Lessons from Japanese Experience

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					- Lessons from Japanese Experience -



             June 7, 2002
     Sigma Base Capital Corporation



                                       1
                                                                             Financial Futures Markets in Japan

     Financial Futures Products
     1985                                 1990                               1995                          2000       Current
                       OSE / OSF 50                                                       1998.1.23  TSE / TOPIX Sector Index
            1987.6.9
                                 TSE / TOPIX Futures                                         TSE / TOPIX Calendar Spread
                                                                                   1997.5.16
 EQUITY            1988.9.3      OSE / NIKKEI 225 Futures                                    OSE / NK225 Calendar Spread
FUTURES                                                         1994.2.4 OSE / NIKKEI 300 Futures
                                                                          1996.4.1 OSE / NK300 Calendar Spread
                                                                                                 2001.6.11 TSE / S&P/TOPIX150
    1985.10.19    TSE / 10-Year JGB Futures
                   1988.7.8 TSE / 20-Year JGB Futures
 BOND                                                                        1996.2.16   TSE / 5-Year JGB Futures
FUTURES                                                                                                        TSE / 5&10-Yr JGBF
                              1989.12.1    TSE / U.S. T-Bond Futures                                 2000.8.14 Calendar Spread

                                           TIFFE / Three-Month Euroyen Futures                 1998.7.14
INTEREST RATE           1989.6.30          TIFFE / U.S. Dollar Three-Month Interest Rate Futures           TIFFE / Three-Month
   FUTURES                                                                                                 Euroyen Futures
                                                 1992.7.14     TIFFE / One-Year Euroyen Futures            Calendar Spread

                                                                                                    1999.3. TIFFE / Three-Month
                        1989.6.30 TIFFE / Japanese Yen-U.S. Dollar Currency Futures                         Euroyen LIBOR Futures
CURRENCY
 FUTURES                            1991.2.15 TIFFE / U.S. Dollar-Japanese Yen Currency Futures


        June 7, 2002                                   Sigma Base Capital Corporation                                    2
                                                                Financial Futures Markets in Japan

Transaction Volume by Category
Units/Day T ransaction Volume (2001)                 ¥100MM/Day T ransaction Risk Value (2001)
70,000                                                    120
            63,268
60,000                                                               99
                                                          100
            TOPIX                                                            89
50,000                                                             TOPIX
                                                           80
40,000      NK300                                          NK300
                     29,825   31,007                       60
30,000
                                                           40      NK225
20,000     NK225

10,000                                                     20
                                          5                                           1          0
     0                                                      0
           Equity    Bond     Interest Currency                    Equity   Bond   Interest   Currency
                                Rate                                                 Rate


         n Transaction Risk Value
      Units X Notional Amount X Stdev (Price Movement)

  June 7, 2002                           Sigma Base Capital Corporation                                  3
                                                                       Financial Futures Markets in Japan

 Volume Trend by Category
UNITS                                        TRADING VOLUME (DAILY)
  160,000
                                                                           151,623          Interest Rate Futures
  140,000                                                                                   Bond Futures
                                                                                            Equity Futures
  120,000                                                                                   Currency Futures

  100,000
                                                      94,796
                                      82,892
   80,000
                                                                                                       63,268
   60,000
                                  36,828
   40,000                                                                                                31,007
                             43,443                              43,164
                                        36,203                                                           29,999
   20,000
                  7,940                            694                                                  5
        0
            1985          1987        1989       1991          1993        1995      1997   1999      2001
                                                             YEAR


   June 7, 2002                                  Sigma Base Capital Corporation                                 4
                                                                                            Financial Futures Markets in Japan

          Transaction Volume by Product
  Units                                                                         Units
                                                      NIKKEI 225                                                                                 10Yr JGB
100,000                                               TOPIX                                               76,072
                                                                                80,000                                                           20Yr JGB
                  87,980                              NIKKEI 300
                                                      SECTOR INDEX                             66,648                                            5Yr JGB
 80,000                                                                                                                   61,331
                                                                                60,000                                                           T-BOND

