An investor who is gaining exposure to international markets, specifically Japanese markets, faces a few decisions. They must decide which index to track capital against, and for the sake of this paper we will compare TOPIX and MSCI Japan. The MSCI Japan Index, like the TOPIX, is designed to measure the performance of the broader Japanese market. The two indices have tracked similarly in the past decade, as shown by the below graph1.

The TOPIX Index typically holds more than 99% correlation to the MSCI Japan. Hence, if you are currently benchmarked to the MSCI Japan, say through an MSCI Japan ETF, it may be advantageous to transition that exposure to TOPIX futures to gain similar exposure without capital strain and currency risk.

Specific to currency risk, when you carry your Japanese exposure at CME Group through TOPIX futures, you are not exposed to what the exchange rate between the US and Japan currencies will do during the duration of your futures contact. The MSCI EWJ US Equity is not giving the right exposure to MSCI Japan due to the fact the EWJ is USD denominated. This difference in exposure between the futures and ETFs becomes more apparent during a “bull market.” When the U.S. economy is strong, typically the Japanese Yen depreciates vs. the dollar which will hinder the performance of the MSCI Japan ETF2 because of the currency performance component of the fund.


CME Group now offers Basis Trade at Index Close (BTIC) functionality on Equity Index futures. It links futures to the cash market and enables market participants to execute a basis trade relative to the official close for the underlying index for more efficient cash management. It is a convenient way to access daily closing prices, which is beneficial to a lot of indexed investors. A BTIC transaction for TOPIX futures provides the ability to trade the future at a price understood to be the theoretical equivalent of the official cash index close with given assumptions on dividends and all-in implied financing to maturity which will give the customer the opportunity to exit their ETF position and gain a futures position without the risk of slippage. This helps customers manage investment flows tied to the MSCI Japan cash close.

BTIC Example

A fund manager benchmarked to the TOPIX Index receives an inflow of $10M to be used on the day's closing index level

  • TOPIX Futures contract
    • Index Level: 1,964.0
    • TOPIX Futures Multiplier: ¥5,000  
    • Exchange Rate (USD to Yen): 140.21
    • ($10M  x 140.21) / 1964 / 5000 = 143 contracts
  • The fund manager determines that 10M in capital is worth 143 contracts
  • Basis/Price of +0.50
    • Trades 143 contracts at +0.50 on screen
  • After the Japanese close, the official TOPIX index level of 1,956.91 is published
    • The fund manager is allocated 143 contracts at a price of 1,957.41

Potential Advantages of Futures over ETFs

  • Around the Clock Trading: Futures trade nearly 24 hours a day. ETFs cannot be traded around the clock
  • Capital Efficiencies: Stock index futures require only an up-front performance bond margin – about 6% of notional amount of the contract. ETFs at a minimum require 50% margin on regulation T (and borrowing the other 50% at broker loan rates)
  • Currency Exposure: Futures are unfunded and thus are not exposed to currency risks. FX risk can be a conscious decision. In ETFs you are exposed to both your equity risk, in addition to additional FX risk
  • Tax Efficiencies: Short-term gains from futures contracts are taxed at a more favorable rate than short term gains from stocks and ETFs1
  • Clearing House Mitigates Counterparty Risk: CME Group’s Clearing House has been a robust and stable entity that has effectively dealt with counterparty risk issues even when the world financial system has undergone significant stress. In addition, customers can cross margin their equity portfolio at the CME Clearing House to receive margin offsets. Customers can then reallocate those funds.


  1. The graph normalizes the two charts to depict the first point on the graph for each index to be at a level of 1,000
  2. Historically, the TOPIX and the MSCI Japan have held strong correlations. EWJ US Equity prices are printed after the close of the US market, whereas the MSCI JAPAN/TOPIX print after the Japanese close, a 14-hour difference. This creates additional noise that can be seen below in the differences below between the EWJ US Equity and its net asset value.


  1. CME Group Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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