Introducing TOPIX Futures

Since 1982, when the CME Group launched futures on the S&P 500 Index, the exchange has been a leader in introducing new stock index futures and options products—domestic and international.   In early 2018, CME Group will introduce futures on the broad-based Tokyo Stock Price Index—TOPIX, offering investors yet another product to capture benchmark Japanese equity exposure.  CME Group allows traders to access both popular benchmarks though the use of Nikkei 225 Stock Average futures and TOPIX futures.    For a comparison of these two benchmarks, please see What is TOPIX?

There are several reasons why traders and portfolio managers should consider TOPIX futures:

1. Access to a key broad-based benchmark of Japanese stocks.  The underlying TOPIX index provides exposure to over 2000 stocks traded on the Tokyo Stock Exchange First Section.
2. TOPIX futures will be available for nearly around the clock trading through the Globex electronic trading system.
3. TOPIX futures will allow more flexible execution options such as via outright purchase and sale of futures as well as via BTIC capability (BASIS TRADE at INDEX close).  BTIC allows traders to capture the certainty of the close by enabling market participants to execute a basis trade relative to the official close for the underlying index for more efficient cash management.
4. Margin offsets—for those wishing to trade/spread other CME stock index products against TOPIX futures the margin offsets will be available. (see figure 1 below)
5. By trading TOPIX futures at CME Group, counterparty risk issues are mitigated by CME Group’s Clearing House.  As the world’s largest derivatives exchange, CME Group takes considerable measures to ensure that global traders/portfolio managers can enjoy a stable and robust clearing mechanism largely free of counterparty risk.

The chart below shows TOPIX and NKY plotted together.  In general, they demonstrate a tight correlation, but there are times when they diverge.  It is these divergences that traders may try to capitalize on with various long/short combinations of the two indexes futures.  Given the popularity of these kinds of trades, margin credits can provide savings from 45-65 percent. 

Let’s look at one way traders can utilize TOPIX Futures in their trading strategy. 

Let’s assume an active trader believes Japanese stocks will rally in the next few weeks/months.   TOPIX is currently trading at 1790.00.   The trader buys (goes long) one TOPIX future at CME Group at 1790.

A few weeks later the trader is proven right in his opinion and TOPIX has rallied to 1820.00 .  He then sells the contract to realize his profit.

Bought: 1 March 2018 TOPIX futures at 1790

Sold: 1 March 2018 TOPIX futures at 1820

Profit: 30 pts

30pts x ¥5000 = ¥150,000

(at current USD/JPY exchange rate of 113.00, ¥150,000 equals ~$1,327)