How are derivatives like covered warrants or CFDs different from the bucket shops that were made illegal in the US?
After reading up a little on the topic, the core difference seems to be that bucket shops were basically running betting pools, with everyone betting against the operator, whereas CFDs and similar derivatives are traded between speculators and the operator merely provides a market and checks the liquidity of participants. A CW seems to be a different matter that I'm not fully sure I understand (at least the description of Wikipedia seems to contradict your statement about not trade being performed on the underlying security).
Should I worry that some regulator decides that my "market maker" is an illegal gambling operation?
Not really. Nations with a mature financial industry (like Japan) invariably have heavy regulations that mandate constant auditing of institutions that sell financial instruments. In Japan, the Financial Services Agency is in charge of this. It's almost impossible that they would let an institution operate and later decide that its basic business model is illegal.
What is possible are mainly two scenarios:
- Your "market maker" goes bankrupt due to bad business decisions. See Lehman Brothers. Any financial instruments like CWs you bought from them would at that point become worthless (well, you might get some payout as a debt holder, but most likely cents on the dollar or, more appropriately, sen on the yen). This is not much different than buying bonds. CFDs might be different, as they are traded between speculators.
- The "market maker" (or rather, someone within it) commits massive fraud and manages to evade the audits while embezzling customer money. End result is the same as above except there will be less warning and higher damage.