The Third "Market System Working Group" on Insider Trading & Market Manipulation
Japan’s Financial Services Agency took a decisive step toward tightening the reins on capital market misconduct today as the Financial System Council’s Market System Working Group convened to finalize its draft report. In a session characterized by broad consensus among legal experts, academics, and industry representatives, the council outlined a comprehensive regulatory overhaul designed to modernize Japan’s insider trading rules and significantly stiffen financial penalties for market manipulation. The meeting, which effectively concluded the group's current deliberations, signals an imminent legislative push to enhance market transparency and align Japan’s enforcement capabilities with global standards.
The centerpiece of the draft report is a substantial expansion of the scope of insider trading regulations. The working group has recommended that the definition of "corporate insiders" be broadened to include external advisors, officials of parent companies based on actual control rather than just financial statements, and asset management companies of Real Estate Investment Trusts (REITs). This move addresses long-standing gaps where individuals with clear access to material non-public information fell outside the technical boundaries of existing regulations. Furthermore, the report proposes a more aggressive approach to calculating administrative monetary penalties for insider trading. Rather than relying solely on realized gains, the new methodology would factor in the average rate of share price increases following a material announcement, ensuring that the financial consequences for violators more accurately reflect the economic impact of their actions.
A significant portion of the session focused on the integrity of large shareholding reporting and the suppression of high-frequency market manipulation. Addressing the so-called "wolf pack" tactics and stealth accumulations of stock, the council endorsed a drastic increase in surcharges for failing to submit or falsifying large shareholding reports. Under the new proposal, the basis for calculating penalties would effectively increase tenfold, shifting from one-hundred-thousandth to one-ten-thousandth of the market value of the shares involved. Additionally, the group targeted the issue of "name lending"—the practice of using another person's account to hide trading activity. Violators who facilitate such unfair trading by providing accounts could face surcharges calculated at 1.5 times the standard rate, a move intended to dismantle the infrastructure that supports anonymous market abuse.
The working group also threw its weight behind expanding the investigative powers of the Securities and Exchange Surveillance Commission (SESC). The draft report calls for granting authorities the legal power to compel testimony during investigations, a tool necessary to cooperate effectively with international counterparts under agreements like the IOSCO Multilateral Memorandum of Understanding. Furthermore, the council emphasized the need to grant criminal investigation powers regarding unregistered financial operators, a sector that committee member and attorney Yuichiro Sakai noted is often linked to organized crime and money laundering. To modernize enforcement, the report also advocates for the digitization of criminal investigation procedures and the establishment of a system to protect and return customer assets when financial instrument business operators exit the market.
While the committee members largely endorsed the draft, several voiced the need for continued vigilance and future refinements. Member Akiko Nomura noted that while deeper theoretical discussions on the basis of surcharge calculations were deferred, the immediate practical changes were vital to address current crises. Similarly, committee member Ryoko Ueda and others highlighted the importance of strictly defining "secondary recipients" of information to avoid chilling legitimate market analysis while still catching bad actors. With the draft report now moving toward finalization, the Financial Services Agency is expected to use these recommendations as the blueprint for legal amendments in the coming year, aiming to fortify investor trust in Japan’s push to become a leading asset management nation.
Norbert Gehrke
