of the acts of Type I financial instruments business6. Operators that do not engage in Type I business follow the provisions of a different subsection and are not covered by this ratio rule1. There are two exceptions.

  • The ratio provisions do not apply to a Type I small-amount electronic public offering service provider or to a special intermediary business operator for unlisted securities7.
  • For an operator that is a foreign corporation, the provisions apply with "capital stock" read as capital brought in, "reserves" read as reserves accumulated at its offices in Japan, and "fixed assets" read as fixed assets at its offices in Japan8.

A bank that is a registered financial institution has no equivalent article, because the subsection on registered financial institutions has no equivalent provision1.

The authorities must refuse the registration of a person who wants to start Type I financial instruments business if a ratio calculated by a method conforming to this formula is below 120%9.

Formula and numerical example

The ratio can be written as follows. The numerator, unencumbered capital, is the sum of basic items and supplementary items, less the amount of deducted assets4.

Net capital ratio=Unencumbered capitalMarket risk equivalent+Counterparty risk equivalent+Basic risk equivalent×100%\text{Net capital ratio} = \frac{\text{Unencumbered capital}}{\text{Market risk equivalent} + \text{Counterparty risk equivalent} + \text{Basic risk equivalent}} \times 100\%

The three components are as follows.

  • Basic items are capital stock, share application deposits, capital surplus, retained earnings (excluding planned dividends and officer bonuses), valuation differences on available-for-sale securities (when negative), and treasury shares.
  • Supplementary items are other items in the net assets section, general allowance for loan losses, and long-term and short-term subordinated debt, with a limit on how much subordinated debt counts10.
  • Deducted assets are fixed assets, deferred assets, some current assets such as advances and prepayments to customers, and some securities issued by affiliated companies11.

Consider a hypothetical example in which the basic items of Securities Firm X are 6.0 billion yen, deducted assets are 0.6 billion yen, and there are no supplementary items. Unencumbered capital is 5.4 billion yen. The table below shows how the equivalents grow as derivative positions increase.

Scenario Market risk equivalent (billion yen) Counterparty risk equivalent (billion yen) Basic risk equivalent (billion yen) Total (billion yen) Ratio
A Normal conditions 2.0 0.8 0.2 3.0 180%
B Positions increased 2.8 1.0 0.2 4.0 135%
C Increased further 3.6 1.2 0.2 5.0 108%
D Increased further by a sharp market move 4.4 1.4 0.2 6.0 90%

If positions are reduced and the equivalents fall, the ratio rises. The table holds the numerator constant, but if losses occur, retained earnings decline and the numerator becomes smaller too.

Risk equivalents and derivative transactions

There are three types of risk equivalent: market, counterparty, and basic. The Commissioner of the FSA sets how they are calculated12, and the notice sets the standards. Derivative transactions enter the market risk equivalent and the counterparty risk equivalent.

Market risk equivalent

The market risk equivalent is the amount corresponding to the risk that can arise from price changes and similar events in the securities, other assets, and transactions the operator holds12. It is calculated by either the standardized method or the internal model method13. The standardized method adds up the equivalents for equity, interest rate, foreign exchange, commodity, and crypto-asset risk14. The internal model method requires approval from the competent Commissioner of the FSA, etc.15.

Derivative transactions enter as follows.

  • Derivatives such as stock index or interest rate futures and forward transactions are converted into positions in the underlying asset. The converted amount is treated as the market value and goes into the equity and interest rate risk equivalents16.
  • The difference between future receipts and future payments on forward foreign exchange transactions, and the principal of a cross-currency swap that is not included in the spot position, go into the calculation of the net position in each currency for the foreign exchange risk equivalent17.
  • Option transactions are calculated by the delta-plus method or the simplified method. In the delta-plus method, the position in the underlying asset is multiplied by delta to give a notional position. The equivalent for that position is calculated in the same way as for other transactions, and the risk equivalents for gamma and vega are added to it18.

