For over a decade now, there has been talk of consolidating Japan's securities exchanges to create an all-in-one bourse. A recent agreement to integrate the trading of securities and commodity derivatives by folding the Tokyo Commodity Exchange (Tocom) into Japan Exchange Group (JPX) brings that dream one step closer to reality.
However, the government authorities that oversee the exchanges still do not see eye to eye over the planned consolidation, slated for October. That means the financial instruments now listed on Tocom will be offered separately by two different marketplaces: Commodity futures trading for metals and agricultural products will be transferred from Tocom to the Osaka Exchange, a JPX unit, while futures contracts for crude oil and petroleum products will stay with Tocom.
Tocom has already requested approval from the Ministry of Economy, Trade and Industry to list electricity futures on a trial basis, in an apparent bid to cement its future as a comprehensive energy market. JPX has raised the concern that having two separate exchanges handle commodity derivatives trading would diminish the benefits of the merger.
Moreover, commodity futures brokerages that deal in the trading of metals and agricultural products at the Osaka Exchange will face multiple regulatory controls by METI and the Ministry of Agriculture, Forestry and Fisheries, plus supervision and inspection by the Financial Services Agency.
If the planners want to create a truly consolidated, globally competitive marketplace, they need to improve the convenience, efficiency and transparency of the bourse. In the U.S., oversight of the derivatives markets is consolidated in the hands of the Commodity Futures Trading Commission. The Japanese government should consider granting the FSA consolidated authority.
A huge amount of time has been spent on the plan for an all-in-one bourse ever since the idea was incorporated in the government's growth strategy. That is in large part because the relevant authorities have stuck to their vested interests, making it difficult to form a consensus.
A survey by the Futures Industry Association of the U.S. reported that JPX's derivatives trading activity ranked 16th out of the world's exchanges in 2018, with just one-12th the trading turnover marked by the top-ranked Chicago Mercantile Exchange. Tocom placed even lower.
For JPX to attain its goal of becoming the premier marketplace in Asia by closing the yawning gap with the leading global exchanges, all parties concerned need to join hands in forging strategies. They should not allow vested interests to continue hindering efforts by Japan's marketplaces to join the best in the world.
There has been little discussion so far about how the planned comprehensive bourse will accommodate derivatives linked with currencies and interest rates, which outperform commodity-based instruments in derivatives trading turnover in global markets. The new exchange will fall short in the area of user convenience if the planners simply sit back and let the Tokyo Financial Exchange do its job.
The first step has been taken, but it is time to fast-track efforts toward a one-stop exchange that will be a viable rival to major global markets.