 60,000
                                                                                                                     47,816
                                                                                40,000
 40,000
                                                                      38,686
                                     25,137
                                                                                                                                                     29,816
            21,752                                                    20,618    20,000
 20,000                       19,107
            21,691                                                                                          6,705
                           5,500                                       3,909                   7,940                                 1,187
                                                                                                          329     2,107                                     9
      0                                                   20                            0
           1988   1990      1992     1994      1996       1998        2000                  1985   1987    1989    1991   1993     1995   1997   1999   2001

  Units            3M EUROYEN                      3M EUROYEN LIBOR
160,000            1YR EUROYEN                     3M DOLLAR
                           151,522

120,000


 80,000                                                           68,862

                                                           59,479
 40,000
             35,394                                                 30,995
           809     12 79                      94                 299    12
      0
          1989    1991      1993      1995         1997        1999     2001
           June 7, 2002                                           Sigma Base Capital Corporation                                                            5
                                                                        Financial Futures Markets in Japan

Market Size : Cash vs. Futures
                TRANSACTION VALUE (2001)                                             RATIO : FUTURES/CASH

                                                                                                                      EQUITY
                                               CASH                                                                   BOND
(billion yen)
                                               FUTURES              6
1,000,000
                                        X 0.91                                                 5.31
  900,000                                                           5
                                     808,676
  800,000
                                               733,485
  700,000                                                           4

  600,000
                                                                    3
  500,000                                                                                                2.65

  400,000                                                                                             2.33
                    X 0.88                                          2
  300,000
                 199,844                                                                                                     0.91
                           175,103
  200,000
                                                                    1

  100,000                                                                 0.07                                               0.88
                                                                                      0.34
         0                                                          0
                    EQUITY              BOND                            1985     1987 1989   1991 1993 1995     1997 1999   2001



  June 7, 2002                                   Sigma Base Capital Corporation                                                6
                                                                           Financial Futures Markets in Japan

Product Specifications

                                                                CONTRACT
   PRODUCTS        EXCG    UNDERLYING      TRADING UNIT                               TICK SIZE    SETTLEMENT          MARGIN
                                                                 MONTHS
                              NIKKEI                                                    ¥10
    NIKKEI
                              STOCK          NK225 X                                (Minimum
      225          OSE                                     Mar., Jun., Sep., Dec.
                            AVERAGE           ¥1,000                                   Value
   FUTURES                                                  cycle (5 contract
                             (NK 225)                                               : ¥10,000)     Cash settlement
                                                           months traded at any
                               TOPIX
    TOPIX                                     Topix X            one time)            0.5 point                      calculated by
                   TSE     (Tokyo Stock
   FUTURES                                    ¥10,000                                 (¥5,000)                         SPAN®*
                            Price Index)
                                                           Mar., Jun., Sep., Dec.       ¥0.01
                           Standardized      JGB ¥100                                                 Delivery
  10-YR JGB                                                  cycle (3 contract         per ¥100
                   TSE     6%, 10-year         million                                             of Deliverable
  FUTURES                                                  months traded at any       face value
                               JGB           face value                                                Bond
                                                                 one time)            (¥10,000)
   3-MONTH                                                 Mar., Jun., Sep., Dec.
                             3-Month
     EURO                                                   cycle (12 contract      0.005 point                      calculated by
                   TIFFE     Euroyen        ¥100 million                                           Cash settlement
      YEN                                                  months traded at any      (¥1,250)                        TIFFE-SPAN
                              TIBOR
   FUTURES                                                        one time

* SPAN® (Standard Portfolio Analysis of Risk) system was developed for calculating margin requirement by CME.
    Margin requirement depends on the position taken, market price and volatility of underlying instrument, time to expiration and
    so on.
    e.g.) For a simple long position, brokerage margin is currently 3-4% (as of May 2002)




    June 7, 2002                                     Sigma Base Capital Corporation                                                  7
                                                                 Financial Futures Markets in Japan

Breakdown by Player
                                                                                SECURITIES Cos       BANKS
                                                                                LIFE & NON LIFE      INVESTMENT TRUSTS
                                                                                BUSINESS Cos         OTHERS
                                                                                FOREIGNERS

