Japan's Financial Services Agency: Administrative Action On J.P. Morgan Securities Asia Pte. Limited, Tokyo Branch

Date 10/03/2006

1. Acts of conducting a series of stock index futures transactions intended to create an artificial market which does not reflect actual state of the market

The Securities and Exchange Surveillance Commission (SESC) conducted an inspection of J.P. Morgan Securities Asia Pte. Limited, Tokyo Branch (hereinafter referred to as ''the Branch''), and found the following violation of the Securities and Exchange Law. The SESC recommended on March 2, 2006, the Commissioner of the Financial Services Agency (FSA) to take a disciplinary action on the Branch.

(1) From 13:57 to 15:10 on November 4, 2004, conducting the TOPIX futures transactions on its overseas affiliated company's account, a trader of the Branch placed in the TSE market a series of selling orders and purchasing orders at the same index point both by himself and matched them each other. As a result, the Branch conducted cross trades in the TOPIX futures transactions with no intention to transfer the rights represented by the TOPIX futures.

(2) The acts above are found to be ''acts of conducting a series of stock index futures transactions intended to create an artificial market which does not reflect actual state of the market'' stipulated in Article 4(iii) of the Ordinance of the Cabinet Office Concerning the Regulations, etc. of Conducts of Securities Companies (before amended in 2005), and thus to have violated Article 42(1)(ix) of the Securities and Exchange Law (before amended in 2004) as applied by Article 14(1) of the Law on Foreign Securities Firms (before amended in 2004).

* The Branch had already received from its another overseas affiliated company an off-session bilateral trade order(the Branch = buy, the Affiliate = sell) of the TOPIX futures at -5bps from the market VWAP of that day(November 4, 2004). The acts above by the Branch were conducted during the hedge trade of the sell order that it had received. As a result, the market VWAP of that day fell down around 0.15 point.

2. Acts of making representation of a false statement or a misleading statement on any material matter, in connection with the sale or purchase of, or any other form of transaction in a security

As a result of the reporting order issued by the FSA to the Branch, the following violation of the Securities and Exchange Law was found.

(1) In November 2004, acting as an intermediary of purchasing a specified corporate bond, which is a real estate securitization product (hereinafter referred to as ''the Bond''), the Branch delivered to the client appraisal reports in which necessary reduction of the valuation of the underlying assets of the Bond was not estimated. Furthermore, in spite of the client's concerns about the estimated exit prices of the underlying assets, the Branch did not provide its lower estimated prices. Thus the Branch failed to give an appropriate explanation for the Bond.

(2) The acts above are found to be ''acts of making representation of a false statement or a misleading statement on any material matter, in connection with the sale or purchase of, or any other form of transaction in a security'' stipulated in Article 4 (i) of the Ordinance of the Cabinet Office Concerning the Regulations, etc. of Conducts of Securities Companies (before amended in 2005), and thus to have violated Article 42(1)(ix) of the Securities and Exchange Law (before amended in 2004) as applied by Article 14(1) of the Law on Foreign Securities Firms (before amended in 2004).

3. Administrative action on the Branch

On the basis of the above findings, the FSA today issued the following business suspension and improvement orders to the Branch based on Article 24(1) of the Law on Foreign Securities Firms:

(1)Business suspension orders:
- i.Suspending all stock index futures trades on its own account from March 10, 2006 to March 31, 2006 (15 business days) except for the execution of transactions contracted on or before March 9, 2006.
- ii.Suspending all business of the Real Estate Finance Division of the Branch from March 10, 2006 to March 16, 2006 (5 business days) except for the execution of duties contracted on or before March 9, 2006.
(2)Business improvement orders:
- i.Strengthening the internal control system, including fundamental review of the systems for appraisal, explanation/solicitation and internal checks & balances concerning the real estate securitization business.
- ii.Securing strict compliance by all the directors and staff and taking preventive measures against recurrence of the above-mentioned violations.
- iii.Clarifying locus of responsibility.
- iv.Submitting a report to the FSA on the implementation of the above measures by March 31, 2006.

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