Trading TOPIX Futures at CME Group

What is the TOPIX?

TOPIX is a free-float adjusted market capitalization weighted index that is calculated based on all the domestic common stocks listed on the Tokyo Stock Exchange (TSE) First Section. The higher the values of the companies in the index, the greater their contribution to the overall index return.

It is highly correlated with other cap weighted indices, such as the MSCI Japan (.997 correlation). The TOPIX includes roughly 2,000 companies, where the top-20 stocks are roughly 25% of the total weighting of the index itself. The TOPIX index comprises of 33 sectors.                                         

In 2005, TOPIX changed the way that it calculated the value of the index. A large majority of companies in Japan have holdings in shares of their business partners. These shares are no longer included in the index’s company weight calculations

How does it differ from the Nikkei 225?

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 61% 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 .962 in the past twelve months. See chart below. 

Trading at CME Group

Since launch in February 2018, CME has seen growth in the market conditions of the TOPIX contract, with bid-ask spread on average three ticks wide. CME designed a market maker program for TOPIX futures and Basis Trade at Index Close (BTIC) to help ensure these strong two-sided markets.

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 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.

Profit and Loss:

  1. Nikkei 225 Leg: (22,625-22,565) x ¥500 x 1= ¥30,000
  2. TOPIX Leg: (1770 – 1730) x ¥2500 x 1 = - ¥100,000

Final: 30,000 + 100,000 = ¥130,000 (eqiv. USD 1,157 (if FX = 112.33))

Capital and operational efficiencies

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 375,000 JPY (4.4% of the contract notional value) and 15,000 JPY for the calendar spread.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.

Leg 1   Leg 2 Ratio Margin Credit*
Nikkei (Yen) Futures vs. TPY 3:2 70%
Nikkei (USD) Futures vs. TPY 3:2 70%
E-mini S&P 500 Futures vs. TPY 3:2 65%
Dow ($5) Futures vs. TPY 4:1 65%
Mid-Cap Futures vs. TPY 3:2 60%
E-mini Nasdaq-100 Futures vs. TPY 3:2 55%
E-mini Russell 2000 Futures vs. TPY 5:6 45%

Instead of gaining exposure by using an exchange in Japan, 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 two long (short) TPY futures contracts held against three E-mini S&P 500 futures contract may receive a credit as high as 65%.3 The table below depicts the margin for holding the TOPIX position at JPX compared to holding both positions at CME:4

Scenario 1
Contract Exchange Initial Margin per Leg
TOPIX Futures JPX 375,000 JPY
E-mini S&P 500 Futures CME $5,600
Offset   N/A
Total Margin   $21,219
Scenario 2
Contract Exchange Initial Margin per Leg
TOPIX Futures CME 375,000 JPY
E-mini S&P 500 Futures CME $5,600
Offset   65%
Total Margin w/ Offset   $7,427

Appendix:

  1. As of June 29, 2018
  2. As of June 29, 2018. Please see this link in order to find updated margins and ratios
  3. As of June 29, 2018. 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

TOPIX Home

Return to the TOPIX homepage for more information regarding contract specs, educational resources, and more.

TOPIX Futures