            NIKKEI 225 FUTURES                       TOPIX FUTURES                           10Yr JGB FUTURES


 100%                                   100%                                     100%
                7.08%                                                                       7.08%
                                                                                            3.55%
  90% 1.38% 5.50%                       90%       15.26%                          90% 0.62%
                                           0.58%                                      1.14%              31.52%
                7.37%     31.52%                                 29.77%               1.27%
  80%                                      1.98%                                  80%
        2.52%                           80%       6.64%                                                           0.64%
                                            0.55%                       0.06%                                     0.22%
  70%                           0.75%   70%       8.09%           2.35% 0.02%     70%                             0.70%
            18.71%              1.09%                                   1.70%                                     0.82%
                          4.49%
  60%                     4.17% 0.49%   60%                      13.42%           60%
                                                                                            59.62%
                                                                                                         33.41%
  50%                                   50%                                       50%

  40%                                   40%                                       40%
                                                  66.90%
  30%       57.46%        57.48%
                                        30%                                       30%
                                                                 52.68%
  20%                                   20%                                       20%                    44.45%
                                                                                            29.48%
  10%                                   10%                                       10%

   0%                                    0%                                        0%
                1991       2001                   1991            2001                       1991        2001


 June 7, 2002                              Sigma Base Capital Corporation                                            8
                                                                       Financial Futures Markets in Japan

Volume by Maturity
 UNITS                NIKKEI 225 FUTURES                           UNITS                           TOPIX FUTURES

 40,000                                                           16,000       13,482
             32,265
 30,000                                                           12,000

 20,000                                                            8,000

 10,000                                                            4,000
                           2      6         0          0                                           0              0                0                0
         0                                                             0
             JUN. ’02 SEP. ’02 DEC. ’02 MAR. ’03 JUN. ’03                      JUN. ’02         SEP. ’02       DEC. ’02       MAR. ’03         JUN. ’03

                               MATURITY                                                                    MATURITY

 UNITS                10-YEAR JGB FUTURES                                               3-MONTH EUROYEN FUTURES
                                                                   UNITS

 25,000
                                                                  10,000
                19,813                                                       7,699
 20,000                                                            8,000
                                                                   6,000            5,268
 15,000                                                                                                 4,519
 10,000                                                            4,000
                                                                                                1,825
  5,000                                                            2,000                                         1,010
                                  15               0
                                                                                                                           218 58              92        21
      0                                                                 0




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 June 7, 2002                                    Sigma Base Capital Corporation                                                                               9
                                                                          Financial Futures Markets in Japan

New Product Introduction
            PRODUCT            EXCG   TIMIMG                   BACKGROUND                                     RESULT
                                                   It was argued that futures products on
                                                                                                Trading volume did not grow
                                                   market capitalization weighted index
                                                                                                significantly even with favorable
                                                   are preferable to simple average such as
           NK300 Futures       OSE    Feb. 1994                                                 trading rules (longer trading hours,
                                                   NK225, as an effective hedging tool as
                                                                                                smaller unit size, favorable margin)
                                                   well as to mitigate impact on cash
                                                                                                and efforts by the regulator
                                                   market.
           NK300 Calendar
                               OSE    Apr. 1996
               Spread                              Aimed at smooth roll-over to the
Equity                                                                                       Moderate success with more than 10%
           NK225 Calendar                          successive maturity.
Futures                        OSE    May 1997                                               share in each product (almost half
               Spread                              International trend to introduce calendar
                                                                                             with NK300)
           Topix Calendar                          spread.
                               TSE    May 1997
               Spread
          Topix Sector Index                       Aimed at offering effective hedging          Trading volume stays very low and
                               TSE    Jan. 1998
               Futures                             tools for various types of stock portfolio   declining
                                                   Aimed at corresponding to S&P’s global
           S&P/Topix 150                                                                        Just started, but no trading volume
                               TSE    Jun. 2001    stock index which may be used as the
              Futures                                                                           since Nov. 2001
                                                   benchmark for global investment
                                                   Need for hedging instrument for
          20Yr JGB Futures     TSE    Jul. 1988    long-term interest rate risk, after the      No trading volume since 1999
                                                   introduction of 20yr JGB
                                                   Need to respond to the increase of
                                                                                                Terminated in Jun. 1996 due to poor
          US T-Bond Futures    TSE    Dec. 1989    foreign securities investment among
                                                                                                trading volume
 Bond                                              Japanese investors
Futures                                                                                         Trading volume stays very low and
                                                   Need for hedging instrument for
          5 Yr JGB Futures     TSE    Feb 1996                                                  declining even after the minor product
                                                   mid-term interest rate risk
                                                                                                renewal in 2000
            JGB Calendar
                                                   Aimed at smooth roll-over to the
                Spread         TSE    Aug. 2000                                                 Around 5% share
                                                   successive maturity.
             (5Yr & 10 Yr)
 June 7, 2002                                     Sigma Base Capital Corporation                                                         10
                                                                                Financial Futures Markets in Japan

