Quiz: Legal Framework

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4 questions to check your understanding of the chapter “Legal Framework”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.

1. Question 1

   As of October 2026 in Japan, what does the Bank of Japan do toward financial institutions that conduct derivatives transactions?

   1. A.It registers financial instruments business operators under the Financial Instruments and Exchange Act (FIEA)
   2. B.It sets self-regulatory rules on the business of its members
   3. C.It goes on site at its counterparty financial institutions to examine the state of their business and assets
   4. D.It grants permission for commodity futures business under the Commodity Derivatives Transaction Act
   Answer and explanation

   Answer: C

   The Bank of Japan concludes an examination contract with its counterparty financial institutions and goes on site to examine the state of their business and assets. At the request of the Commissioner of the Financial Services Agency, it can submit materials on the results of an examination.

   The Prime Minister registers financial instruments business operators, and that authority is delegated to the Commissioner of the Financial Services Agency. Self-regulatory rules on the business of members are set by financial instruments firms associations such as the Japan Securities Dealers Association. Permission for commodity futures business is granted by the competent ministers under the Commodity Derivatives Transaction Act (the Minister of Agriculture, Forestry and Fisheries and the Minister of Economy, Trade and Industry).

   Learn more: Japan's Derivatives Regulation at a Glance

2. Question 2

   As of October 2026, when did the provisions of the Cabinet Office Order on Financial Instruments Business, etc. that set the margin requirements come into force?

   1. A.September 1, 2016
   2. B.May 19, 2010
   3. C.November 1, 2012
   4. D.July 11, 2012
   Answer and explanation

   Answer: A

   The margin requirements are set not by the amending Act but by provisions of the Cabinet Office Order on Financial Instruments Business, etc., and those provisions came into force on September 1, 2016.

   May 19, 2010 is the date the Act Partially Amending the Financial Instruments and Exchange Act was promulgated. July 11, 2012 is the date the Cabinet Office Order on the Regulation of Over-the-Counter Derivatives Transactions was promulgated. November 1, 2012 is the date the clearing obligation and the system for keeping and reporting trade information came into force, not the date the margin requirements came into force.

   Learn more: Japan's Derivatives Regulation at a Glance

3. Question 3

   The FIEA divides derivatives transactions into three categories by where they are conducted. As of October 2026, what is an OTC derivatives transaction?

   1. A.A transaction conducted on a financial instruments market
   2. B.A transaction conducted on a foreign financial instruments market
   3. C.A derivatives transaction in a commodity that the Commodity Derivatives Transaction Act separately covers
   4. D.A transaction conducted outside both a financial instruments market and a foreign financial instruments market
   Answer and explanation

   Answer: D

   The FIEA's three categories are market derivatives transactions, conducted on a financial instruments market; OTC derivatives transactions, conducted outside both a financial instruments market and a foreign financial instruments market; and foreign market derivatives transactions, conducted on a foreign financial instruments market. The category depends on where the transaction is conducted.

   A derivatives transaction in a commodity that the Commodity Derivatives Transaction Act separately covers is not an OTC derivatives transaction under the FIEA, because the definition of OTC derivatives transactions excludes transactions relating to commodities.

   Learn more: The Financial Instruments and Exchange Act and Derivatives

4. Question 4

   It is wrong to think that all FIEA conduct rules fall away when the client is a professional investor. As of October 2026, which of the following is not listed in Article 45 as a provision that does not apply?

   1. A.The suitability principle
   2. B.The prohibition of loss compensation, etc.
   3. C.The provision of information before a contract
   4. D.The display in advertising
   Answer and explanation

   Answer: B

   Article 45 of the FIEA lists the provisions that do not apply when the client is a professional investor. The prohibition of loss compensation, etc. is not among them, so it applies even when the counterparty is a professional investor.

   The suitability principle, provision of information before a contract, and display in advertising are each listed as provisions that do not apply when the person being solicited or the counterparty to the contract is a professional investor. The proviso to Article 45 makes an exception for cases specified by Cabinet Office Order. The Order specifies only some provisions, such as the provision of information at the time of concluding a contract (Article 37-4).

   Learn more: The Financial Instruments and Exchange Act and Derivatives