Update : Nov. 15, 2013
Outline of margin transactions
(1) Definition of margin transactions
- *Article 156-24 of the Financial Instrument and Exchange Law defines margin transactions as follows:
'A Margin transaction is the purchase/sale or other transaction of securities effected on credit extended to the customer by a securities company.'
Customers buying or selling stocks on margin must deposit warranty deposit ("margin") equivalent to at least 30% of the transaction value with the securities company. Having done so they may borrow the securities/money necessary for the transaction. The transaction must be settled within a predetermined period.
(2) Function of margin transactions
- To provide more depth and secure more liquidity.
- To contribute to the fair and orderly price formation.
(3) Reasons to use margin transactions
- To make profits from a short-term capital gain (expecting a rise or fall of stock prices in a short period time)
- Selling hedge (to avoid the risks associated with a fall in stock prices when and after exercising convertible bonds or bonds with warrants)
- Repayment against loans or borrowed stocks
Purchase on margin>>>>>Sell out, repayment against stocks with cash
Sale on margin>>>>>Buy in, repayment against cash with stocks
(5) Rules of margin transactions
(a) Two types:
- lending fee and period of settlement are regulated by stock exchange rules
- securities companies may borrow stocks and cash needed from securities finance corporation ("loan transactions")
- eligible issues are designated by TSE based on the rules
- lending fee and period of settlement are negotiable
- loan transactions may not be used for negotiable margin transactions
- all listed issues are eligible
(b) Opening a margin transaction account
- Customers must complete a written agreement to top open an account.
(c) Period of settlement
- Standardized margin transactions: within 6 months
- * Negotiable margin transactions: negotiable
(d) Margin deposits
- Margin : Collateral deposited to a securities firm, when borrowing money or stocks needed for margin transactions
- Minimum margin : 30% of the transaction value or 300,000 yen ( whichever is greater)
- Securities (bonds, stocks, etc) can be deposited in lieu of cash.
- Customers must maintain margin of at least 20% of the transaction value. If, as a result of market fluctuations, the value of the deposited margin sinks below this level, the customer must deposit additional margin to bring it back up to this level.
Administrative and operational control of margin transactions
In addition to the functions/purposes set out above, margin transactions can also be used speculatively to the detriment of the market. Thus it is important that proper administrative and operational controls are in place to prevent such activities.
(1) Reports from members and disclosure of the balance of margin transactions
(a) Members' balance reports
- Daily: For issues under restriction, issues under observance, etc.
- Weekly: For all margin transaction issues
(b) Balance disclosure
- Daily: Balance of margin transactions per issue (including issues under restriction, issues under observance, etc.)
- Weekly: Balance of margin transactions per issue at end of previous week
- Weekly: Total balance of margin transactions at end of previous week (Tokyo and Nagoya Stock Exchanges)
(2) Restriction of margin transactions
(a) Designation of issues under observance
- Inform investors of excessive margin trading activities of such issues
- Daily disclosure of the balance of margin transactions
(b) Restriction of individual issues
- Triggered when the stock exchange determines that the balance of margin transactions is extraordinary excessive
- Raise the margin requirement, increase cash portion of deposited margin, restriction or prohibition of margin transactions of that issue
(c) Restriction of whole market
- In order to prevent over-heated trading of the stock market
- Raise the margin requirement, change the loan value, increase cash portion of deposited margin
<Flow Chart of Standardized Margin Transaction >