In this interview, Akira Kiyota, Japan Exchange Group’s CEO, outlines his strategy to expand the exchange group with a planned trading system upgrade and by expanding into commodity futures and a range of interest rate products.
SINCE SHINZO ABE became Prime Minister in December 2012, Japan’s government has initiated a strategy to revitalize the country’s ﬁnancial and capital markets. Under this mandate, regulators have pushed a number of important reforms, including a change in the legal framework that breaks down the walls between commodity and ﬁnancial derivatives. These reforms have made it possible for an exchange to list both types of products.
In parallel with this regulatory overhaul, Tokyo Stock Exchange and Osaka Stock Exchange merged into Japan Exchange Group in January 2013 and embarked on a program to integrate their markets and clearinghouses under the leadership of Atsushi Saito.
Saito retired earlier this year, handing the reins to Akira Kiyota, a securities industry executive who became president and CEO of Tokyo Stock Exchange in 2013. Kiyota began his professional career at Daiwa Securities in 1969 and spent 44 years at the company, engaged primarily in the company’s bond business. He rose through a succession of senior management roles and became chairman in 2008.
In an interview conducted by FIA Japan, Kiyota shared his vision for the exchange and discussed his plans to expand the group’s derivatives business.
One part of the strategy is to revitalize its existing products to make them more appealing. For example, earlier this year the exchange revised the speciﬁcations for its 20-year government bond futures, adjusting the interest rate, reducing the tick size, changing the deliverable grade to bonds with greater liquidity, and adjusting the market maker program to encourage more quoting in the order book.
The exchange also is planning to roll out a new trading platform in mid-2016 to replace its J-Gate platform, which was installed in 2011. The exchange has said it expects the new platform will have better processing capability, more reliability and the capacity to support a wider array of products. The exchange also has said the new platform will include pre-trade risk management tools similar to what is commonly found on major exchanges in Europe and North America.
The more ambitious part of the plan is to transform the exchange’s focus in terms of its regional presence and product coverage. Kiyota has embarked on a campaign to build stronger relationships across Asia, opening oﬃces in Hong Kong and other regional ﬁnancial centers to promote the exchange as a destination for regional capital ﬂows.
Kiyota also is spearheading the exchange’s drive to become a “comprehensive exchange” and enter the commodity derivatives markets. In addition, JPX has signed an agreement with the Tokyo Commodity Exchange, Japan’s largest commodity futures market, under which Tocom will use the new trading platform that JPX will launch next year.
You were appointed CEO of JPX in June this year. What is your overall vision for the exchange and its derivatives business in particular?
The vision of JPX is to become “your exchange of choice,” and that is to become the most preferred exchange in Asia. JPX was founded in January 2013 as the result of the merger of TSE and OSE and this ﬁscal year is the last year of JPX’s very ﬁrst three-year management plan. Through this post-merger period, JPX has successfully integrated the cash and derivatives markets and clearing organizations with extensive support from market participants.
JPX further tries to introduce and expand the product line-up into commodity futures and various interest rate products to be competitive against other exchanges in Asia.
Now is the time for JPX to expand its business outward to accelerate the process to reach our vision. First, JPX will renew both of the trading systems: arrowhead, the cash equity trading system, will be updated in September this year and J-Gate, the derivative trading system, will be updated in mid-2016. In addition, JPX is preparing to enhance JSCC’s [Japan Securities Clearing Corporation’s] clearing system. The challenge of JPX is how to expand the revenue sources with new IT systems and infrastructure.
Currently, JPX’s derivatives market is the 15th largest derivatives venue in the world, while the cash equities market is ranked third. Looking at the segment breakdown of the trading volume from the derivatives market, a huge portion comes from domestic equity index futures products. To keep growing and expanding the market, JPX recognizes that we always have to enter new segments and products.
JPX launched JPX-Nikkei Index 400 futures last year and Nikkei 225 weekly options in May of this year. JPX also changed the contract speciﬁcations of the 20-year JGB futures in July this year. JPX further tries to introduce and expand the product line-up into commodity futures and various interest rate products to be competitive against other exchanges in Asia.
