Japan's commodities brokers clean up their acts

TOKYO - Japan's ailing commodities brokerages are facing a major reshuffle, with many forced to slash jobs, sell out or even close down in response to thinning trade and new competitors.

While the rest of the world is seeing a commodities trading bonanza, Japan's exchanges are struggling to mend their battered image by improving transparency and investor protection.

Brokerages are still recovering from a double blow in 2005 when fees were deregulated, hurting their income, and a law was introduced to curb perceived high-pressure sales techniques.

The revised rules have also encouraged new players, such as foreign investors and securities firms, to enter the market.

"In this business climate, it's tough to continue the conventional commodities business," said a senior official of a Japanese brokerage.

"Many are looking for ways to rationalise, while some are looking to sell their companies and some are even considering quitting their business," he said.

The 2005 law clamped down on certain sales techniques, asked for clearer separation between the accounts of customers and brokerages and forced brokerages to deposit clients' margin funds with a clearing house.

This meant that brokerages had to increase their cash positions to boost volumes when they wanted to trade on their own account, which in turn discouraged many smaller market players.

The resulting decline in turnover unleashed a wave of consolidation among commodities exchanges -- there are now four, compared to seven at the start of 2006 and 16 in 1989.

UNSTOPPABLE TREND

"You really cannot stop this trend of reorganization, especially after the law," said Akio Shibata, deputy director at Marubeni Research Institute.

Turnover fell below 100 million contracts in 2006 for the first time in seven years, according to the Japan Federation of Commodity Exchanges, and was down 18 percent year-on-year at 92.7 million contracts.

Despite the law's impact on the industry, many said it had been a necessary change.

"In the past, Japanese commodities markets were not fully equipped with rules to protect investors," Toshinori Ito, a senior analyst at UBS Securities Japan.

"The new law enhanced investor protection, but at the same time, it created a greater burden for brokerages who were required to make a contribution to support the measure," Ito said. "Some cannot bear this kind of additional cost, and are forced to leave the market."

The number of commodity firms has dwindled to 80 at the start of this year from 86 last April and 96 in April 2005, just before the law was implemented, according to data from the Ministry of Economy, Trade and Industry.

There were about 125 companies in 1996.

NEWCOMERS

"We are seeing a lot of rationalization," said a senior official at the ministry. "This is the trend now and this is a necessary move."

But he said greater transparency and better investor protection had also attracted new entrants.

"We are seeing many foreign institutions and financial institutions entering the business. The trend is there and we welcome this move," the official said.

Faced with such new competition, many brokerages are opting for mergers. The sector has seen several tie-up projects over the past few weeks, and more are expected.

Japan's leading commodities trading adviser, Astmax Co. Ltd <8734.Q>, is in talks to buy up shares of Mitsui Bussan Futures Ltd., a subsidiary of Japan's No. 2 trading house, Mitsui & Co. Ltd. <8031.T>.

Both companies were aiming to clinch a deal by Monday.

Separately, Himawari CX, a subsidiary of Himawari Holdings Inc <8738.Q>, will merge its conventional retail brokerage business with another Japanese brokerage, USS Securities Co. Ltd., from April 1.

And another commodities firm, Hokushin Shohin Co. Ltd., will transfer its online trading and retail businesses to its parent company Hoxsin Bussan Co. Ltd. by March 19 to improve efficiency and to strengthen its financial base.