Another alternative considered in a proposal, seen by FOW, would be to enable an existing exchange to offer both commodity and financial derivatives.

The plan will also alter the regulation of derivatives markets. The Tokyo Stock Exchange and Osaka Securities Exchange are overseen by the Financial Services Agency. However, Japan’s largest commodities exchange, the Tokyo Commodity Exchange, is regulated by the Ministry of Economy, Trade and Industry, while the Tokyo Grain Exchange is under the Ministry of Agriculture, Forestry and Fisheries.

The plan said: “If the regulatory authorities will be centralised, a reorganization of crowded securities exchanges and commodity exchanges is expected.”

The proposal is being led by Japan’s new prime minister, former finance minister Naoto Kan. After discussions he will announce a firm plan by the autumn.

Market participants have said for several years that one of the big weaknesses of Japan’s derivatives markets is their fragmentation. There is duplication of contracts between the exchanges, and the large number of trading venues raises costs.

Seven exchanges share an annual trading volume of 240m contracts – less than are traded in a couple of months at Eurex. Of that, 166m contracts are traded at the Osaka Securities Exchange, nearly all of that in Nikkei 225 Futures, Options and Mini Futures.

Japan’s four commodity exchanges have been hit particularly hard over the last decade, since an amendment to the Commodity Exchange Law in 2005 made it much harder for them to market to retail investors. Each exchange has reported financial losses, and trading at C-Com and TGE has dwindled to a fraction of its former rate.

Consolidation begins

The prime minister’s initiative has been accompanied by a wave of moves toward consolidation among the exchanges.

Most sensational was a report in the Sankei Shimbun newspaper on June 23 that the Osaka Securities Exchange was discussing a possible merger with the Tokyo Commodity Exchange. The OSE and Tocom denied the story.

However, an executive at a futures commission merchant in Tokyo said he was not surprised by the speculation, as the exchanges would make a good strategic partnership, and the deal would provide “significant advantages” to Japan.

In the same week, the Tokyo Commodity Exchange agreed to the Central Japan Commodity Exchange’s request that it take over its only two products with substantial activity, the Gasoline and Kerosene Futures. That appears likely to spell the end of C-Com, although the exchange has denied this.

A week later, Tadashi Ezaki, chief executive of Tocom, said his exchange would be interested in listing three of Tokyo Grain Exchange’s most active futures, on corn, soybeans and coffee. “We wouldn’t make an approach ourselves because that would mean taking over a negative legacy, so we are waiting for things to unfold naturally,” Ezaki said.

Several media sources in Japan have speculated that TGE is seeking a merger with Tocom. Spokespeople for both insisted no deal was being discussed.

Corn and Soybeans Futures are TGE’s most successful products, with about 70,000 contracts traded a month recently; the next most active is Raw Sugar Futures with about 20,000-30,000 and Azuki (Red Beans) Futures with about 15,000-20,000.

Arabica Coffee trades about 3,000 contracts a month and Robusta Coffee around 200.

TGE’s overall volume in 2009 was 4.83m contracts, a quarter of 2007’s volume.

Tocom’s derivatives range is centred on precious metals, rubber and oil products.

TGE has already moved closer to Tocom by agreeing to license its Nasdaq OMX-supplied trading platform, set to be introduced between October 2010 and January 2011.

TGE will license the platform for use by its members but will also “place exchange terminals and operations staff and operate its markets within Tocom’s building”. Tocom IT staff will help with this.

An executive at a futures commission merchant in Tokyo welcomed any move that would reduce the fragmentation of the Japanese commodity derivatives market, which he said has hindered it so badly.