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FIA-ASIA DERIVATIVES CONFERENCE BEIJING CHINA AUGUST 11, 2005

FIA-ASIA DERIVATIVES CONFERENCE BEIJING CHINA AUGUST 11, 2005. JAPAN COMMODITY MARKET: VISION FOR GLOBALIZATION AND REORGANIZATION. Mitch R. Fulscher Chairman FIA-Asia Committee.

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FIA-ASIA DERIVATIVES CONFERENCE BEIJING CHINA AUGUST 11, 2005

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  1. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 JAPAN COMMODITY MARKET: VISION FOR GLOBALIZATIONAND REORGANIZATION Mitch R. Fulscher Chairman FIA-Asia Committee

  2. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION MAY DAY – 2005 “BIG BANG” …FINALLY • NEW LAW ENACTED • ESTABLISH COMMON CLEARING HOUSE • INTERNATIONALIZATION

  3. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION NEW LAW • Stronger Net Capital Rules for Brokers • Protection of Customer Assets • Customer Sales Practices Rules • Modernize ExchangeStructure

  4. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION INTERNATIONALIZATION OF JAPAN COMMODITY MARKET

  5. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 Japan Commodity Clearing House Co., Ltd. NOGUCHI, Nobuya Executive Vice President, JCCH JAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND　REORGANIZATION

  6. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION ＴＧＥ ＴＯＣＯＭ Ｙ-ＣＯＭ Ｃ-ＣＯＭ ＫＡＮＥＸ ＯＭＥ ＦＦＥ ＪＣＣＨ Ｃｌｅａｒｉｎｇ　Ｐａｒｔｉｃｉｐａｎｔｓ Ｃｌｅａｒｉｎｇ　Ｐａｒｔｉｃｉｐａｎｔｓ Page 1

  7. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION 1. A common clearing house for all the seven commodity futures exchanges. No direct trading relationship between Sellers and Buyers. No counterparty credit risk. 2. Clearing participants can net all the profits/losses by marking to the market. 3. Clearing processes as a whole become more speedy and simple. Page 2

  8. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION 4. JCCH collects margins from clearing participants. (Segregation of Funds) (1) Clearing Participants deposit Customers’ margins with JCCH by cash or securities. Customers have a privilege to claim the credits of margins to JCCH when a Clearing Participant defaults. (2) Substituted (Replacement) Deposit is also available for FCMs(clearing participants) with the written consent of customers. Page 3

  9. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Ｃｌｅａｒｉｎｇ　Ｐｒｏｃｅｓｓ Ｔｒａｄｉｎｇ Ｍａｔｃｈｉｎｇ Ｎｅｔｔｉｎｇ Ｃｌｅａｒｉｎｇ 【ＥＸＣＨＡＮＧＥ】 FCM A Ｃｌｅａｒｉｎｇ　Ｍｅｍｂｅｒ －６０ ＪＣＣＨ Ｔｒａｄｉｎｇ FCM A －６０＋４０＝－２０ －２０ FCM B ＋４０ Ｃｏｍｍｏｄｉｔｙ　Ｍａｒｋｅｔ Ｃｌｅａｒｉｎｇ　Ｍｅｍｂｅｒ ＋５０ FCM A FCM　Ｂ －３０＋５０＝＋２０ ＋２０ Ｔｒａｄｉｎｇ －３０ FCM B 【ＣＨ】 Ｃｏｍｍｏｄｉｔｙ　Ｍａｒｋｅｔ 【ＥＸＣＨＡＮＧＥ】 Page 4

  10. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION JCCH Overview Date of Incorporation:December 24, 2004 Commencement of Operations:May 2, 2005 Clearing Participants:118 Participants Capital: 600 million Yen Deposit of Trading Margin:368 billion Yen Default Funds: 24 billion Yen Page 5

  11. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 　　　　　The Tokyo Commodity Exchange HAMADA, Takamichi President JAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND　REORGANIZATION

  12. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Diversity of product line　(2004) Listed commodities Page 1

  13. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION High liquidity Trading volume 2004 Page 2

  14. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION 　　　　　　　May 2004 Fimat became a generalmember. 　　　　　　　March 2005 Morgan Stanley became a broker 　　　　　　　　　　　　　　　　　 　member. May 2005 Amended Commodity Exchange Law was enforced. 　　　　　　　July 2005 Goldman Sachs became a market 　　　　　　　　　　　　　　　　　member. New members Page 3

  15. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION 　Trades from abroad* 2001-2004 Foreign participation Foreign customer trade breakdown 2004 Page 4 *Foreign trades are the amount of buy and sell by non-Japanese customers.

