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On November 4, 2005, the Financial Services Agency required us
to report the results of an overall inspection of TSE's systems,
and on December 14, 2005, the Commissioner of the Financial Services
Agency ordered us to improve our services in accordance with the
provisions of the Securities and Exchange Law. We responded to these
orders by investigating the causes behind the recent system failure,
working out measures to prevent future failures, and reviewing our
entire market-supervision system. Here we would like to report the
progress of these endeavors.
I. Causes behind the system failure of December 8, 2005
(facts discovered after submission of the "Report on the trading of J-COM shares" (dated December 12, 2005))
1. The incident itself
On December 8, 2005, Mizuho Securities attempted to cancel an erroneous order for J-COM shares newly listed on the exchange. The equities and CB trading system of the Tokyo Stock Exchange, however, failed to cancel the order due to a malfunction in the mechanisms used to cancel orders already deemed to be processed(*1).
(*1) Processing
of orders deemed to have been processed at the upper or lower limit
of the range of price fluctuation.
2. Causes behind the incident
TSE has determined that an incorrect part of the reference conditions in the program to retrieve cancellation orders for post-deemed processing orders was the cause of the incident.
3. When was the faulty computer code created?
During the development phase of TSE's equities and CB trading system, developers failed to adequately consider the conditions that would cause this type of incident to occur when creating the program for deemed processing. As such, TSE concluded that the glitch that caused this incident was embedded in the system by the time it was activated in May, 2005.
4. What market-supervision system was in place on the day of the incident?
TSE is aware that the market-supervision system in place on the
day of the event was inadequate in areas such as the system for
communicating with trading participants in emergencies, market supervision
of the exchange when unusual orders are placed, and information
disclosure on erroneous orders.
II. Measures to prevent system failures in the future
1. Measures to remedy the system glitches responsible for the incident of December 8, 2005
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Measure |
Expected completion |
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(1) Correction of the code used to cancel orders deemed to have been processed (*2) |
Mid-February (including the verification test) |
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(2) New functions to check orders
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By the end of April for (i) and (ii) For (iii), between two to three months after the implementation of (i) and (ii) above. |
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(3) Verification test on special processing, etc. (i.e., functions which are less frequently used) |
By the end of April |
2. Results on the overall inspection of system and measures for
improvement
|
Measure |
Results of overall
inspection |
|
(1) Special inspection of hardware |
No system problems were found after a special inspection which included items not normally covered in regular periodic inspections. During the inspection we replaced several components of the system and changed the settings for some of the system equipment. |
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(2) Material inspection of software |
We conducted a prioritized inspection of items thought to capable of impacting system operation. As a result, we recognized that in one area of the system, although currently there is an extremely low probability of problems occurring, adjustments must be made to the code considering the necessity to prepare for increased order volumes in the future. We have decided to make these adjustments according to the level of their urgency. *Detailed inspections will continue until the end of May. |
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(3) Review of operation, maintenance, and inspection of the system |
All of the work described in II 4. (Review of system operation processes by outside experts) will be completed by the end of this fiscal year. |
3. Overall inspection covering the management of trading orders
by securities firms and measures for its improvement
Heretofore, Tokyo Stock Exchange has carried out examinations of the order execution systems of trading participants, including measures taken to prevent erroneous orders. Whenever we have detected problems in the management of an order-execution system, we have required the securities firm in question to submit a business improvement report, and strongly urged the implementation of measures to prevent a reoccurrence. On December 22, 2005, the Financial Services Agency requested all securities firms to conduct an overall inspection of their systems for oversight of trade order placement for equities and other securities. We will take the results of these inspections and also the discussions of the "Working Group to Improve Stock Order Management and Risk Management Systems" established by the Japan Securities Dealers Association into account when we implement measures this fiscal year to improve the effectiveness of our examinations of systems for preventing erroneous orders.