Counterparty risk equivalent

The counterparty risk equivalent is the amount corresponding to the risk that can arise from a counterparty's default and similar events12. It is the sum, across transaction and asset categories, of the credit equivalent amount multiplied by a risk weight set by counterparty category19.

For the transactions listed in the notice's table (excluding repurchase-type transactions and lending and borrowing transactions), the credit equivalent amount is the add-on plus the replacement cost when it is positive. The add-on is calculated by multiplying the notional amount by the factor the notice sets for the transaction category and the maturity category20.

Example of transaction Counterparty risk equivalent category How it enters the market risk equivalent
Interest rate swaps between different currencies, forward foreign exchange transactions, currency option transactions Foreign exchange-related transactions Includes transactions that enter foreign exchange risk. Options use the delta-plus method or the simplified method
Interest rate swap transactions within the same currency, interest rate option transactions Interest rate-related transactions Interest rate risk
OTC derivative transactions on shares Equity-related transactions Equity risk

The categories are defined in the definitions chapter of the notice21. The following rules also apply.

  • Under a legally valid bilateral netting agreement, replacement costs can be offset. The add-on can also be converted by a formula that uses the ratio of net to gross replacement cost22.
  • Exchange-traded transactions that require daily mark-to-market margin, and transactions assumed by a central counterparty that requires a daily margin call, are excluded from the add-on and the replacement cost23.
  • For uncleared OTC derivative transactions, initial margin that has been posted and is held in trust or a similar arrangement can be excluded from short-term guarantee deposits24.

The risk weight varies with the counterparty category (government and central bank, financial institution and similar, other corporation and similar, or individual) and with whether an eligible rating exists25.

Basic risk equivalent

The basic risk equivalent is the amount corresponding to the risk that can arise in day-to-day business, such as errors in processing12. It is one quarter of the total operating expenses for the year ending two months before the month of the calculation date, plus an amount for holding or managing crypto-assets and similar items26. Because it is derived from operating expenses, it does not change with the positions of individual derivative transactions.

Responses by ratio level and reporting

The operator reports the month-end ratio to the competent Commissioner of the FSA, etc. by the 20th of the following month27. A document stating the quarter-end ratio is kept at every office for public inspection for three months, starting one month after the quarter-end date. It states the amount of unencumbered capital, the three equivalents and their total, and the ratio28.

The lower the ratio, the more is required. A ratio below 120% is also below 140%, so the report and the report form for each business day for a ratio below 140% continue to apply below 120%. The plan attached, however, is a recovery plan in place of the maintenance plan27. Falling below 140%, and later returning from that level, are cases that require a report in addition to the month-end one. The "Fell below" rows are responses newly added when the ratio falls below that level. The "Returned to 140% or higher" row and the registration revocation row are not responses to falling below a level.

Ratio What is required
Fell below 140% Report to the Commissioner of the FSA at once. Submit a report form for each business day and a maintenance plan to the competent Commissioner of the FSA, etc.27
Returned to 140% or higher Report without delay27
Fell below 120% A breach of the law. Report with a recovery plan attached in place of the maintenance plan; the operator may also be ordered to change its business methods or take similar measures2729
Fell below 100% The operator may be ordered to suspend all or part of its business for up to three months29
Suspension ordered, ratio still below 100% on the day three months after the order, and no prospect of recovery The registration may be revoked29

The orders for a ratio below 120% and a ratio below 100% are issued when the authorities find it necessary and appropriate in the public interest or for investor protection29.

The supervisory guidelines set out "early corrective measures" based on the ratio and then describe the supervisory response when a level is breached. When a report of a ratio below 140% comes in, the authorities check the plan and encourage voluntary improvement. If the situation continues for a long time or recurs, they request a report to understand it. For a report of a ratio below 120%, they check the recovery measures and timing, and the state of customer asset segregation and cash management30.

