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Meeting the Needs of Gold Investors Today

By Ryoichi Seki, General Manager, Global Business Development, TOCOM

Published on September 25, 2017

Tokyo Commodity Exchange, Inc. (TOCOM) opened its gold market in 1982 and is the benchmark price for the region, while its platinum market, founded in 1984, serves a similar role. Ryoichi Seki looks at the recent launch of its rolling spot futures contract, and explains how the exchange is innovating to stay relevant in the current market.

Precious metals are the most active contracts on the Tokyo Commodity Exchange (TOCOM), Japan’s largest commodity futures exchange, representing 62% of exchange volume in the first half of 2017. Gold is the most active, comprising 43% of exchange volume. The Gold Standard (1 kg) contract is TOCOM’s flagship, comprising 26% of exchange volume in the first half of 2017, with an average daily volume of 24,348 lots – equivalent to 24 tonnes.

Japanese retail investors and major trading houses active both in Japan and overseas gold markets have contributed to the liquidity of the contracts offered. Japanese gold refineries also participate in the market as members. In addition, many international traders engage in arbitrage between TOCOM and other markets, including New York and London. Currently 55% of Gold Standard contract trading originates outside Japan.

While many new gold markets have opened in Asia in recent years, the TOCOM gold contract remains popular with investors from all over the world, and the exchange continues to innovate, which attracts participants from all over the world.

Expanding precious metals on offer

TOCOM has four physically delivered futures products – gold, silver, platinum and palladium – but it has been expanding the boundaries of the precious metals it offers (Figure 1).

To meet the demand for risk management and investment tools, gold options were introduced in 2004. The 1 kg, American-type contracts were revamped in September 2016 as 100 g, Europeantype contracts. To meet the needs of retail investors, TOCOM added mini and rolling spot contracts for gold and platinum. On top of these derivatives contracts, it began trading physical gold in 100 g and 1 kg quantities in July 2016. TOCOM’s gold market has evolved to include futures, options and physical trading, with a wide variety of hedging and trading opportunities.

Figure 1: Precious metals products offered by TOCOM

Items that meet purity standards will undergo the hallmarking procedures. Items that do not meet standards would then be investigated to determine if it is sub-standard. Fire assaying is an internationally accepted test method to determine the precious metal content present.

Rolling spot futures

Rolling Spot (“RS”) contracts were first introduced in May 2015 for gold and for platinum in March 2017. Unlike traditional futures, the RS contract has just one series that expires each business day. Open positions are automatically rolled to the next trading day. This feature allows participants to hold positions indefinitely, which facilitates longterm trading strategies.

Initially, Gold RS was well received by Japanese retail investors who needed a platform to execute such strategies. The participation of overseas investors made RS a successful contract for the exchange. It is now the second largest in open interest, and third in volume. Platinum RS is also experiencing similar success, with its open interest ranked fifth, just four-months after its launch (Figure 2).

The success of RS contracts is due the fact that they do not undermine existing contracts, but instead give investors additional liquidity. It also demonstrates that RS contracts address the market demand for new investment tools.

Figure 2: Participation in TOCOM rolling spot contracts

Handmarking, whereby articles are hand-struck with a metal punch and a hammer (Image 4), is the most traditional form of hallmarking. Today, laser marking is widespread, and is done using fine, high-powered laser beams (Image 5). This method can also be used to mark signatures and logos.

Expanding physical delivery mechanisms

In July 2017, TOCOM added Brink’s Japan as a designated warehouse, the first of its kind without a Japanese parent company. The addition of Brink’s increases flexibility, especially for international market participants.

At the same time, TOCOM introduced rule changes for physical delivery. In principle, deliveries require a warehouse receipt. TOCOM now allows using alternative delivery arrangements when both counterparts agree to the delivery terms. As such, participants can now choose book entry transfer, or can deliver bullion approved by other industry organisations, such as LBMA Good Delivery bars.

Figure 3: Physical delivery through book-entry transfer

Looking ahead

With current global developments focused on central clearing obligations on OTC products and the introduction of benchmarking regulations, the trend has been to develop and introduce new exchange-traded products that offer solutions to cope with regulatory changes facing the precious metals industry.

While TOCOM has a long history, it continues to innovate, and is introducing a new gold index and is working together with an ETF provider to list ETF/ETN contracts based on the index, targeting its products at pension funds. The exchange is also searching for ways to integrate fintech in its operations, as it hopes to continue to support the global trading community for years to come.

Ryoichi Seki is the General Manager of Global Business Development at the Tokyo Commodity Exchange (TOCOM). With over 20 years of experience at the exchange, Mr. Seki entered his current role as head of international activities in 2011. Mr Seki has led several teams in negotiating regulatory approvals around the world. He has also worked on numerous IT and systems-related projects and brought the to successful outcomes.

TOCOM Adopts Delivery by Physicals for Precious Metals Market

The Tokyo Commodity Exchange, Inc. (TOCOM) announced precious metals market rule changes for Declared Delivery and Customized Delivery. The new rules allow settlement through the delivery of bars instead of warehouse receipts if there is consent between buyer and seller. The updated rules took effect on 1 August 2017.

TOCOM had stipulated, as a general rule, that precious metals market futures must be settled by delivery of warehouse receipt from a TOCOM-approved warehouse for bullion that manufacturers refine and hold in their storage themselves. This rule controls and maintains the quality of deliverable goods in an open marketplace where anonymous participants can trade and conveniently distribute bullion. Recently, an increasing number of market participants, particularly those from abroad, requested that the Exchange permit settlement by the delivery of precious metal bars.

The adjustment defines the requirements for counterparties who wish to deliver through mutual consent. The updated rules substantially ease restrictions imposed on commercial participants and the financial institutions, which do not have warehouse receipt issuance qualifications, when they wish to deliver bullion on the TOCOM market. For example, a local precious metals processor may use gold bars purchased from an international vendor for delivery without having to have a warehouse receipt issued. Other participants may use bars purchased from an overseas financial institution for delivery by transferring ownership at a warehouse.

In conjunction with these rule changes, TOCOM has accepted Brink’s Japan Limited, a subsidiary of Brink’s Incorporated, as an approved warehouse operator, which will increase delivery options.

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