The Japanese government is working along with the regulators to establish Tokyo as a global ﬁnancial center. At the same time, JPX aims to become the most preferred exchange in Asia. What is needed to achieve both goals? Do you have any plan to conduct international mergers and alliances to facilitate business expansion outside Japan?
JPX should maintain a fair trading facility with various listed products for investors both inside and outside of Japan to raise the presence of Tokyo as a global ﬁnancial center. For JPX to become a comprehensive exchange, where not only ﬁnancial derivatives but also other types of derivatives such as commodity derivatives are traded, should deﬁnitely bring positive eﬀ ects on the future of Tokyo as a global ﬁnancial center.
Regarding international business expansion, there is no doubt that Asia is the strategic focal point for JPX based on key characteristics of the region, such as high future economic growth expectation, ﬁnancial asset amounts and regional links among countries. The relationships with China and the ASEAN countries are what really matter for JPX to achieve its goals. However, this does not directly mean that JPX is preparing to conduct mergers and acquisitions in the region. In fact, JPX has been putting its eﬀorts on developing relationships through support and alliance based on mutual understanding. For example, JPX has been part of the joint venture established to develop the ﬁrst stock exchange in Myanmar, which is scheduled to launch by the end of this year. JPX opened a representative oﬃce in Hong Kong last year following those in Singapore and Beijing to boost the promotion to investors in China and other Asian countries. I would like to cultivate the trust with the countries in Asia following the above examples.
At the FIAJ Financial Market Conference held in Tokyo in May this year, JPX announced its intention to enter the commodity derivatives business. What is the strategy behind your plan to become a comprehensive exchange?
Major trading venues in the world oﬀer various kinds of asset classes to investors, such as equity, ﬁxed income, foreign exchange and commodities. This diversiﬁcation enables those venues to oﬀer access to multiple asset classes to investors and to ensure multiple revenue sources, which make the overall business not depend on the market condition of a single product.
In Asia, SGX [Singapore Exchange], HKEx [Hong Kong Exchanges and Clearing] and KRX [Korea Exchange] already have multiple asset-class business structures and it is likely that other trading venues in emerging countries will follow the same strategy. Therefore, it is indispensable for JPX to achieve the diversiﬁcation of asset classes and to establish its identity as a comprehensive exchange.
In Japan, the discussion of the comprehensive exchange scheme started eight years ago. Since then, Cabinet decisions have been made four times and the Financial Instruments and Exchange Act has been revised to set up the legislative backbone for the scheme. Recently, the Cabinet oﬃce stipulated in its revised Japan revitalization strategy that the comprehensive exchange should be developed as soon as possible. However, there has not been much progress made so far and meanwhile, the Chinese commodity market has been expanding rapidly and gaining more competitive advantage.
JPX and Tocom have agreed that the two exchanges would jointly use JPX’s next generation derivatives trading system, which is scheduled to be launched in mid-2016. JPX will keep moving forward to expand JPX’s business segment not only into the commodity market but also into other markets, such as the interest rate market. I also expect the cooperation with related entities and stakeholders to help achieve JPX’s goals.
What are your views on the current regulatory changes taking place globally and how do you see this affecting Japanese markets?
OTC derivatives regulations were dramatically tightened all over the world in the wake of the global ﬁnancial crisis in 2008. The U.S. market has been particularly dynamic in ﬂexibly responding to these changes by doing things such as introducing swap execution facilities for trading OTC interest rate swaps and shifting from OTC to on-exchange trading. We previously listed FX futures in the past and with respect to Nikkei 225 options, we expanded the number of tradable contract months and will introduce on-demand strikes with the introduction of the next generation derivatives trading system. We will continue to make various eﬀorts to draw in ﬂow from the OTC market.
Looking toward the future, I think that margin requirements for non-centrally cleared derivatives will be a key issue going forward. Although postponed from December 2015 to September 2016, the impact of regulations scheduled to come online in this area will be signiﬁcant because they encompass margin deposits and segregation management for all parties participating in a non-centrally cleared OTC transaction. Traditionally, dividend derivatives and single stock options have been traded on the OTC market in Japan, but we expect these regulations to contribute to a shift to listed market trading.