Takamichi Hamada, President & CEO
Tokyo Commodity Exchange (TOCOM), established in 1984 and headquartered in Chuo-ku, Tokyo, is Japan’s largest commodity futures exchange. It has grown to be one of the world’s biggest commodities markets of late, fuelled mainly by yield-hungry retail investors in Japan.
It operates electronic markets for precious metals, oil, rubber and soft commodities. TOCOM offers futures and options contracts for precious metals (gold, silver, platinum and palladium), energy (crude oil, gasoline, kerosene and gas oil), natural rubber and agricultural products (soybeans, corn and azuki).
In March 2019, Japan Exchange Group (JPX), owner of the Tokyo and Osaka stock exchanges said that it will take over Tokyo Commodity Exchange to create an all-in-one bourse that would attract more international traders and investors. The takeover bid for TOCOM will be launched in June this year with a view to completing the transaction by October and merging the two exchanges in the fiscal year ending March 2021. According to a recent report, the transfer of most TOCOM products onto JPX platforms and the consolidation of clearing facilities is expected to be completed after March 2020.
TOCOM says that its rubber market is now more accessible and was greeted with enthusiasm from China, the world’s largest consumer, as well as Thailand and Indonesia, which are major producers.
In this exclusive interaction with Rubber Asia, Takamichi Hamada, President & CEO, TOCOM, explains the new initiatives of TOCOM. FULL TEXT:
TOCOM has a legacy of almost four decades. How do you position TOCOM in the 21st century?
The Tokyo Commodity Exchange was established in 1984 when the Tokyo Rubber Exchange was merged with the Tokyo Gold Exchange and Tokyo Textile Exchange. TOCOM has assumed an important role as a publicly regulated exchange in providing vital utilities for Japan’s economy and global businesses.
The Tokyo Rubber Exchange listed rubber futures in 1952, making it the oldest contract at TOCOM. Consistent efforts to maintain an open market has established TOCOM rubber as the global benchmark.
We continuously update the market with improved price formation, hedging tools, physical delivery and clearing. TOCOM is also improving its credit capability and invigorating the derivative market.
TOCOM and JPX agreed to combine the businesses in October 2019 to establish a “comprehensive exchange” – a one-stop-shop for financial and commodity derivatives.
This will improve the global presence of the Tokyo market and invigorate the commodity market by facilitating inflows from financial institutions, such as securities companies and banks and other global investors.
We understand that TOCOM wants to continue with public awareness programmes as well as marketing at home and abroad in 2019. Could you elaborate on this?
Attracting a diverse set of new market participants continues to be an important part of our marketing efforts. TOCOM promotes its markets to retail investors in Japan, prop firms abroad, and market participants in China and across Asian markets.
In Japan, we are increasing our efforts to attract securities and Forex (FX) brokerages, and promote commodity investment to their customers.
To reach prospective market participants abroad, we attend major commodity seminars and meet many in person. In Asia, we work closely with leading Futures Commission Merchants (FCMs) in China and Singapore to co-host marketing events and communicate TOCOM’s benefits.
With natural rubber, we encourage producers, shippers and consumers of the commodity to participate in our market.
What are the new facilities offered by TOCOM for traders and investors in recent years?
In September 2016, TOCOM’s trading system was integrated with the J-GATE derivatives trading platform, which is operated by JPX. This improved access to TOCOM markets for those who trade on TOCOM and the Osaka Exchange, the derivatives arm of the JPX.
In March 2019, we launched an off-floor trading platform to further improve our market. This platform offers trading opportunities in the selected listed commodities such as RSS, TSR, gold, platinum and crude oil outside of Exchange trading hours.
We opened a facility called “TOCOM Square” in our Tokyo headquarters in May 2016 to disseminate information to retail investors with seminars and online communications. In addition to providing effective sales and marketing, TOCOM Square also hosts television and radio broadcasts sponsored by the exchange.
Rubber as a raw material has so much importance in Asia and across the globe. How has TOCOM leveraged the scope of this commodity over the years?
