Japan's Financial Services Agency has opened public comment on a narrow but practically important fix to the rulebook governing in-kind exchange-traded fund creation. The draft Cabinet Office Order, published July 28, adds a third exception to Article 19, Paragraph 5 of the Regulation for Enforcement of the Act on Investment Trusts and Investment Corporations. The current rule already allows two narrow cash substitutions when building a physically backed ETF basket; the amendment adds a third, and it is the one that matters for anyone assembling a creation unit near a controlling stake.
The mechanism the FSA is fixing
Contributors building an in-kind ETF basket normally hand over a fixed lot of each underlying stock, in proportion to its weight in the index. Under the draft text, if a contributor does not already hold enough of a particular stock, and would need to make a "purchase, etc." of that stock, as defined under the tender-offer provisions of Article 27-2, Paragraph 1 of the Financial Instruments and Exchange Act, in order to respond to the ETF's creation-unit offering, the new exception kicks in whenever that purchase would push the contributor's ownership ratio in the stock past 30% after the purchase, or when the contributor's ownership ratio is already above 30% before responding to the offering. In either case, the contributor may instead pay cash, calculated at the stock's valuation amount, plus the expenses the trust needs to acquire the shares itself.
The 30% line is the trigger for Japan's mandatory tender-offer regime. Without this carve-out, a contributor topping up its holding of a thinly held constituent, purely to complete a routine ETF subscription, could find itself obligated to launch a full public tender offer for that stock. The draft order lets the contributor sidestep that obligation by writing a cheque instead of buying the shares outright.
What happens next
The FSA is taking comments through 17:00 JST on August 28, 2026, submitted by post or through the government's e-Gov portal; phone submissions are not accepted. After the comment window closes, the agency plans to proceed through the standard promulgation and enforcement steps, though it has not set a specific effective date. The excerpt supplied does not name which index funds, market makers, or authorized participants prompted the change, and the packet does not indicate whether any ETF creation has already run into this tender-offer trap in practice.
For fund operators and authorized participants who build Japanese ETF baskets in kind, the practical takeaway is straightforward: once finalized, the rule removes a compliance dead end that previously had no clean exit other than either forgoing the creation or triggering a tender offer neither side wanted.