Japan's Commodity Exchange System - A Comprehensive Market

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Abner Strickland
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1 Midterm Management Plan (Fiscal ) March, 2014 Tokyo Commodity Exchange, Inc.

2 Principle Management Strategy 2 Move quickly to enhance liquidity with initiatives that increase volume to deliver sufficient market functions and to create a solid business foundation and financial base. In addition, prepare new energy products, including LNG and electricity futures to our existing oil products. This should establish TOCOM as a comprehensive energy market with fair price indicators that contribute to a more stable energy supply and demand situation in Japan. Continue to study the situation surrounding the comprehensive exchange to decide if TOCOM participation supports commodity futures industry growth. Business Environment Intensifying competition with other exchanges in Japan and overseas Risk money shifting between markets Demand for a marketplace that contributes to a stable supply of energy in Japan Improvements in the situation for establishing the comprehensive exchange

3 Priority Initiatives 3 1. Initiatives to Increase Volume (1/3) (1) Attract a wide range of new market participants 1 Attract new market intermediaries and General Clearing Participants Strengthen sales efforts to internet-based securities firms and global financial institutions 2 Attract new market participants Bolster sales activities targeting retail/institutional investors, financial institutions and commercials Move forward with overseas marketing activities Drive forward collaborative efforts with other exchanges Engage in educational activities for retail investors 3 Work more closely with existing Members Continue supporting Broker Member marketing efforts. Increase support of efforts to improve the skills of sales representatives 4 Increase trade volume of existing market participants Follow-up with initiatives related to existing market participants

4 Priority Initiatives 4 1. Initiatives to Increase Volume (2/3) (2) Enhance the product portfolio 1 Invigorate existing markets Redesign existing contracts to better suit needs of market participants Revitalize products other than gold; i.e. oil, rubber and agricultural products & sugar 2 Develop new contracts Consider introducing international products listed jointly with overseas exchanges (e.g., crude oil) Continue researching copper and emissions trading 3 Prepare for the launch of the comprehensive energy market Consider launching electricity and LNG futures contracts Research LPG and coal trading Bolster linkage with OTC markets collaborating with JCCH (OTC clearing) and JOE (OTC transaction intermediary) (3) Further improve market convenience and reliability Review various rules and procedures Move to optimize Japan s tax and accounting framework where it hinders the development of commodity futures markets Improve the convenience and reliability of trading and clearing systems Monitor markets in a manner appropriate for increasing the diversity and sophistication of transactions

5 Priority Initiatives 5 1. Initiatives to Increase Volume (3/3) Primary Objectives Among the aforementioned three initiatives to increase volume, the actions below are prioritized to attract more retail investors, prop firms and high frequency traders (HFT) that can contribute the most to trading volume at TOCOM: 1. For Retail Investors i. Attract equity investors ii. Coordinate with regulatory authorities to relax severe restrictions on solicitation to retail investors 2. For Prop Firms and HFT i. Improve market accessibility ii. Develop collaboration with other exchanges 3. Redesign Gold Options Decisions need to be made based on Members technical readiness for trading options and prospects for participation, as well as the estimated time to develop systems at the Exchange itself. How much time until a transfer to the next generation trading platform also needs to be considered.

6 Priority Initiatives 6 2. Initiatives for Trading System Revamp Consider use of a trading platform of another exchange while taking measures to continue use of the existing system 3. Initiatives for Further Cost Reductions Explore options for a next generation trading system with lower costs Continue to work through cost reduction efforts 4. Initiatives for Compliance with New Global Regulatory Frameworks Develop a structure in compliance with the new regulatory frameworks that have been strengthened in the U.S. and EU.

7 [Reference] Fiscal 2014 Business Plan 7 1. Initiatives to Increase Volume (1) Attract a wide range of new market participants 1 Attract new market intermediaries and General Clearing Participants Target internet-based securities firms, FX and CFD brokers to bring in retail investors Target global financial institutions to bring in overseas institutional investors acting as FCMs, remote brokers and clearing brokers 2 Attract new market participants [Domestic] Bolster sales activities targeting institutional investors, financial institutions and commercials Co-sponsor retail investors seminars with financial exchanges and FCMs Provide enriched market information to retail investors Work with investment trusts and securities companies to promote TOCOM products as components of ETFs and other financial instruments, and to assist their marketing efforts for ETFs and investment funds Continue ongoing marketing communication efforts utilizing IT and various other media to improve public perception of commodity futures trading Continue offering lectures at universities and other institutions to foster an understanding of the commodity futures market [Overseas] Move forward with marketing activities, such as regular events and communication initiatives to prop firms, institutional investors, commercial players, etc. Address tax issues to facilitate utilization of proximity services Work with foreign regulatory authorities (U.S., Singapore, etc.) to provide direct market access Drive forward collaborative efforts with other exchanges

8 [Reference] Fiscal 2014 Business Plan 8 3 Work more closely with existing Members Support Broker Members with marketing efforts for retail investors and commercial interests by cohosting seminars and offering webinars Maintain closer contact with Members to share information and incorporate their needs Assist with efforts to improve the skills of sales representatives 4 Increase trade volume of existing trade participants Enhance follow-up initiatives through closer communications with market participants to encourage trading (2) Enhance product portfolio 1 Consider redesigning listed contracts to better suit needs and convenience of market participants Strengthen efforts toward market revitalization of products other than gold, i.e. oil, rubber and agricultural products & sugar 2 Develop new contracts Consider listing international commodities, such as crude oil, jointly with overseas exchanges Study the introduction of copper futures and emissions trading, etc. 3 Prepare for the launch of a comprehensive energy market Consider listing electricity futures while closely observing the discussion on the liberalization of electricity trade by the METI Move ahead on study of listing LNG futures while keeping an eye on the discussion by the LNG futures market council Consider the introduction of LPG and coal Make OTC clearing services of JCCH and OTC intermediary business of Japan OTC Exchange viable. Consider opportunities for collaborative efforts with other exchanges to enhance the reliability and liquidity of the energy market

9 [Reference] Fiscal 2014 Business Plan 9 (3) Further improve market convenience and reliability Update trading hours to offer more opportunities during an active trading time zone in Europe by shifting the night session start to 15:15 JST / 6:15 GMT (previously 15:30) and close at 16:30 JST / 7:30 GMT (previously 17:00) (effective as of July 22, 2014) Adjust the First Trading Day for a New Contract to start from the night session immediately following the Last trading Day of the current contract month, to increase trading opportunities (effective on July 22, 2014) Promote spread trades to coincide the introduction of SCO on inter-commodity spreads in the Oil Market on March 24, 2014 Improve remote membership (scheduled for March, 2014) and implement promotional activities Review various rules and procedures, based on requests from trading participants, to improve market convenience Support the optimization of Japan s tax and accounting framework where it is hindering the development of commodity futures markets Monitor markets in a manner appropriate for increasing the diversity and sophistication of transactions 2. Initiatives for Trading System Revamp Pursue considerations for using the trading platform of another exchange while taking measures necessary to continue the use of the existing system 3. Initiatives for Further Cost Reductions Explore options of a next generation trading system that enables significant cost reductions Continue to work through cost reduction efforts 4. Initiatives for Compliance with New Global Regulatory Frameworks Develop a structure in compliance with the new regulatory frameworks that have been strengthened in the U.S. and EU.

Midterm Management Plan (April 2010 March 2013) TOCOM

Midterm Management Plan (April 2010 March 2013) TOCOM 1 1. SWOT Analysis (1) Strengths TOCOM s Strengths An Asian commodity futures market with high liquidity Listed commodities (gold, platinum, rubber)