Natural rubber is a versatile industrial material, and its single most important usage is in the manufacturing of tyres. Its importance has grown globally along with the dramatic increase in vehicle sales
As such, TOCOM has prioritized improving the rubber market by collaborating with industry organizations in Thailand and Singapore, as well as Japan, and updating its trading rules and regulations.
Our rigorous quality control of deliverables ensures the product meets the standards that the tyre manufacturers require. As a result, our rubber market is considered highly-reliable and is widely used for physical supply and demand adjustments as well as physical procurement.
There are other exchanges in the world which offers rubber trading. How TOCOM is different from them in dealing with the commodity?
Our efforts to maintain the openness of the market, over 60% of TOCOM rubber trading originates outside of Japan. A diverse group of participants allows TOCOM rubber to reflect the global supply and demand balance and reflect the global benchmark price.
In October 2018, we launched TSR futures to respond to the shift in the natural rubber market and to meet the industry demand.
In order to differentiate ourselves from Singapore Exchange Limited (SGX), which also lists TSR, we chose STR20 as our standard. For delivery, we adopted Free On Board (FOB) at major ports of Thailand. (FOB refers to a transaction where the seller pays for transportation of the goods to the port of shipment, plus loading costs). These contract specifications were adopted in response to the current market structure, where Thailand is the largest producer of natural rubber and China is the largest consumer.
Such contract specifications helped volume and open interest of our TSR futures develop steadily. In just over six months after the launch, the delivery volume of TSR topped that of RSS.
What is the current status of the takeover bid by Japan Exchange Group (JPX). What change will it bring in in respect of TOCOM’s structure and activities?
The tender offer is slated for July 2019 to combine TOCOM and JPX. JPX is currently performing its due diligence. The business combination will provide a comprehensive exchange, leading to improved convenience and global competitiveness and a stronger market presence.
Also, the future comprehensive exchange will help invigorate commodity markets by facilitating inflows from financial institutions, such as securities companies, banks, and other global investors, whose participation is currently limited. We also expect it will further enhance Japan’s commodity markets (i.e., the formation of price indicators, hedges against price fluctuation risks, physical delivery and clearing).
What are the new initiatives by TOCOM in the pipeline?
TOCOM plans to launch the electricity futures contracts sometime after August 2019.
The electricity futures market is expected to support an essential part of Japan’s energy policy. We will open trading as soon as we receive regulatory approval and develop a firm market. Due to the recent market reforms, liberalization is making significant progress in Japan’s electricity market. It is now the largest single liberalized market in the world and we expect our electricity futures to have strong growth potential.
Going forward, we will focus on three important initiatives. First, we are planning to launch electricity futures. This project is nearing fruition, with the understanding that it will support an important part of Japan’s industry and economy. Second, along with JPX, we will consider consolidating stock and commodity markets. We will consider whether consolidation will enhance market access and reliability and whether it would contribute to the expansion of the commodity market and industry. We will move forward if such needs can be met. Third, we plan to support AI-based automated commodity trading, known as “robo-advisor” services. The technology will be available to FCMs and is expected to attract less-experienced investors.
Last year TOCOM’s total trading volumes fell below 24 million contracts, less than a third of a record 87 million contracts traded on the exchange in 2003. Trading volumes have dwindled since 2005. What are your comments on this? Do you expect any turnaround in the immediate future?
Our market suffered declines in volume after 2003 from rigid regulations against solicitation, which hurt the commodity futures industry and caused a significant decrease in trades by retail investors.
To restore volume, we introduced a world-class trading system, updated rules and regulations and strengthened our marketing activities. We have successfully broken the declining trend in volume and now aim for a strong recovery.
Also our plan for a comprehensive exchange with JPX supports a strong turnaround. The comprehensive exchange, which offers a range of derivatives products, will help improve the usability and global competitiveness of the Tokyo market. We expect to see inflows from financial institutions, such as securities companies, banks, and other global investors. We also expect the consolidated clearinghouse will further enhance credibility and attract new market participants.