Unlike the TOPIX, the Nikkei is price weighted. The higher the individual price per share of a company in the index, the greater weight it holds. A company with fewer shares outstanding, but a higher stock price, holds a greater influence compared to a company with more shares and a lower per-share price.

In a general sense, the inclusion of more companies in the TOPIX means that the index is more representative of the broader Japanese companies. Of the 225 stocks that represent the Nikkei, all are represented in the TOPIX and represent 71% of the weight of the index¹. While there are strong differences in the indices and how they are constructed, their performance has shown a correlation of .967 in the past twelve months. See chart below. 

CME Group now offers yen- and USD- denominated TOPIX futures, as well as Basis Trade at Index Close (BTIC) on both futures which make CME a unique place to manage the risk on this broad-based benchmark Japanese stock index.  The market maker program for both outright futures as well as the BTICs help ensure the strong two-sided markets for investors who are seeking for liquidity to trade.

Compared with JPX, CME’s contract is half the size (¥5000 x TOPIX vs. ¥10,000 x TOPIX). CME and JPX’s TOPIX contracts both settle to the same Special Opening Quotation (SOQ) price upon expiry.

There are numerous examples of ways to trade TOPIX at CME, but one interesting one to look at would be a Nikkei 225 vs. TOPIX Ratio Trade. Example is below. An institution has decided to use 100M JPY in a spread trade between TOPIX futures and Nikkei 225 futures.

1. Nikkei 225 Leg: (28,100-27,590) x ¥500 x 7= ¥1,785,000
2. TOPIX Leg: (1935 – 1964) x ¥2500 x 10 = - ¥1,450,000

Final: 1,785,000 – 1,450,000 = ¥335,000 (equivalent to profit of USD 2,383, if FX = 140.21)

Additionally, the institution will enjoy significant amount of margin offset between NIY and TPY (2:3 at 70% as of November 14, 2022) while trading this spread.  

There are many capital and cost efficiencies related to trading TOPIX at CME Group. The initial margin estimate for the Yen-denominated TOPIX Futures (TPY) outright contract is approximately 638,000 JPY (6.4% of the contract notional value) and 319,000 JPY for the calendar spread.² CME Clearing provides customers the opportunity to offset their contracts against each other to achieve greater capital efficiencies and free up cash each evening. Any offsetting combination of the below products at their appropriate ratio may receive a certain margin credit, beginning with the pair with the highest credit ratio first.

Investors have the chance to gain operational and capital efficiencies by using CME Group as their exchange for both TOPIX and their various U.S. exposure

As an example: an investor has three long (short) TPY futures contracts held against two E-mini S&P 500 futures contract may receive a credit as high as 65% at CME.³ The table below depicts the margin for holding the equivalent notional amount of TOPIX position at JPX compared to holding both positions at CME:⁴

1. As of November 14, 2022
2. As of November 14, 2022. Please see this link in order to find updated margins and ratios
3. As of November 14, 2022. Please see this link in order to find updated margins and ratios
4. CME uses a Historical Value-at-Risk (VaR) methodology called SPAN to ensure that margins are set to cover 99% of potential price moves. JPX entered into an agreement with CME and uses the original SPAN system developed by CME to calculate Clearing Margin. CME considers several factors to compute the gains and losses a portfolio would incur under different market conditions
5. FX rate (USD to Yen) = 140.21, as of November 14, 2022