Commodity traders urged to change business model: TOCOM chairman

Traders of commodity futures should develop new business models on the back of changing market conditions, the chairman of Tokyo Commodity Exchange said during a news conference in Tokyo on Wednesday.

TOCOM Chairman Masaaki Nangaku cited the commodity exchange law revision in 2005 and the diversification of futures brokers as changes in the commodity trading environment. The 2005 law revision urged stronger compliance measures for brokers in order to protect investors' interests, which forced some local brokerage houses to leave the industry while it drew new participation from overseas and the financial sector. Currently there are 61 member brokers of TOCOM, as opposed to 71 before the law revision.

"Many brokerage houses are running red...and some brokers who cannot draw a positive business plan going forward have left the industry. Since the law revision, around 10 brokers have left, but TOCOM also drew six new members," Nangaku said. He cited the new participants Goldman Sachs and Lehman Brothers from overseas, and some local financial institutions who were not trading commodities previously.

"I see the brokers getting more diversified and to survive in the competition, they are urged to develop new business models to overcome the difficulties, continue efforts," Nangaku said.

TOCOM ALSO NEEDS TO CHANGE

TOCOM itself also needs to develop a new market vision against a background of global consolidation of exchanges, he suggested. On Tuesday, the Chicago Mercantile Exchange and the Chicago Board of Trade announced a merger agreement.

Commenting on the merger deal, Nangaku said: "This signifies more intense global competition among the exchanges...TOCOM needs to study the impact of this merger very closely, and work towards the goal of higher market credibility, efficiency, and highly reliable commodity clearing house system."

He added TOCOM would not be "buried" in the global exchange consolidation but would work to attract more global funds to transact business on the exchange. "This is our responsibility," he said.

Nangaku reported that turnover volume on TOCOM during the April to September 2006 period increased by 25% year on year but open interest at the end of September was down by 18% to 560,000 contracts. The decrease in the open interest is another challenge for TOCOM. Nangaku said due to wider price volatility, market participants tend to open and close their positions in a shorter time frame, leading to decreases in the open interest.

"I need to investigate further on the causes behind the fall in open interest as well as in the turnover since August," Nangaku said.

TOCOM trades gold, silver, platinum, palladium, aluminium, sour crude oil, kerosene, gasoline and rubber.