FIA-ASIA DERIVATIVES CONFERENCE BEIJING CHINA AUGUST 11, 2005

FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005

JAPAN COMMODITY MARKET:

VISION FOR GLOBALIZATION

AND REORGANIZATION

Mitch R. FulscherChairman

FIA-Asia Committee

MAY DAY – 2005“BIG BANG” …FINALLY

NEW LAW ENACTED

ESTABLISH COMMON CLEARING HOUSE

INTERNATIONALIZATION

FIA-ASIA DERIVATIVES CONFERENCE BEIJING CHINA

JAPAN COMMODITIES INDUSTRY: VISION FOR GLOBALIZATION AND REORGANIZATION



NEW LAW

Stronger Net Capital Rules for Brokers

Protection of Customer AssetsCustomer Sales Practices RulesModernize Exchange Structure



INTERNATIONALIZATION OF JAPAN

COMMODITY MARKET


Japan Commodity Clearing

HouseCo., Ltd.

NOGUCHI, Nobuya Executive Vice President, JCCH

JAPAN COMMODITIES INDUSTRY: VISION FOR GLOBALIZATION ANDVISION FOR GLOBALIZATION AND REORGANIZATIONREORGANIZATION



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ＴＧＥＴＯＣＯＭＹ - ＣＯＭＣ - ＣＯＭＫＡＮＥＸＯＭＥＦＦＥ

ＪＣＣＨ

Ｃｌｅａｒｉｎｇ　ＰａｒｔｉｃｉｐａｎｔｓＣｌｅａｒｉｎｇ　Ｐａｒｔｉｃｉｐａｎｔｓ



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1. A common clearing house for all the seven commodity futures exchanges.

No direct trading relationship between Sellers and Buyers.

No counterparty credit risk.

2. Clearing participants can net all the profits/losses by marking to the market.

3. Clearing processes as a whole become more speedy and simple.



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4. JCCH collects margins from clearing participants. (Segregation of Funds)

(1) Clearing Participants deposit Customers’ margins with JCCH by cash or securities. Customers have a privilege to claim the credits of margins to JCCH when a Clearing Participant defaults.

(2) Substituted (Replacement) Deposit is also available for FCMs(clearing participants) with the written consent of customers.

Ｃｌｅａｒｉｎｇ　Ｐｒｏｃｅｓｓ



FCM A

FCM B

Ｔｒａｄｉｎｇ

【ＥＸＣＨＡＮＧＥ】

Ｃｏｍｍｏｄｉｔｙ　Ｍａｒｋｅｔ

【ＥＸＣＨＡＮＧＥ】

FCM A

FCM B

Ｔｒａｄｉｎｇ

Ｃｏｍｍｏｄｉｔｙ　Ｍａｒｋｅｔ

【ＣＨ】

ＪＣＣＨ

FCM A－６０＋４０＝－２０

Ｃｌｅａｒｉｎｇ　Ｍｅｍｂｅｒ

－６０

＋５０

－３０

＋４０

－２０

Ｃｌｅａｒｉｎｇ　Ｍｅｍｂｅｒ

FCM 　Ｂ－３０＋５０＝＋２０

＋２０

ＴｒａｄｉｎｇＣｌｅａｒｉｎｇＮｅｔｔｉｎｇＭａｔｃｈｉｎｇ

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JCCH OverviewDate of Incorporation: December 24, 2004Commencement of Operations: May 2, 2005Clearing Participants: 118 ParticipantsCapital: 600 million YenDeposit of Trading Margin: 368 billion Yen

Default Funds: 24 billion Yen

Fundamental Requirements to Attract

Institutional Investors :

The view from a financial intermediary

Francis Repka, Deputy CEO, SG Asia

Xuan Tran, Chief of Staff to the Head of SG CIB Asia Pacific

11th August 2005

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11th August 2005






11th August 2005


The Tokyo Commodity Exchange

HAMADA, Takamichi President




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Diversity of product line (2004)

Platinum18.6%

Gold23.3%

Gasoline31.7%

Kerosene17.5%

Crude Oil3.1%

Gold Options0.1%

Aluminum0.4%

Gas Oil0.3%

Palladium0.6%Silver

2.0%Rubber

2.3%

Listed commoditiesListed commodities



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Trading volume 2004

0

50

100

2000 2001 2002 2003 2004

(million lots)

Tra

din

g v

olu

me

by

com

mo

dity

gro

up

s

0

500

1,000

1,500

2,000

(billion USD)

To

tal n

om

ina

l tra

din

g v

alu

e

Metals volume Rubber volumeOil volume Textile volumeTotal Nominal Trading Value

High liquidityHigh liquidity



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May 2004 Fimat became a general member.

March 2005 Morgan Stanley became a broker

member. May 2005 Amended Commodity Exchange Law was

enforced.

July 2005 Goldman Sachs became a market member.

New membersNew members



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Trades from abroad* 2001-2004

0

1,000

2,000

3,000

4,000

5,000

(thousand lots)

2001 2002 2003 2004

Metals Rubber Oil

*Foreign trades are the amount of buy and sell by non-Japanese customers.

