From the November 01, 2008 issue of Futures Magazine • Subscribe!

Japan: Chicago Cubs of futures?

“Being a Cubs fan is like being in an abusive relationship,” says Cubs fan Mary Lou. “You keep thinking, ‘They’re going to change! They’re going to get better…’”

And they do get better — frustratingly so, tantalizingly so, painfully so — right up to that inevitable moment each year when all that promise inexplicably evaporates.

It’s a cycle familiar not only to fans of Chicago’s beleaguered baseball team, but also to anyone working in the futures sector of the world’s second-largest economy, which has been in a perpetual state of reform since 2004. First came the launch of the Japan Commodity Clearing House (see “The many faces of Asia,” Futures, June 2006), followed by the 2005 Commodity Exchange Act (CEA) and the ensuing crackdown on boiler rooms and overhaul of the commodities segment, a series of botched technology upgrades and a grand initiative launched early last year by then-Prime Minister Shinzo Abe to catapult Japan’s exchange sector to its rightful place in the global trading network (see “Asia: Almost here,” Futures, June 2007).

More than a year later, Abe is gone and Japan stands alone. In an era of demutualized high-tech derivatives exchanges, its own exchanges, by contrast, are member-owned and technologically clunky. They’ve seen volumes stagnate and even decline in a period of global largesse.


Mitch Fulscher says the country’s malaise has been overstated. A resident of Japan since 1986 and head of FIA Asia since late 2006, he says he’s bullish on Japan’s futures sector.

“People from the U.S. have been asking me for years if it’s the right time to come to Japan, or not,” says Fulscher. “Until now, my answer has always been ‘not yet,’ but now I feel confident saying, ‘any day now.’”

He rattles off a variety of reasons for optimism: some of the exchanges are finally embracing top-notch electronic trading platforms provided by Liffe Connect and Nasdaq OMX; attendance soared at September’s FIA Asia meeting, held for the first time in Japan; and algorithmic traders are finally showing an interest in the Japanese markets.

But what really gets him excited is the commitment that regulators like the Ministry of Economy, Trade and Industry (METI) and the Financial Services Agency (FSA) have shown in forcing the sector to implement the changes mentioned above.


“Regulators usually try to slow things down,” says Fulscher. “But in this case they’ve given a kick in the butt to these exchanges to get them to quit horsing around with the politics and get on with business.” Indeed, FSA Commissioner Takafumi Sato himself addressed the FIA Asia conference on Sept. 18, and outlined further steps towards reform — both within his agency and within exchanges themselves.

The agency, he said, was going to remove restrictions on direct access from abroad to Japanese exchanges, as well as restrictions on information flows within brokerage houses.

“These steps should enable financial groups to better serve their customers by allowing them to propose a wide range of alternatives at one time, and will facilitate integrated risk management within a financial group,” he said. “This relaxation will take place by June next year.”

He also says that, subprime crisis or no subprime crisis, the FSA will relax restrictions on the types of business that banks can participate in, and that Japanese banks will be able to own futures subsidiaries as early as December.

METI and the FSA also are taking an active role in beefing up the exchanges themselves.

“The measures we have in mind are: developing and accumulating internationally competitive human resources in the areas of finance, law, accounting, etc.; and enhancing urban functions to levels suitable for an international financial center,” Sato said. “By taking these actions…we intend to enhance the overall attractiveness and quality of Japan’s financial and capital markets.”


The Tokyo Commodity Exchange (TOCOM) is wrapping up a five-year makeover of the entire commodities sector after taking a leadership role in cracking down on the boiler room retail operations that provided the bulk of its volume before the CEA was implemented in 2005. But the exchange remains membership owned, and its technology is far from cutting edge. Algorithmic traders have thus not stepped in to fill the gap left by retail traders.

That’s all set to change beginning with demutualization on Dec. 1 and accelerating five months later, when the exchange fires up its new Nasdaq OMX trading engine. The new technology will come with longer trading hours, easier access for algorithmic traders, direct access from abroad (assuming the FSA makes its own regulatory adjustments), and a shift from price limits to circuit breakers.

To attract hedgers, the exchange has increased position limits for commercials in most of its markets, a key factor in the decision by Nippon Oil and Idemitsu Kosan to join as full members this year.

To attract foreign hedgers, the exchange has created a so-called “associate membership,” which offers indirect access to non-Japanese commercials, a membership that they hope to be able to convert to direct access some time after May. Launching this category now has made it possible for them to attract commercials from across Asia, especially in the rubber market, where 26 associate members have joined as of press time.

To attract algo traders and other liquidity providers, the exchange introduced a volume discount fee program earlier this year and will add a colocation service that allows black-box traders to install their trading servers on site when the new trading system is up. They’re also thinking of introducing a market maker program.

On the product front, the exchange launched mini-futures on its gold contract last year, and is looking at expanding that strategy into other existing products, beginning with platinum. It’s also investigating new commodity contracts such as liquefied petroleum gas, fuel oil, and coal futures, as well as index futures based on the TOCOM Commodities Index. The exchange also is considering developing commodity-linked ETFs in collaboration with the Tokyo Stock Exchange (TSE) and the Osaka Securities Exchange (OSE).


Both the TSE and OSE have entered into arrangements with established global players.

In the case of TSE, that player is Euronext Nyse, whose Liffe Connect trade-matching subsidiary is building the new Tdex+ trade-matching engine, set to go live in the early first half of 2009 as a prelude to beefing up TSE’s derivatives segment (a move the FSA has not been shy about promoting).

The system will make it possible for TSE to support state-of-the art market-making functionality in its new options segment, an area that exchange boss Atsushi Saito says is underdeveloped.

The OSE, meanwhile, remains Japan’s largest futures exchange, thanks to the continued success of its flagship Nikkei 225 futures contract, which recently celebrated its 20th anniversary by signing a memorandum of understanding (MoU) with the CME Group that could eventually give members of both exchanges direct access to each other’s products and has even sparked talk of an eventual mutual offset.

“These MoUs are usually a dime a dozen,” says Fulscher. “But this one has the potential to deliver.”

It’s still, however, not clear what technology OSE will use. They had agreed to build a joint options platform in cooperation with the International Securities Exchange (ISE), but terminated that agreement in August and announced they were putting together a team to go it alone.


The Tokyo Financial Exchange (TFX), like TOCOM, has actually seen its volumes drop this past year — largely because its flagship product is based on the country’s benchmark short-term interest rate, and the Bank of Japan’s policy rate has already fallen to 0.5%.

Indeed, it was the long period of absolute zero interest rates that prompted the exchange to launch an OTC currency platform for retail traders in 2005.

That currency platform has become an unqualified success, and the exchange also is researching other new products as well but continues to play it close to the chest.

“Japan has the potential to become the second-largest financial futures market in the world,” says Fulscher. “It’s just a question of whether they can execute everything that they say.”

And if that “if” looms large, let’s not forget that the Chicago exchanges seemed to be on the ropes just a few short years ago. They demutualized, electronified and are doing quite well. Now, if the city can only get its baseball house in order.

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