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Fading star of global commodity trade moves closer to sale

Tokyo Commodity Exchange is fighting for relevance as it's dwarfed by rival bourses in China and beyond


IN its heyday in the early 2000s, the Tokyo Commodity Exchange (Tocom) 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 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. "With the rise of Shanghai and other exchanges, Tocom's position in the world has sunk."

Japan Exchange Group, owner of the Tokyo Stock Exchange, is now in talks to merge with Tocom with the Financial Times reporting that a deal may be announced this week.

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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 aluminium 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. South-east Asia produces about three quarters of global natural rubber." BLOOMBERG

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