“Contrary to that book by Thomas Friedman, the world is not yet flat — at least not in Asia,” laughs Foo-shiung Ho, the former Chicago Board of Trade (CBOT) economist and head of the Taiwan Futures Exchange (Taifex) who now runs the Futures Industry Association (FIA) Asia. “One third of global futures trading takes place in Asia, but very little of that is cross-border traffic.”
Nowhere is that more true than in the big three economies: China, India and Japan. China and India are hermetically sealed by regulators, and Japan has let private-sector in-fighting keep its futures markets from taking their rightful place on the world stage.
At the other end of the scale is tiny Singapore, where the Singapore Exchange (SGX) gets a whopping 80% of its volume from abroad. Singapore and Tokyo are also home to communication hubs for most major exchanges and connectivity providers like Chicago-based Trading Technologies International Inc. (TT), which is in the process of a massive regional hiring blitz. The build-up comes to grab business flowing among scores of regional exchanges, many of which are either wrapping up or initiating technology overhauls — and, of course, the eventual opening of China and India.
CHINA: MANY BABY STEPS
Some time in May, perhaps by the time you read these words, China will have granted 10 new licenses for brokerage houses interested in offering their customers futures on the Shanghai and Shenzhen 300 Index, the debut product of the China Financial Futures Exchange (Cffex). Under a new securities law that became effective April 15, five of those licenses will go to futures brokers and five to securities brokers.
Two of those licenses will go to Chinese brokerages that are partly owned by non-Chinese companies: one being the joint venture between ABN Amro and China’s largest retail securities brokerage, Galaxy Securities; and the other to the joint venture between Calyon and a leading Chinese futures broker, Citic Futures.
The big question, however, is: when will Schenzhen 300 futures actually start trading? It had been slated for the first quarter, then for April, and now for some time before the end of June. “If it’s delayed again, I suspect it won’t launch until the end of the year,” Ho says.
INDIA: TWO STEPS BACK
The most frustrating story in Asia remains India, where two innovative exchanges, the Multi Commodity Exchange (MCX) and the National Commodities and Derivatives Exchange (Ncdex) have done an impressive job of building national commodity platforms only to see a left-wing political victory lead to the banishment of futures on four key foodstuffs (rice, wheat, tur and urad) after prices soared in tandem with global markets (see “Do chickpeas have a future?” April 2007).
Although both exchanges have enough products to keep themselves viable, and MCX in particular has built its foundation on clones of products offered on non-Indian exchanges, the loss of these two products leaves the exchanges with little in the way of economic justification. After all, what is a futures exchange that only offers instruments for speculation?
Both exchanges have beefed up their rural education efforts to make producers and consumers alike aware of the benefits of price transparency, but it appears that forces ideologically opposed to markets of all sorts have the upper hand now. In March, an expert committee charged with evaluating the situation failed to meet an early March deadline for delivering its report. As of mid May, we’re still waiting.
JAPAN: FORCED FUSION?
The exchanges of Japan could be in for some unexpected government-mandated upheaval after Prime Minister Shinzo Abe unleashed a plan to force Tokyo’s three derivatives exchanges to sell themselves to a holding company, which the Tokyo Stock Exchange (TSE) plans to form in September ahead of its long-awaited and often-delayed public offering.
The stunning proposal grew out of the new prime minister’s desire to find out why the major financial institutions and commodity dealers of Japan transact nearly all their derivatives business in New York, Chicago and London despite the fact that their home country is still the world’s second-largest economy by most conventional measures.
Part of the answer can be attributed to history. Although Japan's securities industry was overhauled a decade ago, the commodities exchanges drew the bulk of their volume from boiler-room sales operations until 2005. Reforms implemented through the past two years put an end to that and nurtured the latest phase of a wave of consolidation begun in the mid 1990s and culminated on Jan. 1 with the Nagoya-based Central Japan Commodity Exchange’s (C-Com) acquisition of the Osaka Mercantile Exchange.
But in the short term, the reforms deprived the commodity exchanges of their prime liquidity source, and by the time Abe took office last September volumes simply weren’t paying the exchanges’ bills. Although volumes looked to be picking up at the time of our last Asia survey, they have since fallen back to unsustainable levels, and the six-year-old Council on Economic and Fiscal Policy was charged with assessing the problem.
Their diagnosis: malaise. Their prescribed treatment: The above-mentioned forced consolidation of the Tokyo exchanges, plus relaxation of some restrictions on derivatives.
The prescription was delivered via two successive front-page stories in the Nihon Keizai Shimbun (Nikkei) daily newspaper, which said the idea could become action as early as June.
The Tokyo Commodity Exchange (Tocom), the Tokyo Grain Exchange (TGE) and the Tokyo Financial Exchange (TFX) are hardly endorsing the proposal, but they are taking it seriously, largely because those members of the Council who are there to speak on behalf of the private sector were most supportive of the forced consolidation.
“When the first story broke, people were like, ‘this is interesting,’” says Mitch Fulscher, chairman of the FIA’s Japan chapter. “When the second story hit, people were like, ‘this is serious.’”
Ironically, the proposal came just as Tocom and TFX were embarking on modernization projects designed to put them on the global map. TFX, under the leadership of Shozo Ohta, is in the midst of a major technology overhaul that will see it running the most up-to-date version of LiffeConnect within a year, and volumes in its interest rate products have been rebounding since Japan abandoned its zero interest rate policy. Speaking at a panel discussion in Boca Raton, Ohta shocked the room by declaring his goal of launching a TFX IPO ahead of TSE’s, which is set for next year.
“Over the past year, the leadership of TFX has gone out of their way to welcome major institutional users and market makers that we’ve brought over to them,” says Fulscher. “It’s because they want to lure the potential algorithmic users that they’re making changes to their platform.”
Tocom hasn’t been sitting idle. Current Chairman Masaaki Nangaku has been pushing to list new products that would appeal both to foreign and domestic users, such as gold-linked ETFs, and has laid out the red carpet for liquidity providers like EWT, which joined the exchange earlier this year and has also become a member of FIA Japan.
In short, 2007 is the year these revamped exchanges were going to get to test their mettle. The TSE hardly seems like the sort of cutting-edge entity able to competently oversee three derivatives exchanges in addition to itself. Despite being the world’s second-largest securities exchange, its derivatives offerings have fallen flat. Futures and options on its benchmark Topix Index pale in comparison to the Osaka Securities Exchange’s Nikkei 225 products, and it has suffered chronic technological glitches since late 2005, and its initial public offering has been repeatedly delayed since the exchange demutualized in 2001.
On the plus side, it has agreed to share technology with both NYSE.Euronext and the London Stock Exchange (LSE), and is in alliance talks with everyone from the Chicago Mercantile Exchange (CME) to Singapore’s SGX.
The proposed forced merger comes as the nation implements its sweeping Financial Instruments and Exchange Law (FIEL), which gives more regulatory powers to the Financial Services Authority (FSA) but has been fought tooth and nail by the Ministry of Agriculture, Forests and Fisheries (MAFF), which regulates commodities, and the Ministry of Economy, Trade and Industry (METI), which shares regulation of derivatives with the FSA.
What FIEL doesn’t do is allow for the formation of a single exchange for futures and commodities. Instead, it follows the Asian model of allowing the creation a holding company like TSE Holdings, which can have commodities and securities on two separate platforms under one corporation.