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Japan traders piling into derivatives set to get new options

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As the Japanese stock-market euphoria continues into the new year and traders increase spending on derivatives, the nation's exchange is about to give them another tool to bet on the shares: flexible options.

[SINGAPORE] As the Japanese stock-market euphoria continues into the new year and traders increase spending on derivatives, the nation's exchange is about to give them another tool to bet on the shares: flexible options.

The contracts, to be introduced in the quarter starting April, are poised to boost a market that grew to 1,334 trillion yen (S$15.9 billion) for equity-index derivatives in 2017, the second-biggest year on record. The options are a response to tightening rules on over-the-counter transactions and mimic off-exchange trading by allowing investors to set expiration dates and strike prices.

"Probably this kind of product might be well received" if investors want to play the Japanese market, said Hisao Matsuura, a strategist at Nomura Holdings Inc in Tokyo. The upcoming Bank of Japan governor election, speculation for a normalization of policy and an increase in the consumption tax next year may attract traders, he said.

The Topix index has rallied 3.4 per cent this month after capping its best annual performance since 2013, with traders spending about 14 per cent more than in 2016 on listed derivatives, according to data from the Japan Exchange Group Inc. Topix products saw a surge in demand, and options on the measure's banking sub-gauge and TSE Reit Index are among those that the Osaka Exchange, which operates the derivatives market under the JPX, will launch. They will be available only in a flexible format, the bourse said.

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The stock benchmark closed 0.3 percent lower on Friday at 1,879.39, with banks and insurance companies the biggest drags.

The implementation in 2016 of an internationally agreed collateral requirement for OTC derivatives has made the need for listed alternatives more pressing, according to Masahiro Yada, general manager of corporate communications at the JPX. With the introduction of flexible contracts, the bourse is playing catch up to regional peers in Hong Kong and Australia, which launched the products in 2010 and 2015, respectively.

The derivatives have generated limited interest so far - in Hong Kong, no Hang Seng Index contract was traded last year and only 10,000 Hang Seng China Enterprises Index securities changed hands. But Hong Kong Exchanges & Clearing Ltd is betting the need for listed products will keep on growing in the stricter regulatory environment, a media representative wrote in an email. The bourse said it will introduce long-dated options and futures on the HSI and H-shares gauge in the first quarter.

"The post-crisis regulatory environment has over the years created a bias towards listed options, given the better overall risk treatment and transparency," said Bharat Sachanandani, head of flow, strategy and solution for global markets in Asia Pacific at Societe Generale SA. Traders have started to favor exchange-listed contracts, he said.

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