Market Impact and Regulations
                                                 Introduction of Futures
                                                    Easy Access                                                   Regulations on
    •Increase Margin                                                                   Generate Arbitrage
                                                    • Low Transaction Cost                                        Arbitrage Trades
    •Increase Transaction Cost                                                         Trades
                                                    • High Leverage                                               (Tick Rule)


  Higher Chance of                   Higher Chance of             Larger Weight of            Theoretical Price
  Single Player                      Fraudulent                   Speculators                 Achieved between
  Influencing Market                 Transaction                                              Cash and Futures
                                                                  Higher Transaction
                       Pre                                        Volume/Frequency
                          v   ent
•Disclosure
•Restrictions                       Increased Liquidity           Increased Futures           Higher Influence on Cash
•Monitoring System                                                Market Volatility           Market (through
•Product Design                                                   (Short Term?)               Arbitrage Trades)

              •Circuit Breaker
              •Limit on Price Movement                                           Increased Cash Market
              •Indication System                                                 Volatility (Short
                                                                                 Term?)                              Benefits

                                                                                                                     Problems
                                                Efficient Portfolio Risk                                             Actions Taken
                                                Management (Hedge)

   June 7, 2002                                           Sigma Base Capital Corporation                                         11
                                                                                     Financial Futures Markets in Japan

Regulation/System Change
                         • Increased four times from 15%/10% (1990) to 30%/25% (1991)
                         • Gradually decreased four times from 30%/25% (1991) to 15%/10% (1995)
                         • Major change in the calculation method : further reduction (1997)
  Brokerage / Clearing
                           - Linked to volatility (revised every 3 months)
        Margin
                           - Gross to Net
                           - Abolition of minimum margin
                         • Introduction of SPAN (2000) :further reduction
                         • Brokerage commissions were determined by trading volume (approx. 0.005%-0.04%)
 Brokerage Commissions   • Increased by twice (to approx. 0.01%-0.08%) (1992)
                         • Deregulation of brokerage commissions (1999)
                         • Taxation on exchange trading began in Oct. 1990 (0.001%)
     Exchange Tax        • Reduced by half to 0.0005% (Mar. 1998)
                         • Abolished (Mar. 1999)
                         • Limits of daily price movement: around 3% of the price at the beginning
   Daily Price Limits
                         • Relaxed in 1994 with the introduction of Circuit Breaker (currently around 10%)
                         • Introduction of Circuit Breaker (1994)
      Restrictions           - Trading rule that calls for a 15-minutes halt when extreme market movement occurs
                         • Prohibition of ‘customer front running’ for transparency and fairness of brokerage trading (1994)
                         • Changed to smaller tick limit of quote and to longer interval of revision (early 1990s)
   Revision of Quote     • Relaxed in 1994 with the introduction of Circuit Breaker
                         e.g.) TOPIX: from 9 pt - 3minutes (1989), 3 pt - 6 minutes (1990), 6 pt - 3 minutes (1994), 6 pt - 1 minute (since 1999)
                         • Announcement of total volume of arbitrage trades by clearing members (weekly 1990 to daily 1991)
      Disclosure         • Announcement of weekly and daily arbitrage trade volume of each of top 15 clearing members (1991)
                         • Announcement of trading volume and open interest of each clearing member (1992)
                         • 9:00 a.m.-11:15 a.m., 1:00 p.m.-3:15 p.m. at the beginning
     Trading Hours       • Trading hours shortened to prevent market disorder at closing (OSE) (1991-1992)
                         • Relaxed back in 1997 (OSE), currently 9:00 a.m.-11:00 a.m., 12:30 p.m.-3:10 p.m.



 June 7, 2002                                            Sigma Base Capital Corporation                                                             12

				
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