Tokyo Stock Exchange: Measures Taken For Preventing Recurrence, Etc. Concerning The Derivatives Trading System Malfunction

Tokyo Stock Exchange, Inc. (TSE) would like to offer its sincere apologies to investors and the many others involved in its markets for the inconvenience caused by the Derivatives Trading System malfunction that occurred on February 8, 2008.

Below is a summary of the causes of the system malfunction, the TSE's response to the problem, the locus of responsibility, measures taken for preventing a recurrence, and other information.

1 Background

At 11:00 a.m. on Friday, February 8, 2008, the Derivatives Trading System failed to correctly process order executions for the morning-session closing price of the March 2008 TOPIX Futures contract, making further processing of the contracts impossible. The TSE halted trading of the contract in the afternoon due to these circumstances.
The TSE then investigated the cause of the malfunction and implemented preventative measures over the weekend. Trading of the contract resumed on Tuesday, February 12, 2008.
The TSE received an order from the Financial Services Agency (FSA) Commissioner to provide a report on this matter pursuant to the provisions of Article 151 of the Financial Instruments and Exchange Law, and submitted the report to the FSA today accordingly.

2 Outline of Report on Occurrence of the Trading System Malfunction

(1) Cause of the Malfunction

Derivatives Trading System order acceptance processing is as follows:
When accepting orders, the System first registers them on the order storage table, then updates a different table (the so-called "order book") where the aggregate number of orders per price is organized based on price and number of orders. During processing for this second table (the order book), the System checks prices using work area in the memory, and updates the aggregate number of orders whose prices are the same.
The malfunction occurred when certain conditions caused the work area in the memory not to be initialized. As a result, the data registered in the above two tables were mismatched, and order execution processing for the closing price was halted as designed.
There was an omission in the work area initialization process that should not have occurred when the development vendor developed the program, and based on this, the TSE has determined that the fundamental causes of the problem were 1) that the development vendor did not adequately establish a framework for checking whether such processing was carried out correctly, and 2) that there was room for improvement in the TSE's supervisory framework.

(2) TSE's Response to the System Failure

After the system malfunction occurred, the TSE and the development vendor promptly investigated the cause and attempted retry processing such as changing execution processing from automatic to manual The system, however, failed to process order execution for the morning-session closing price of the March 2008 TOPIX Futures contract, and thus the trading session was not completed. Prompt investigation of the cause of the malfunction in order to take the appropriate countermeasures would be difficult, and the TSE concluded that the market for the contract would be further disrupted if closing-price orders continued to go unexecuted. As a result, the TSE halted trading in the March 2008 TOPIX futures contract at 11:24 am, and decided to halt trading in the contract for that day at 11:53 am.
During this time, the TSE kept all trading participants informed of the system malfunction, subsequent developments on the situation, and trading halt and resumption, etc. through simultaneous facsimile transmissions and the "Exchange Notice to Trading Participants". In addition, the TSE explained the situation to investors via its website.

(3) Locus of Responsibility

It is the TSE's responsibility to stably provide various market functions, and the TSE sincerely apologizes for creating a situation in which investors' trading opportunities were limited when index-futures transactions were halted due to the system malfunction.
Although the direct cause of the system malfunction was the work area initialization process that failed to be completed when the development vendor developed the program, the TSE's responsibility as a market operator and administrator is also significant in terms of failure to construct an organizational structure that gives top priority to ensuring the functioning of the market. This includes developing a robust system and having measures in place for prompt recovery in case of a system malfunction.

(4) Disciplinary Actions

Disciplinary actions regarding the system malfunction are as follows:
The TSE then investigated the cause of the malfunction and implemented preventative measures over the weekend. Trading of the contract resumed on Tuesday, February 12, 2008.
The TSE received an order from the Financial Services Agency (FSA) Commissioner to provide a report on this matter pursuant to the provisions of Article 151 of the Financial Instruments and Exchange Law, and submitted the report to the FSA today accordingly.

Reductions of Officers' Remuneration

Taizo Nishimuro, Chairman of the Board, Atsushi Saito, President & CEO, Yasuo Tobiyama, Senior Managing Director & COO, and Yoshinori Suzuki, Managing Director (System Unit) & CIO will receive a 10% reduction in monthly remuneration for one month.
Strict Censure

Strict censure will be issued to Yoshinori Suzuki, Managing Director (System Unit) & CIO, and Masayuki Hirose, Director of IT Development for Trading System.

(5) Measures Taken for Preventing Recurrence

In order to ensure that this type of malfunction does not occur again in the future, the TSE will promptly review and steadily implement the following preventative measures. The TSE is committed to ceaselessly making such efforts to further elevate the level of fairness and confidence in its markets.

(1) Measures to Improve the Quality of the Derivatives Trading System

Outline	Planned Implementation
(1) Reimplementation of Operation Confirmation, High-Stress and Other Tests Taking the nature of the malfunction into account, the TSE will once again conduct tests such as the following: - Operation confirmation tests before and after specific times in which processing changes occur such as market opening and market closing. - High-stress tests in which a large number of orders are placed under the above circumstances.	By the end of April, 2008
(2) Theoretical Verification of Program Logic Taking the nature of the malfunction into account, the TSE will once again conduct tests such as the following: - Initialization process verification of the work areas that caused the system malfunction. In cooperation with the TSE, the development vendor has already performed inspections on major programs such as order acceptance and order execution, and will continue to confirm whether or not any initialization logic is insufficient by conducting horizontal development of all programs. - Verification of the order acceptance and order execution programs where the malfunction occurred. In cooperation with the TSE, the development vendor will confirm whether the processing logic is normal, whether or not any logic is insufficient, and whether there is a problem in data connection among programs.	By the end of April 2008

Outline

Planned Implementation

(1) Reimplementation of Operation Confirmation, High-Stress and Other Tests
Taking the nature of the malfunction into account, the TSE will once again conduct tests such as the following:
- Operation confirmation tests before and after specific times in which processing changes occur such as market opening and market closing.
- High-stress tests in which a large number of orders are placed under the above circumstances.

By the end of April, 2008

(2) Theoretical Verification of Program Logic
Taking the nature of the malfunction into account, the TSE will once again conduct tests such as the following:
- Initialization process verification of the work areas that caused the system malfunction.
In cooperation with the TSE, the development vendor has already performed inspections on major programs such as order acceptance and order execution, and will continue to confirm whether or not any initialization logic is insufficient by conducting horizontal development of all programs.
- Verification of the order acceptance and order execution programs where the malfunction occurred.
In cooperation with the TSE, the development vendor will confirm whether the processing logic is normal, whether or not any logic is insufficient, and whether there is a problem in data connection among programs.

By the end of April 2008

(2) Overall Review of System Malfunction Response Measures

Outline	Planned Implementation
(1)Review of Project Management Framework Considering that the fundamental cause of this system malfunction was an insufficient management framework for governing the system manufacturing process, both the development vendor and the TSE will enhance project management more than before.	Prompt implementation in the development project in the future.
(2) Theoretical Verification of Program Logic In order to improve the crisis management system, the TSE will conduct a company-wide re-verification of response work-flow in case of a system malfunction. In addition, the TSE will make revisions to guidelines for response to system malfunctions, etc.	April, 2008
(3) Conducting Training on System Malfunctions In addition to theoretical training and practical training using the actual equipment of each system, the TSE will periodically conduct training for system failures using the actual equipment of trading and other systems simultaneously in order to further enhance malfunction response.	Training will first be conducted before the end of May 2008, and periodically thereafter.