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Outline and Amendment of Commodity Exchange Law

Outline and Amendment of Commodity Exchange Law. Taro Yoshida Commodity Derivatives Division, Ministry of Economy, Trade and Industry, Japan yoshida-taro@meti.go.jp. Contents of Commodity Exchange Law (CEL). Commodity Exchanges Commodity Transaction Clearing Organizations

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Outline and Amendment of Commodity Exchange Law

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  1. Outline and Amendment of Commodity Exchange Law Taro Yoshida Commodity Derivatives Division, Ministry of Economy, Trade and Industry, Japan yoshida-taro@meti.go.jp Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  2. Contents of Commodity Exchange Law (CEL) • Commodity Exchanges • Commodity Transaction Clearing Organizations • Futures Commission Merchants (FCMs) • Commodity Futures Associations (self-regulatory organization) • Consignor Protection Fund • Miscellaneous Provisions: OTC, Penalty, etc. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  3. A Broad Perspective Objective: Enhancement of Market Functions Encouragement of Market Participants in its Quality and Quantity Market’s Convenience Market’s Credibility Attractiveness of Japanese Market in the Intensifying Competitiveness around the Globe Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  4. For Increasing Market Credibility - Enhancement of Protection of Customers’ Assets - • All Trading Margins to be Deposited with the Clearing Organization (“JCCH”) • Whether such trading margins are clearing maintenance margins or abundant margins, all the trading margins are deposited with the JCCH. In other words, FCMs [Clearing members] deposit with the JCCH all the trading margins that are deposited by their customers [their non-clearing members]. • Customers are entitled to request the JCCH to return their assets to them, even though their FCMs become insolvent. Therefore, customers’ assets are unaffected by FCMs’ insolvency. (continuing) Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  5. Strengthening of Segregation of Customers’ Assets from the FCMs’ Own Assets. • Segregating measures are re-designed in order to ensure that customers’ assets shall be better secured. • Penalty is provided for breach of FCMs’ obligation of segregation. • FCMs’ obligation of segregation is monitored every business day. • Establishment of Consignor Protection Fund • When a FCM is insolvent and its customers’ assets are not fully returned, the Fund shall liquidate such customers’ assets up to 10 million yen per a customer if such customers are worthy of protection. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  6. For Increasing Market Credibility - Strengthening of Regulations Concerning FCMs - • Strengthening of Regulations Concerning FCMs’ Sales Practice • Increase of solicitation to be prohibited. • Establishment of a guideline regarding sales practices for protection of customers. • Legalization of FCMs’ duty of explanations. • FCMs’ compliance shall be monitored and audited by National Commodity Futures Association, a self-regulatory organization. • FCMs’ own rules regarding their business operations were examined by the Association. (continuing) Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  7. Flexible Application of Orders to Improve [and Suspend, if necessary] FCMs’ Business Operations • Generalization of requirement for application. • Since the amended Law was effective this May, three FCMs were ordered to suspend their business operations. • Kohwa Futures Corporation: Suspension for 44 business days • Seiyu Shoji Corporation: Suspension for 72 business days. • Globaly Corporation: Suspension for 60 days and accusation by the Police. Last Friday, it decided to close its business operation regarding commodity futures transactions. • Enhancement of Capacity to Audit and Inspect FCMs. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  8. For Increasing Market Credibility - Rationalization of Regulations Concerning FCMs - • Replacement of Financial Regulations Concerning FCMs. • Abolition of rigid financial regulations, set on individual markets that FCMs do their business operations. • Establishment of “Net Worth Ratio” regulation, on the basis of Basel Accord in 1988 and 1996, focusing on the exposure of non-liquidated contracts. • Replacement of Permission System of FCMs. • Under the former Law, permission was granted to an applying corporation on a market basis. Therefore, FCMs were obliged to apply to the Ministries for doing their business in a new market. • Under the amended Law, permission is granted regardless of markets. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  9. For Increasing Market Credibility • Establishment of Out-House Commodity Transaction Clearing Organizations. • The Japan Commodity Clearing House (“JCCH”) was established and began its business as a central counterparty of all the transactions at all the seven Commodity Exchanges this May. • Requirement of clearing members and non-clearing members is delegated to its business regulation. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  10. For Increasing Market Convenience • Enlarging Definition of “Commercials.” • Commercials: one of the requirements for a membership of Commodity Exchanges • Definition: a person who has engaged in the business of purchase or sale, intermediary, broking or acting as agent thereof, or production, processing or use (underlined is attached at this amendment) • Establishment of JCCH • Increasing efficiency of settlement fund and rationalization of settlement affairs for FCMs which are permitted as clearing members because the JCCH is the clearing organization for all of the seven Commodity Exchanges in Japan. (continuing) Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  11. Encouragement of OTC Trading by Deregulations. • Enabling OTC dealers, which were formerly permitted to trade, as a risk taker, only with commercials, to trade with other OTC dealers to the extent necessary to hedge their risks caused by trading with commercials. • Introduction of a facility at which commercials and financial institutions trade commodities, whether such commodities are listed on Commodity Exchanges or not. • Encouragement of Advanced Information Technology. • Introduction of an Incorporation as a Form of Commodity Exchanges, in addition to Membership. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

  12. Thank you. Regulation and Market Enhancement -- An Asian Perspective (Aug. 12)

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