Last month exchange leaders and market participants from around the world travelled to Chicago for the FIA Expo. Ryoichi Seki, senior vice president, global business development at the Tokyo Commodity Exchange flew in from Japan and sat down with JLN Metals editor Sarah Rudolph to talk about TOCOM’s newest developments, strategies for growth, challenges to the metals industry, and regulatory changes in Japan.
Q: TOCOM announced that it would add a suite of agricultural products from the Tokyo Grain Exchange to its lineup and launch an agricultural market in February of 2013. Which products will you add when you take over the Tokyo Grain Exchange?
A: We will be adding soybeans, azuki beans, corn and raw sugar. The other listed product at TGE, the rice contract, will be going to the KANEX (Kansai Commodities Exchange).
When we launch this agricultural market next year, the contract specifications will be almost the same as at the current Tokyo Grain Exchange, except the trading hours will be extended until 4 a.m. Both the metals and energy contracts end at 4 a.m., so our agricultural products will be aligned with those markets. Only the rubber market is an exception – it ends at 7 p.m.
Those four agricultural products are actually already traded on TOCOM’s platform, the Nasdaq OMX CLICK XT, which we have been using since May of 2009. TGE migrated to our trading platform in January of 2011, and now the ownership of the market will change from TGE to TOCOM.
Q: There are currently three commodity exchanges in Japan, and you are by far the largest one?
A: Yes, there are TOCOM, TGE and KANEX. In terms of trading volume, TOCOM accounts for more than 90% of overall trading volume in Japan.
Q: TOCOM introduced night trading sessions in May 2009 and extended them to 4 am in Sept. 2010. How has night trading benefitted the exchange and its customers?
A: We intended to broaden trading opportunity for our market participants who trade our gold, platinum and crude oil, in particular. These contracts are internationally traded, so we aimed at facilitating arbitrage between these contracts and Comex gold futures, WTI at Nymex, or the Brent crude oil markets at ICE Futures Europe. We have seen an increase in the number of trades during the night session, around the closing of the European market and the opening of the U.S. market. That’s where most of the activity is concentrated. The highest volume occurs in the opening of each session, and also increases when European and U.S. trading hours overlap.
Q: Volumes have been up and down in metals lately. Do you have a strategy to increase volumes either in general or to attract particular customers?
A: As a strategy to increase volumes in general, we provide a market maker program and a volume discount program.
Also, in order to promote arbitrage between our gold/platinum standard contracts and gold/platinum mini contracts, we have recently changed the contract specs for the mini contracts. From December 25, 2012 with the commencement of trading of the December 2013 contract, the final settlement price fixing of the mini contracts will be based on the opening price of the day session on the last trading day of the standard contract of the respective commodity. This will replace settlement price fixing that is based on the settlement price on the final settlement day, which is calculated as volume weighted average.
As a result of this change, market participants will know the final settlement price of the mini contract, which means they have clearer indications for performing arbitrage, before trade of the standard contract is finalized. Also, the new final settlement price fixing is based on an actual price, therefore there will always be a chance that the prices of standard and mini contracts correspond to one shared price on the opening of the day session of the last trading day.
Q: What are the biggest challenges ahead for the metals industry, gold and platinum in particular, in the current climate? For example, there has been a lot of trouble and uncertainty in gold and platinum mining.
A: For our commercial participants, what happens in the fundamental markets affects what happens in the cash markets and influences how they trade in the futures market. If there is high volatility, they need to hedge their activities in the cash market, so they use our market to hedge. Speculators and high-frequency traders also make up a great part of the market, but we cannot tell which players are taking a particular view.
Q: What percentage of trading at TOCOM is done in Japan and what percentage comes from abroad?
A: About 30 percent of our trading is coming from abroad, and we are seeing that trade increasing. In our rubber contract, more than 50 percent of trading is coming from abroad. By country, most of the foreign trade comes from Hong Kong, but that does not necessarily mean these trades originate there, because many U.S. and European institutions have bases there for trading in Asia.
Q: Does TOCOM have plans to merge with the Tokyo Stock Exchange and the Osaka Securities Exchange?
A: We are considering a few options. One is to join the Japan Exchange Group, which TSE and OSE are jointly creating. The other options are to partner with other exchanges or remain standing alone. We are considering the merits of each option. What is best for the commodity derivatives market is our top priority.
TSE has financial derivatives, but is more inclined to cash equity, whereas OSE has the very active Nikkei 225, and is more focused on the derivatives side. The components of their contracts are almost the same, so this merger will combine two exchanges into one cash equity plus financial derivatives market. Whether we will join them has not been decided.
Q: If TOCOM did join with TSE and OSE, how many exchanges would exist in Japan?
A: We do have a Tokyo Financial Exchange, and there are several regional stock exchanges. So there would be a few exchanges left. The majority of the financial trades would be done on the Japan Exchange Group.
Q: How is the commodity derivatives market in Japan evolving?
A: Japan’s commodity derivatives market declined after the volume peaked in 2003 due mainly to the tightening of regulations by the government. The way brokers can solicit retail investors was restricted. Because retail investors used to account for a considerable proportion in market participation, the stricter regulations restrained liquidity and volume in the commodity market. That is one of the reasons why we turned our focus to attracting institutional investors, particularly abroad, and one of the reasons we introduced the Nasdaq OMX trading platform in May of 2009. It had been used in other exchanges such as the Singapore Exchange. We wanted to make it easy for foreign customers to take part in the market. We also extended the trading hours for international traders. We have been successful in this, and are still focusing on reaching out to foreign customers. At the same time, we need the Japanese players, who are our core participants.
Q: Was tightening the rules for brokers the biggest recent regulatory change?
A: No, that change took place some years ago and the policy has been relaxed more recently in order to stimulate the growth of Japan’s commodity market. Another important regulatory change makes it possible for commodity exchanges like ourselves to join with financial exchanges like the TSE and OSE. Previously, it had been very difficult for exchanges to merge. There was a strict distinction between financial instruments and commodities, and two different regulatory authorities for the two. This change paves the way for breaking down the regulatory silo structure that existed in the Japanese derivatives market and enables Japanese exchanges to become comprehensive exchanges trading all types of cash and derivatives contracts, including commodities, under the oversight of one regulator.
Q: What did you come away with from your meetings with market participants here in Chicago?
A: What we hear from U.S. and European market participants is that the tightening of regulations in the U.S. and the financial crisis in Europe have prompted them to look for new opportunities, and they are looking to the Asian markets for that. In the past, the degree of regulation was relatively higher in Japan than in the US or Europe and it discouraged some traders from taking part in our market. But now the situation has changed and there is less ambiguity in regulatory policy in Japan. As far as the regulatory environment goes, I think Japan has advantages in offering a stable condition to global market participants.