Japanese Foreign Exchange and Foreign Trade Act Rules: Explained
This article discusses the Japanese Foreign Exchange and Foreign Trade Act Rules.
- Investor Types- Definitions
- Issuer Categorisation
- Using the rules
- Important Notes
The Japanese Ministry of Finance (“the MoF”) has undertaken a major overhaul in its foreign investment regime. The Foreign Exchange and Foreign Trade Act (“FEFTA”) is now the overarching foreign direct investment regime governing disclosures in Japanese issuers.
FundApps now support coverage of this regime within our Sensitive Industries rules package. You can learn more about Sensitive Industries here.
The FEFTA regime differentiates its disclosure thresholds for three different types of investors: Foreign Financial Institutions, General Investors, and State-Owned Enterprises. Additionally, the regime categorizes Japanese issuers into one of three types, which will dictate the threshold at which pre-approval and/or disclosure obligations arise. We have summarised the definition of each type of investor below - more detailed descriptions can be found starting on page 4 of this document published by the MoF.
Investor Types - Definitions
Foreign Financial Institutions
This includes Securities Firms, Banks, Insurance Companies, Asset Management companies, Trust Companies, Registered Investment Companies (including mutual funds and exchange-traded funds) and High-frequency Traders.
This includes Sovereign Wealth Funds and Public Pension Funds accredited by the Japanese authorities.
This includes State-Owned Enterprises and those investors with a record of sanction, due to a previous violation of the FEFTA.
As previously mentioned, the MoF has categorised all Japanese issuers into three different groups. This includes Non-Core Designated Business Sectors, Core Designated Business Sectors and a third list which is a combination of the two. These groups are published by the MoF in separate lists with issuers attributed to their respective ISIN.
FundApps monitor the lists and house the issuers in value sets within FundApps.
Using the rules
Our existing Sensitive Industries clients will have access to the Japan FEFTA rules as part of their current subscription.
They will identify the Investor Type (see available choices above) that describes their firm as a whole. For the avoidance of doubt, only one Investor Type should be chosen which describes a firm overall. This will determine which threshold obligations apply as a foreign investor in Japanese securities. Without any guidance from aosphere, the rules will only run on the Top level entity. Further details on the values corresponding to Investor Types can be found in our article on CompanyType, which is the FundApps property where these values can be specified. In addition, clients can find authoritative definitions directly from the MoF publication.
Additionally, existing clients should provide the ISIN of any securities held in Japan. This is to allow the rules to call upon the three issuer lists monitored in-house by FundApps, and apply the correct reporting obligations for that issuer depending on its sensitivity as determined by the MoF. The lists of issuers can be found as a value set within FundApps under the name JPFEFTAIssuers. Note: Some issuers are named as “-”. These English names will remain as “-” within the value set, as this is how they are represented by the MoF. These issuers are still distinguishable by ISIN but will require attention when making disclosures. If any discrepancies are found in the list these should be raised with the MOF as they are responsible for the list.
To cover the FEFTA regime in FundApps we have coded 7 new rules:
- State Owned Investors - Pre-Approval (All Issuer Groups)
- State Owned Investors - Threshold Disclosure (All Issuer Groups)
- General Investor - Threshold Disclosure (Group 1 Issuers)
- General Investor - Threshold Disclosure (Group 2 Issuers)
- General Investor - Threshold Disclosure (Group 3 Issuer)
- General Investor - Pre-Approval (Group 3 Issuers)
- Foreign Financial Institution - Threshold Disclosure (All Issuer Groups)
The Existing Sensitive Industries: Japan rules
We would recommend that clients of the Sensitive Industries service still provide GICS codes for their securities listed in Japan. This is because there are still separate industry-specific restrictions that fall outside of the FEFTA regime Separate disclosures will still have to be made to the Ministry of that particular industry.
How does this obligation relate to sensitive industries?
The list of issuers is derived from sector-related concerns (including national security). In addition, the regulation is also focused on foreign ownership, which aosphere includes in the sensitive industries section of their memoranda.
Our legal information provider, aosphere (an affiliate of Allen & Overy) provide limited support on the FEFTA regulations. We have been in contact with both the Bank of Japan and the MoF to seek clarity where possible and have included this in our rules, but this remains at FundApps’ discretion. Similar to the Shareholding Disclosure service, we will continue to support updates to the Japan FEFTA rules as and when aosphere update their memoranda.
We cannot determine which specific assets are to be included in the Japan FEFTA rules package given ambiguity on this aspect in the legal information, so we've made this decision on a reasonable efforts basis.
Total Share Capital vs Total Voting Rights
The thresholds relate to either the percentage of total voting rights or total shares outstanding, whichever is greater as per the Aosphere guidance.