Tokyo, Osaka Ses Changing Rules For ig Bang'

Japanese investors will soon be able to deal in options on individual stocks, something which their European and US counterparts have long been able to do. Currently, Japanese exchanges only offer options on indices rather than single companies.

The move is significant not just because it will give Japanese institutions greater flexibility in their portfolio strategies and bring Japanese financial markets one step closer towards world standards. It is also a precursor of a wave of financial deregulation and new products due in Japan's big bang'' over the next few years, and so is being closely watched to see if the sweeping public statements are being followed through with genuine commitment to change.

 

The signs so far are good. The most encouraging factor is the speed at which the new system is being implemented. Japanese institutions are notorious for changing at a snail's pace. The Tokyo commodities exchange, for example, this week introduced trading in aluminium futures "� about 10 years after the idea was first mooted.

The introduction of options on individual stocks, however, will have taken less than two years from proposal to launch, if it goes ahead as planned in July.

From the US standpoint, that seems like ages, but from the Japanese experience, it seems like lightning speed,'' says Mark Chamiel, general manager for futures and options at ING Barings Securities in Tokyo.

If nothing else, it really demonstrates that with big bang, they are pushing through some of the measures more quickly, as opposed to it being just rhetoric or window dressing.''

The options are due to start trading this summer on Japan's two main exchanges: the Tokyo Stock Exchange and the Osaka Stock Exchange, which has set the launch for July 18.

The OSE is hoping to play the role of Chicago to Tokyo's New York: it has more experience with derivatives "� it introduced options on the Nikkei indices, which the TSE does not trade "� but Tokyo is a much larger and more active market.

Although the two will be competing over options, they have been co-operating on the planning. For example, although the OSE initially favoured US-style options, which can be exercised at any time, and the TSE wanted European-style options, with one fixed exercise date, they eventually agreed on the European system to avoid the confusion of having two trading systems in one country.

Both the TSE and OSE will use stock rather than cash settlement. Full details of how the options market will work have yet to be decided; more news is expected in May.

Both exchanges have issued guidelines as to which shares will be eligible, with a priority being to ensure good liquidity. For example, in Tokyo, eligible stocks must have at least 5,000 shareholders, average daily turnover of at least 150,000 shares and at least 130m shares listed. In Osaka, the requirements are a minimum 3,000 shareholders, annual turnover of 25m shares, and 100 million shares listed.

There are several hundred possibles for each exchange, but Tokyo is expected to start with options on between 10 and 40 shares, and Osaka with 20 to 60, so there is keen speculation on which will be selected.

Volatile sectors such as banking seem likely. Analysts say it is still too early to judge who will be the main users of the new options, but it seems clear that the exchanges are aiming for a good mix of institutional and retail clients, and have also been careful to include foreign brokerages in the consultation process.

Japanese private investors' speculative tendencies are well known, hence they are expected to be interested in options as highly-geared investments. For institutions, one attraction is the use of options for portfolio hedging.

Overseas investors can arrange options on Japanese shares through offshore over-the-counter markets, but Japanese institutions have been barred from even that degree of flexibility, and at a time when Japanese fund managers are being exposed to closer scrutiny of their performance, the new instruments may be very helpful.

Leigh Baxandall, head of derivatives research at BZW Securities in Tokyo, says: Institutions in general are very interested in stock option markets, from the perspective that it allows them in particular to sell options. Currently all the institutions can do is buy convertibles and buy warrants.''

Options are considerably more flexible. Unlike warrants, which are long dated and have a single strike price, Japanese options will have a range of short maturities, and a choice of at least five strike prices, one about the current share level, two below and two above.

Also, of course, both put and call options will be available, giving investors greater scope for taking negative positions. There is still much detail to be filled in, but observers are optimistic about the prospects both for this innovation and those to follow.

It is a very significant indicator of what will happen in the big bang,'' says Baxandall.