Foreign customer trade breakdown 2004

Foreign (lots)*% of foreignGasoline 686,392 12.22%Kerosene 460,007 14.94%Gas oil 514 9.68%

Crude oil 89,472 14.31%Rubber 486,086 22.80%Gold 500,140 13.67%Silver 28,907 9.33%

Platinum 364,907 14.42%Palladium 6,560 7.91%Aluminum 5,597 5.71%

TOTAL 2,628,582 12.50%

Foreign participationForeign participation



Increase of ISVs trade

and % of foreign via ISVs

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0

100

200

300

400

11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05

(thousand lots)

0

10

20

30

40

50

60

(%)

ISV volume (buy and sell)

ISV / Foreign (%)

2003 2004 2005

Access via ISVsAccess via ISVs


Central Japan Commodity Exchange

MATSUI, KohsakuDirector, International Affairs

JAPAN COMMODITIES INDUSTRY: VISION FOR GLOBALIZATION AND VISION FOR GLOBALIZATION AND REORGANIZATIONREORGANIZATION



Established in 1996, when three commodity Exchanges in Aichi Prefecture were consolidated,

Only comprehensive Exchange in Japan licensed by both METI and MAFF

Listing Gasoline, Kerosene, Gas Oil and Eggs,

Providing the World’s Largest Itayose (Session Trading) Market.

Who We Are



Over 33 millionOver 33 million Contracts Traded in 2004

2nd2nd Largest Commodity Exchange in Japan

4th4th among Energy Futures Exchanges in the world

8th8th Largest Commodity Exchange in the world

C-COM Offers Liquid Markets



Ferrous ScrapFerrous Scrap to be listed on October 11, October 11, 20052005is a Perfect Futures is a Perfect Futures Commodity Commodity

Ferrous Scrap (Shindachi, Tokyo)

Gasoline Futures

Yen-denominated Gold Futures

31.615.1

4.0

High Volatility (Coefficient Variance, 2003-2004)

High Liquidity

Solution for High Cost Inventory



Dollar-denominated Gold FuturesRice FuturesLPG (Liquefied Propane Gas)

FuturesCoal FuturesInternational Commodity Index Futures Weather Futures

Upcoming Products

Demutualization



International Affairs Division Created in 2004

Establishing Co-operative Relationship with Major Global Exchanges

Application for CFTC Part 30 Exemption

Associate Membership

Rapid Globalization



Established in March 2005 for Foreign Brokers and Commercial Investors

Lower Margin Requirements Applied

23 Associate Members* (From 5 Different Countries)

Associate Membership

(*As of August 2005)



Thank you for your attention


Views from a global broker

Lionel Ghouila-HouriFimat Tokyo

Business Development , Vice-President


Overview



2004 Commodities Exchange Law (“CEL”)

Sharp Decline in Trading Volume

How to attract Foreign Investors

Requests from Foreign Brokers

Conclusion

Major Achievements of CEL 2004



Japan Commodity Clearing House (“JCCH”)

Solicitation/Sales rules modernized

Risk-based capital requirement

A reliable, integrated market place




Frequent Limit stop in energy market

Tighter rules for commercial solicitation

New capital requirements limits Japanese FCM prop trading




Volumes Japan Exchanges over the last 3 years

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

2002 2003 2004 E2005

years

nu

mb

er o

f lo

ts

Osaka

TOCOM

C-COM

YCE

Fukuoka

Kansai

TGE

Priority Actions to Attract Foreign Investors



Number 1Promote liquidity and unleash volatility by broadening Price fluctuation limits

Number 2Implement “Give-up” mechanism

Number 3Continuous quotation and ISV connections

Number 4Align with international practice for Margining

Requests from Foreign Brokers



Full broker-membership entrance fee too high

Transaction costs should be reduced further

Harmonious regulatory framework – Between Commodity and Financial regulations– Listed and OTC markets

Conclusion



From Regulatory view, the CEL 2004 moves in the right directionFrom a market perspective, some additional steps should be made to bring in more foreign interests:– Free price fluctuation– Continuous trading with ISV connection– Reduction of entrance fees for full membership– Reduction of transaction costs



Thank You


Proposition for the market

development

Yasuo Mogi Senior Vice President ＆ COO

Himawari CX, Inc.




To the Regulators (including SRO)

Understandings of International Standard

1 Account Documentation 2 Futures Transactions – Specific Identification method 3 Margin (customer clearing) accounting process 4 OTC vs. ETD (Exchange Traded Products) Consolidated account statement (Domestic and foreign ETD and regulated OTC) 5 English translation of Laws and Regulations

To the exchanges

1 Contract design Needs of market participants and customers Market condition and needs

2 Market design Option Spread Evening Session

3 Education





To the Clearing House

1 Margin Money Associate with market and portfolio risk Interest on Equity Intraday and Emergency Margin Call

2 Efficiency Position transfer (ex-pit) Simplified give-up process

3 OTC Clearing



Market integrity and efficiency can be developed only by the synergy among the regulators and members of the industry i.e. exchanges, clearing house and intermediaries.

FCM ｓ are required to develop & maintain high standard of commercial ethics


JAPAN COMMODITY MARKET:

VISION FOR GLOBALIZATIONAND

REORGANIZATION

Thank you

Documents

FIA-ASIA DERIVATIVES CONFERENCE BEIJING CHINA AUGUST 11, 2005