The Tokyo Commodity Exchange (Tocom) said yesterday that it will push ahead with plans to launch a dollar based crude oil futures contract on the Singapore Exchange (SGX) in September despite market apathy for the project.
The two exchanges first announced plans for the crude futures in April, but oil market participants showed little enthusiasm at the time.
Tadayoshi Nakazawa, the Chairman of Tocom, said he was confident that its contract would succeed, even after failed previous attempts to kick start crude futures trading in Asia by London's IPE and the Nymex.
”We will launch the contract in September and we're confident it will do well,” he said in an interview in Singapore.
Nakazawa said increased trade between Asian countries and oil business risks would ensure the success of the contract.
”Because of the risks involved in oil business, there is a heavy need for a hedging tool among oil traders and commercial players,” he said.
Tocom's SGX crude contract will be tailored like its Japanese version launched by Tocom in September 2001, and settled on market assessments of Middle East Oman and Dubai benchmark crudes.
But it will be a dollar based system and on a per barrel basis versus Tokyo's yen based per kilolitre contract.
From 1995-2001, the SGX had also listed a North Sea Brent crude contract under a mutual offset agreement with IPE, the world's biggest oil exchange, but drew no liquidity.
In May 2000, Nymex launched a Middle East sour crude contract after much fanfare but also gave up after about a year.
Only Tocom has had any success with oil futures in Asia but its crude, gasoline and kerosene derivatives, priced in yen and kilolitres, draw mainly day traders - individual retail customers and market speculators - and not oil traders.
While the launch date of the Tocom contract has been decided, daily position and price limits were still being discussed, Nakazawa said.
”We're in the final stages of working out the spot month position and daily price limits, but have not made any decisions yet,” he said. “We are certain, however, that the position limits would be greater than the Japanese contract.”
The existing Japanese contract has a spot month position limit of 80 lots, equivalent to 50,320 barrels, and a daily price limit of 900 yen.
Traders wondered how arbitrage may work between the two Tocom and SGX crude futures.
“We're not concerned, on the contrary, we expect healthy arbitrage,” Nakazawa said, adding that the potential for arbitrage would boost traded volumes.
On the domestic front, Nakazawa said Tocom was reviewing a change in margins or “good faith deposits” required by traders.
Margins for one 100-kilolitre lot would be reduced to 135,000 yen from July 1, 10 per cent lower than the previous 150,000 yen, he said.
But current trading limits, which traders have complained are too low, would stay for now.
"We won't change the daily price or position limits yet, since we can't do everything at one time," Nakazawa said.
He said TOCOM planned more changes next January, when it would launch a new electronic trading platform.
Nakazawa also said he expected to launch a gas oil contract early next year, but could not provide as concrete date. "It will only be launched after we go electronic," he said.