Aug 01, 2012
Japanese swaps growth steady
Derivatives markets in Japan are continuing to grow thanks
to the introduction of central clearing, exchange mergers, increased use of
high-frequency trading (HFT), and steady growth of foreign exchange transaction
volumes.
A new report from financial research consultancy Celent has
found while Japan’s derivatives market as a whole has continued to grow
gradually, there is a significant gap between various instruments, with some demonstrating
remarkable growth and others not.
Last year, listed derivatives in the country recorded 404.3
million transactions and Celent forecasts the market will continue to trace a
moderate growth curve. OTC derivatives in 2011 recorded 5.1 million
transactions, accounting for one-quarter of the world’s OTC derivative trading
volume.
“Efforts continue to boost both the stability and
transparency of Japan’s derivatives market. These efforts include attempts to
shore up the legal infrastructure as well as the merging of exchanges,” said
KyongSun Kong, an analyst with Celent’s Asian financial services group and
author of the report. “More of the same can only be expected moving ahead, and,
by virtue of this, the nation’s derivatives market will in all probability
enjoy substantial growth.”
Merging trends
Kong points to repeated mergers of and integration among
Japan’s derivative exchanges as one cause for increased growth of the markets.
As of February 2012, five exchanges in Japan deal in listed derivative products
– the Tokyo Stock Exchange (TSE), Osaka Securities Exchange, Tokyo Commodity
Exchange (TOCOM), Tokyo Grain Exchange and Tokyo Financial Exchange.
“Each of these exchanges handles a varied selection of
derivative products, and each has a particular orientation,” wrote Kong, adding
the merging of the Tokyo and Osaka stock exchanges is scheduled for January
2013, with the latter expected to take charge of managing the derivatives
market. “This merger is being closely watched to determine how it will affect
Japan’s derivatives market.”
Kong also cited the adoption of central counterparty
clearing as a factor which will propel growth in the market. The use of CCPs was mandated in by the G20 in 2009, when
countries agreed OTC derivative contracts should be centrally cleared by the
end of 2012.
“Japan is no exception, and efforts are afoot to prepare a CCP
in time,” wrote Kong. “The details related to CCP deployment remain uncertain,
but what is certain is that it is incumbent upon market participants to do
their due diligence and actively research, analyse, and prepare for their
introduction.”
Derivatives growth in Japan is also due to increased numbers
of foreign investors in the country. Kong said one reason behind the large
number of overseas investors that trade on Japan’s listed derivatives market is
the availability of HFT, which is gaining ground in Japan but still a far cry
from the level seen in US or Europe.
“As indicated by the introduction of the high-speed
processing systems at TSE and TOCOM, the proliferation of HFT in Japan is a
certainty and only a matter of time,” said Kong. “In conjunction with the
spread and increased use of HFT domestically, Japanese investors can also be
expected to take part more actively in trading derivatives contracts. With an
environment in place allowing for short-term trading, the overall market
liquidity is envisaged, rising further and contributing to heightened trade
volume.”
Bruce Love
+44 (0)20 7397 3818
bruce.love@thetrade.ltd.uk