YesNoIs the net capital ratiobelow 140%?Month-endreport onlyYesNoIs it below 120%?Added:below-140%report andplanYesNoIs it below 100%?Added:breach,orders;recovery planAdded: possiblesuspension order
Figure 1Responses by ratio level
Figure description

Check the questions from the top, asking whether the ratio is below each level. The box reached at the first "no" is the response added at the level where the ratio stops. For example, a ratio below 140% but at or above 120% gets "no" at the second question and ends at the box "Added: below-140% report and plan". A ratio below 120% is also below 140%, so the duty to report and submit a report form for each business day for a ratio below 140% continues, and the plan attached becomes a recovery plan27. The lower the level, the more orders there are. The reports added below 140% continue, and the plan is replaced; each level's response is as in the table just above. The report on a return to 140% or more and the cancellation of registration are outside the figure and are in the table.

Consider a hypothetical example in which Securities Firm X newly enters into a cross-currency swap and a forward foreign exchange transaction. This corresponds to the move from scenario A to scenario B in the table in "Formula and numerical example".

  • The new transactions raise the foreign exchange risk equivalent, so the market risk equivalent goes from 2.0 billion yen to 2.8 billion yen. The same transactions raise the add-on and the positive replacement cost, so the counterparty risk equivalent goes from 0.8 billion yen to 1.0 billion yen. The basic risk equivalent is derived from operating expenses and stays at 0.2 billion yen, so the total goes from 3.0 billion yen to 4.0 billion yen.
  • The ratio falls from 180% (5.4 billion yen divided by 3.0 billion yen) to 135% (divided by 4.0 billion yen). It still meets the 120% level, but it is below 140%, so the firm must report to the Commissioner of the FSA at once, submit a report form for each business day, and attach a maintenance plan.
  • In scenario D, after a further sharp market move that takes the total to 6.0 billion yen, the ratio is 90%. It is below 100%, so the authorities can order the suspension of all or part of the business for up to three months. If a suspension is actually ordered, the ratio is still below 100% on the day three months after the order, and no recovery is expected, the registration can be revoked.

Daily monitoring and reporting in practice

A financial instruments business operator monitors the market risk equivalent and the counterparty risk equivalent every business day, by a reasonable method suited to its business. It also monitors the state of its ratio every business day31. The daily monitoring routine is covered in Daily Risk Management Operations.

If daily monitoring shows the ratio below 140%, the operator reports at once without waiting for month-end. The monthly report is the one that gives the month-end ratio by the 20th of the following month27. Both are part of reporting to regulators, which is covered in Regulatory Reporting.

What this page does not cover

The specific values of the add-on factors and risk weights, the approval criteria for the internal model method, the special rules for securitization securities and crypto-assets, and the consolidated regulation of special financial instruments business operators and ultimate designated parent companies are not covered on this page. The expected exposure method for the counterparty risk equivalent, available with approval32, is also not covered. Whether an interest rate swap between different currencies also enters the interest rate risk equivalent is not covered either.

Notes

  1. "金融商品取引法" (external site) (Financial Instruments and Exchange Act, in Japanese; English translation: Japanese Law Translation), Article 46-6, paragraphs 1, 2, and 3. The title of Subsection 1 is "Financial Instruments Business Operators Engaged in Type I financial instruments business"; registered financial institutions are in Subsection 3 (Articles 48 to 48-3). ↩ ↩2 ↩3

  2. FSA, "金融商品取引業者等向けの総合的な監督指針" (external site) (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc., in Japanese; October 2026), the opening of IV-2 (page 115, PDF page 126). ↩

  3. FSA, "銀行法第十四条の二の規定に基づき、銀行がその保有する資産等に照らし自己資本の充実の状況が適当であるかどうかを判断するための基準" (external site) (FSA Notice No. 19 of 2006, in Japanese), Article 2 (pages 26 to 27). ↩

