Full of eastern promise as Japan, Hong Kong and China seek to attract Western FX business – LeapRate investigates


At a time when the FX industry has been concentrating on the increasingly dire situation which surrounds the Eurozone, punctuated by Switzerland’s removal of the 1.20 peg on the EURCHF which resulted in catastrophic outcomes for many firms, the Far East is becoming ever stronger, and is courting overseas business.

Japan, a region synonymous with fastidious business ethics, and a domestic FX market which accounts for between 30% and 40% of all retail order flow globally, is widely regarded as a domestic-focused market, where Japanese traders stick firmly to Japanese companies, themselves veritable giants.

Japan is now extending its markets to overseas participants as Japan Exchange Group (JPX) has started the calculation and publication of currency-hedged JPX-Nikkei Index 400.

This will consist of six currency-hedged indices of the JPX-Nikkei Index 400, to respond directly to the needs of foreign investors. The calculation for the new indices (JPX-Nikkei 400 Net Total Return EUR Hedged Index, USD, GBP, Daily EUR, Daily USD and Daily GBP Hedged Index) started on January 26 this year.

Since its listing on November 25, 2014, JPX-Nikkei Futures has been widely traded among various types of market participants.

Average Daily Volume in 2014 since the listing date was 64,253 contracts, exceeding the Mini-TOPIX Futures. In addition to the market making program available since its listing, OSE will introduce another market making opportunity dedicated to the night session hours in order to enrich liquidity during the US/UK trading hours.

In addition to this, fellow Japanese venue, Tokyo Financial Exchange (TFX), which is already a very popular on-exchange FX trading entity for domestic participants, is looking further afield with its Currency Futures Market Study Group.

This group was set up to explore the possibility of establishing a currency futures market and its first meeting was held on December 8, 2014. Amidst ongoing OTC derivatives regulatory reforms globally, several venues have launched new futures markets for currency related transactions.

On January 19, 2015, TFX announced a new plan to list a Turkish Lira/Japanese Yen currency pair on its Exchange Forex Margin Contracts Market (Click 365).

While taking into account various aspects such as trading members’ readiness, TFX aims to launch the new product by the first quarter of the fiscal year 2015, which begins in April.

The trading unit of the new product will be 10,000 with a tick size of 0.01 (minimum tick value JPY100). There has been high demand fro trading the Turkish Lira from investors due to its high swap point stemming from the country’s high interest rates.

TFX considers it a hot currency among emerging economies, and cites that it could provide a stable trading environment for the investors as the liquidity of Turkish Lira in the global FX market has been improving. A radical move from conservative Japanese corporate executives!

Whilst Japan’s domestic companies court an overseas audience, North America’s CME Group Inc (NASDAQ:CME) looks East.

The company has recently launched a physically delivered Gold Kilo Futures contract (contract code GCK) which is listed on COMEX.

A Hong Kong deliverable contract, the product is similar to the structure of the benchmark 100 troy ounce Gold Futures contract (GC), It is tied directly to 9999 gold prices in Hong Kong and can be delivered physically in COMEX-approved Hong Kong vaults, providing access to round-the-clock price discovery for the Asian gold market.

Being listed on COMEX allows customers to benefit from deep margin offsets against other products. The contract is available for trading electronically via CME Globex and for clearing through CME Clearport. Currently the COMEX-approved vaults in Hong Kong are Brink’s Incorporated and Malca-Amit Far East Ltd.

With this inter-continental possibility comes inter-continental bureaucracy, and in this case, the US Commodity Futures Trading Commission (CFTC) has become interested in supporting the potential of Eastern venues providing services to a Western audience.

The CFTC has granted Tokyo Commodity Exchange (TOCOM) approval for its registration as a Foreign Board of Trade (FBOT) under the US Commodity Exchange Act. This took place on January 20 this year, and the registration permits TOCOM to provide its members and market participants located in the US with direct access to its electronic order entry and trade matching system.

an FBOT registered with the CFTC must demonstrate that it meets regulatory requirements comparable to those required of US futures exchanges, and the CFTC must determine that the FBOT’s regulatory authorities support and enforce regulatory objectives that are similar to those of the CFTC, in particular with regard to market integrity, customer protection, clearing and settlement and the enforcement of the rules of the FBOT and its clearing organization.

Rather more surprisingly, China is moving toward opening its markets to foreign investors, despite its non-alignment with free market economies.

The China Securities Regulatory Commission (CSRC) issued a proposed set of guidelines on December 31 that would permit, under certain (very likely strict) conditions, access to the Shanghai Futures Exchange Crude Oil contract by foreign investors and brokerages.

The draft rules were open for consultation until January 31, 2015, and the step follows the implementation of the QFII system which already allows Qualified Foreign Investors (hence the acronym) to participate in the market up to certain thresholds, as well as the creation of Free Trade Zones, bringing Chine a bit closer to opening its market to global participants.

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Full of eastern promise as Japan, Hong Kong and China seek to attract Western FX business - LeapRate investigates

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