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Commodity derivatives

Yuki Sakamoto

From January 1 2011, the Amendment to the Commodity Exchange Act (Act No. 74 of 2009) became effective in its entirety and the Commodity Exchange Act (CEA) was superseded by the Commodity Futures Transaction Act (CFTA).

Under the CFTA, certain conduct which was not regulated before the enactment has become a commodity futures transaction business (CFT business) and persons who wish to undertake such business are required to receive authorisation from the director general of the relevant Bureau of Economy, Trade and Industry Office and/or Agricultural Administration Office.

The CEA primarily focused on transactions on domestic commodity exchanges (such as the Tokyo Commodity Exchange) and brokers who received customers' orders and traded on such exchanges. As a result, there were only a few rules regulating intermediary and broker parties for transactions involving domestic investors on foreign commodity exchanges (such as the New York Mercantile Exchange) or over-the-counter commodity derivative transactions outside the exchanges.

Specifically, neither permission nor registration was required for intermediary and broker parties for transactions on foreign commodity exchanges, and there were only a few regulations on conduct (such as an obligation to provide an explanation to customers). In addition, there was no law that clearly authorised OTC transactions and, accordingly, there was the potential risk of OTC transactions being deemed as an act of gambling, prohibited by the criminal law of Japan.

Intermediary and broker parties on both domestic and foreign exchanges, as well as OTC transactions, are collectively categorised as commodity derivative transactions under the CFTA and require authorisation as a CFT business. An exception is in the case of certain OTC transactions between professional parties with an in-depth knowledge of commodities (the scope of these professional parties is generally similar to the professional investors referred to below).

As for OTC transactions, there is no transitional measure for those parties who conducted them on or before December 31, 2010 other than the settlement of outstanding transactions. Anyone who intends to conduct OTC transactions must become authorised as a CFT business or limit the extent of the transaction to only those among the professional parties discussed above, regardless of whether they have previously conducted OTC transactions.

Commodity future transaction operators authorised under the CFTA are regulated in a manner similar to financial instruments transaction operators under the Financial Instruments and Exchange Act (FIEA). Although the regulations on commodity transaction operators under the CEA remain with minor modifications, a significant change under the CFTA is that, as under the FIEA, investors are newly categorised as either professionals or amateurs, and some regulations on conduct, such as the obligation to provide an explanatory document to customers before a transaction, do not apply when the customer is a professional investor.

The definition of professional investor under the CFTA is also similar to that under the FIEA; certain corporations doing businesses related to the commodities targeted by the CFTA are, however, considered as professional investors under the CFTA with respect to transactions pertaining to the commodities they are trading so that the hedging effect of the commodity derivative transactions may be wider utilised. Moreover, as with the FIEA, certain amateur investors may choose to change their status to become professional investors.

Yuki Sakamoto

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