  4. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese; English translation: Japanese Law Translation), Article 1, paragraph 4, item 2 (amount of unencumbered capital) and item 4 (所管金融庁長官等, the competent Commissioner of the FSA, etc.). ↩ ↩2

  5. The consolidated version of FSA Notice No. 59 of 2007 (external site) (金融商品取引業者の市場リスク相当額、取引先リスク相当額及び基礎的リスク相当額の算出の基準等を定める件, in Japanese), Article 1, item 4 (a) (PDF pages 1 to 2), and the comparison tables of the amending notices of 2024 (Reiwa 6) (external site) and 2025 (Reiwa 7) (external site) (Article 1, item 4 (a) only). ↩

  6. "金融商品取引法" (external site) (Financial Instruments and Exchange Act, in Japanese), Article 28, paragraph 1, item 2. ↩

  7. "金融商品取引法" (external site) (Financial Instruments and Exchange Act, in Japanese), Article 29-4-2, paragraph 6, and Article 29-4-4, paragraph 5 (第一種少額電子募集取扱業者, 非上場有価証券特例仲介等業者). ↩

  8. "金融商品取引法" (external site) (Financial Instruments and Exchange Act, in Japanese), Article 49, paragraph 2. Article 193 of the Business Order sets the same reading for the provisions on capital and deducted assets. ↩

  9. "金融商品取引法" (external site) (Financial Instruments and Exchange Act, in Japanese), Article 29-4, paragraph 1, item 6 (a). ↩

  10. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 176, paragraph 1 (items 1 to 6 are basic items and item 7 is supplementary items), paragraphs 2 and 3. ↩

  11. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 177, paragraph 1, items 1 to 6. ↩

  12. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 178, paragraph 1, items 1 to 3. ↩ ↩2 ↩3 ↩4

  13. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 3, paragraph 1 (page 11). ↩

  14. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 4, paragraph 1 (page 13). ↩

  15. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 10, paragraph 1 (page 25). ↩

  16. FSA Notice No. 59 of 2007 (external site) (in Japanese), the table of derivatives in Article 5, paragraph 1, and Article 6, paragraph 1 (pages 17 to 19). ↩

  17. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 8, item 1 (b) (pages 24 to 25). ↩

  18. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 4, paragraphs 2 and 3 (page 13). ↩

  19. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15, paragraphs 1 and 3 (pages 40 and 44). ↩

  20. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15, paragraph 1, item 1 and the table (pages 40 to 41). ↩

  21. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 1, items 48, 50, and 51 (pages 5 to 6). ↩

  22. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15, paragraph 1, item 1, note 2 to the table (page 41), and paragraph 2 (page 44). ↩

  23. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15, paragraph 1, item 1, note 3 to the table (page 41). ↩

  24. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15, paragraph 1, item 3, note 6 to the table (pages 42 to 43). ↩

  25. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15, paragraph 3, item 3 and the table (pages 44 to 45). ↩

  26. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 16, paragraph 1 (page 51). ↩

  27. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 179, paragraphs 1 to 5. ↩ ↩2 ↩3 ↩4 ↩5 ↩6 ↩7

  28. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 180, paragraph 2. The inspection period is set in Article 46-6, paragraph 3, of the FIEA (external site). ↩

  29. "金融商品取引法" (external site) (Financial Instruments and Exchange Act, in Japanese), Article 53, paragraphs 1 to 3. ↩ ↩2 ↩3 ↩4

  30. FSA, "金融商品取引業者等向けの総合的な監督指針" (external site) (Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc., in Japanese; October 2026), IV-2-2 (pages 117 to 118, PDF pages 128 to 129). ↩

  31. "金融商品取引業等に関する内閣府令" (external site) (Cabinet Office Order on Financial Instruments Business, etc., in Japanese), Article 178, paragraph 2, and Article 179, paragraph 6. ↩

  32. FSA Notice No. 59 of 2007 (external site) (in Japanese), Article 15-2, paragraph 1 (page 47). ↩