The Entrusted Securities Indemnity Fund
In 1968, Japan established the Entrusted Securities Indemnity Fund to protect investors in the case that a securities firm became insolvent. Up until 1996, the Entrusted Securities Indemnity Fund did not have to pay out any compensation to investors. However in 1997, there were four cases where investors had to be compensated, followed by another three cases in 1998.
Most notable among these cases were the 1997 bankruptcy of Sanyo Securities, which resulted in a payout of about ¥36.1 billion and a net cost after asset recovery of approximately ¥28.7 billion, and the failure of Maruso Securities in the same year, which resulted in a payout of about ¥10.1 billion and a net cost after asset recovery of approximately ¥7.2 billion.
Note. The Entrusted Securities Indemnity Fund did not have an indemnification cap of ¥10 million like the Japan Investor Protection Fund and all assets held in trust were eligible for compensation.
Reorganization into the Japan Investor Protection Fund
Against the backdrop of a change in the requirement for entering the securities business in Japan from a licensing to a registration system, competition intensified in the securities industry. Based on the assumption that greater competition would result in an increased number of securities firms being forced out of the market, as one step toward improving the industry environment, the Entrusted Securities Indemnity Fund was dissolved in a 1998 revision of the Securities and Exchange Law and replaced with the Japan Investor Protection Fund (JIPF). The revision established JIPF as a corporation under the Securities and Exchange Law, introducing an investor safety net framework for the industry.
On December 1, 1998, the same day that JIPF was established, a group of mainly foreign-affiliated securities firms formed the Securities Investor Protection Fund, which existed in parallel with the JIPF for some time. However, in July 2002, these two funds were consolidated into the current JIPF.
Segregated Custody Obligation
To ensure that customer’s assets being held by securities firm would be returned to them in the event that the firm went bankrupt, the 1998 revision of the Securities and Exchange Law made it obligatory for securities firms to manage their proprietary assets and assets being held in trust for customers separately (hereinafter referred to as the “segregated custody obligation”).
More specifically, with regard to securities, securities firms had to not only carry out management of proprietary assets and customer assets on a segregated basis using a clear and orderly asset management method, the firms also had to calculate and deposit the monetary equivalent of the customer assets in custody that would have to be returned should the securities firms decide to terminate or discontinue their securities business. Moreover, this amount had to be deposited in trust with a trust banking or similar company in Japan.