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Fading star of global commodity trade moves closer to sale

In its heyday in the early 2000s, the Tokyo Commodity Exchange was at the heart of the global commodity trade, its precious metals and rubber contracts used as benchmarks around the world.

Today, as it moves closer to a sale to Japan Exchange Group, the bourse is fighting for relevance as it's dwarfed by rival exchanges in China and beyond.

Tocom's demise was cemented in 2005 by stricter rules against soliciting business from retail investors, who had provided so much liquidity that prices for rubber and platinum on the bourse became global price markers. Volume and open interest have since dwindled and so has Tocom's status as a global commodity hub.

"Volumes slumped after the government restricted unsolicited offers" to retail investors, Satoru Yoshida, a commodity analyst at Rakuten Securities Inc. in Tokyo, said by phone. "With the rise of Shanghai and other exchanges, Tocom's position in the world has sunk."

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Japan Exchange Group, owner of the Tokyo Stock Exchange, is now in talks to merge with Tocom with the Financial Times reporting that an agreement may be announced this week. A spokesman for JPX would only reiterate what Chief Executive Officer Akira Kiyota said last month that the direction of the integration will be set by the end of March. A Tocom spokeswoman declined to comment.

Tocom's origins date back to 1951 with the founding of the Tokyo Textile Exchange. In 1984, it merged with the Tokyo Rubber Exchange and the Tokyo Gold Exchange to create the Tokyo Commodity Exchange, which listed rubber, gold, silver and platinum contracts. The bourse later added other precious metals including palladium as well as aluminum and crude oil.

Tocom saw its heaviest annual volume in 2003, when more than 87 million contracts traded. Open interest peaked in 1996 with almost 1.5 million outstanding contracts.

But since the country's commodity exchange act was revised in 2005 the decline has been acute. Trading in Tocom's once dominant gold, platinum and rubber contracts has tumbled. Annual volume shrunk to about 24 million contracts last year while open interest stood at 363,110 at the end of February 2019.

Tokyo's diminishing significance has coincided with China's growing dominance as the world's biggest consumer of raw materials, and an explosion in liquidity on its domestic exchanges. Trading on the Shanghai Futures Exchange, Dalian Commodity Exchange and Zhengzhou Commodity Exchange now dwarfs Tokyo's.

Once dominant contracts have also been supplanted by other bourses in Asia. One of the world's biggest rubber importers, Japan's futures were long used as the global standard. But in recent years, Singapore's contract has grown in prominence thanks to the city state's proximity to the world's biggest producers and because it reflects the price of the most-produced and consumed type of rubber in the world.

"Japan's importance as a natural rubber importer has dwindled over the years, which probably explains the decline in Tocom's trading volume," said Alvin Tai, global agriculture analyst with Bloomberg Intelligence. Singapore "on the other hand is close to the most important producing countries such as Thailand and Indonesia. Southeast Asia produces about three quarters of global natural rubber."

In precious metals, Tokyo's influence has also waned. Open interest in Tocom's platinum contract has slumped while futures have gradually increased on the New York Mercantile Exchange.

Tocom's merger with JPX could prove to be a fillip for the commodities bourse as it opens the market to a bigger pool of liquidity, according to Hideshi Matsunaga, an analyst at Sunward Trading in Tokyo.

"Tocom's size has shrunk to about a 10th of what it used to be about 10 years ago," he said. "The merger will enable brokerages to more easily trade commodities as they already have the path to JPX ready. Until now, they hardly traded commodities. Trading volumes should increase a lot, and the market will become much more active."

 

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