  16. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Increase of ISVstrade and % of foreign via ISVs Access via ISVs Page 5 2003 2004 2005

  17. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 Central Japan Commodity Exchange MATSUI, Kohsaku Director, International Affairs JAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION

  18. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Who We Are • Established in 1996, when three commodity Exchanges in Aichi Prefecture were consolidated, • Only comprehensive Exchange in Japan licensed by both METIand MAFF Listing Gasoline, Kerosene, Gas Oil and Eggs, • Providing the World’s LargestItayose (Session Trading) Market.

  19. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION C-COM Offers Liquid Markets • Over 33 millionContracts Traded in 2004 • 2nd Largest Commodity Exchange in Japan • 4th among Energy Futures Exchanges in the world • 8th Largest Commodity Exchange in the world

  20. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Ferrous Scrap to be listed on October 11, 2005 is a Perfect Futures Commodity High Volatility (Coefficient Variance, 2003-2004) 31.6 15.1 4.0 Ferrous Scrap (Shindachi, Tokyo) Gasoline Futures Yen-denominated Gold Futures High Liquidity Solution for High Cost Inventory

  21. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Upcoming Products • Dollar-denominated Gold Futures • Rice Futures • LPG (Liquefied Propane Gas) Futures • Coal Futures • International Commodity Index Futures • Weather Futures Demutualization

  22. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Rapid Globalization • International Affairs Division Created in 2004 • Establishing Co-operative Relationship with Major Global Exchanges • Application for CFTC Part 30 Exemption • Associate Membership

  23. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Associate Membership • Established in March 2005 for Foreign Brokers and Commercial Investors • Lower Margin Requirements Applied • 23 Associate Members* (From 5 Different Countries) (*As of August 2005)

  24. FIA-ASIA DERIVATIVES CONFERENCE　BEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Thank you for your attention

  25. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 Views from a global broker Lionel Ghouila-Houri Fimat Tokyo Business Development , Vice-President JAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND　REORGANIZATION

  26. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Overview • 2004 Commodities Exchange Law (“CEL”) • Sharp Decline in Trading Volume • How to attract Foreign Investors • Requests from Foreign Brokers • Conclusion

  27. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Major Achievements of CEL 2004 • Japan Commodity Clearing House (“JCCH”) • Solicitation/Sales rules modernized • Risk-based capital requirement A reliable, integrated market place

  28. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Sharp Decline in Trading Volume • Frequent Limit stop in energy market • Tighter rules for commercial solicitation • New capital requirements limits Japanese FCM prop trading

  29. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Sharp Decline in Trading Volume

  30. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Priority Actions to Attract Foreign Investors • Number 1Promote liquidity and unleash volatility by broadening Price fluctuation limits • Number 2Implement “Give-up” mechanism • Number 3Continuous quotation and ISV connections • Number 4Align with international practice for Margining

  31. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Requests from Foreign Brokers • Full broker-membership entrance fee too high • Transaction costs should be reduced further • Harmonious regulatory framework • Between Commodity and Financial regulations • Listed and OTC markets

  32. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Conclusion • From Regulatory view, the CEL 2004 moves in the right direction • From a market perspective, some additional steps should be made to bring in more foreign interests: • Free price fluctuation • Continuous trading with ISV connection • Reduction of entrance fees for full membership • Reduction of transaction costs

  33. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Thank You

  34. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 Proposition for the market development Yasuo Mogi 　　　　　　　　　　　 Senior Vice President ＆COO 　　　　　Himawari　CX, Inc. JAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND　REORGANIZATION

  35. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION To the Regulators (including SRO) Understandings of International Standard 1 Account Documentation 2 Futures Transactions – Specific Identification method 3 Margin (customer clearing) accounting process 4 OTC vs. ETD (Exchange Traded Products) Consolidated account statement (Domestic and foreign ETD and regulated OTC) 5 English translation of Laws and Regulations

  36. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION To the exchanges 1 Contract design Needs of market participants and customers Market condition and needs 2 Market design Option Spread Evening Session 3 Education

  37. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION To the Clearing House 1 Margin Money Associate with market and portfolio risk Interest on Equity Intraday and Emergency Margin Call 2 Efficiency Position transfer (ex-pit) Simplified give-up process 3 OTC Clearing

  38. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAJAPAN COMMODITIES INDUSTRY:  VISION FOR GLOBALIZATION AND REORGANIZATION Market integrity and efficiency can be developed only by the synergy among the regulators and members of the industry i.e. exchanges, clearing house and intermediaries. FCMｓ are required to develop & maintain high standard of commercial ethics

  39. FIA-ASIA DERIVATIVES CONFERENCEBEIJING CHINAAUGUST 11, 2005 JAPAN COMMODITY MARKET: VISION FOR GLOBALIZATIONAND REORGANIZATION Thank you

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