4. Progress in reoccurrence prevention measures as described in the "Report on System Failures" (dated November 15, 2005)
(i) Reoccurrence prevention measures for the trading system
|
Measure |
Progress |
|
(1) Review of operation processes, responsibilities, and check mechanisms |
This measure was completed by the end of January 2006. Relevant manuals have been improved and new operation processes have been implemented. |
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(2) System-check function to confirm the conversion of programs and normal loading |
The system is currently running with the enhanced check function in place, and a portion of system-check tools have been introduced. |
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(3) Review of system operation time |
Since December 12, 2005, the system has been activated two hours earlier than before. |
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(4) Extraordinary system audit by an outside auditor |
The system was audited by an outside auditor by the end of January 2006 |
(ii) Overall measures to improve IT security
|
Measures and summary |
Progress |
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(1) Establishment of "System Advisory Committee (tentative name)" of outside academics and specialists |
Committee members are to be selected and appointed once the CIO (chief information officer) position described in (5) below is established. |
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(2) Review and re-verification of system operation processes by outside specialists |
The potential candidates for outsourcing were selected in December 2005. Review and verification work is expected to be completed by the end of March. |
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(3) Acquisition of outside accreditation of information security management |
The project to acquire BS7799 ISMS accreditation is now underway. The target date for acquisition is the end of March. |
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(4) Review of system backup |
TSE is considering the establishment of a backup site from the next fiscal year |
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(5) System development and enhancement of operations |
Establish a CIO position and install a qualified specialist from outside the company on February 1. Under the new system, a "System Advisory Committee" will be formed to consider and implement practical measures. |
III. Fundamental review of the market-supervision system
1. Enhanced trading supervision organization
A general manager responsible for the supervision of trading will be newly assigned to the trading-supervision group in the Equities Division. This manager will oversee all affairs related to trading supervision, and will have the authority to temporarily halt or suspend trading when necessary. Steps will also be taken to enhance the personnel structure in the trading-supervision group.
2. Establishment of measures to respond to unusual orders
TSE will newly appoint a manager who will monitor the market for and extract unusual orders on a full-time basis. By the end of April, TSE will introduce a system to extract unusual orders on the basis of the number of listed shares and to reject clearly erroneous orders placed by trading participants. Once this system is implemented, TSE will introduce a system which will restrict order input to a certain valid price range for newly listed stocks before the opening price is determined (see II "Measures to prevent system failures in the future").
3. Improved communications during emergencies
A dedicated communication system for communicating with trading participants during emergencies (e.g., when unusual orders are placed) will be developed by the end of February.
4. Enhanced system for disclosing emergency market information
The Tokyo Stock Exchange is committed to fully disclosing emergency market information in the event of an unusual order so that confusion in the market may be averted. TSE will also require trading participants who place unusual or erroneous orders to disclose relevant information.
5. Improvement of the service execution system
We have created a service manual on the recent market supervision system review and responses to unusual orders. We have also decided to provide periodic training on both appropriate responses to unusual orders and the disclosure of emergency market information.
6. Other issues
The Tokyo Stock Exchange is now researching and studying the mechanisms
used to cancel erroneous orders in overseas markets, and consider
the possibility of implementing such mechanisms in Japan.
IV. Placement of responsibility in light of repeated system failures within a short period of time
The Tokyo Stock Exchange is responsible for the proper operation
of the exchange securities market and the stable provision of market
functions. We have a grave social responsibility for the recent
series of system malfunctions that disrupted the market and seriously
inconvenienced investors and other related persons.
To clearly demonstrate the responsibility of management for these
disruptions, the Board of Directors called for disciplinary actions,
including the resignation of directors, in a meeting held on December
20, 2005.
1. Resignation of Directors, etc.
| Takuo Tsurushima, | Representative Director and President: | Resignation |
| Sadao Yoshino, | Representative Director and Senior Managing Director: | Resignation |
| Yasuo Tobiyama, | Managing Director: | 10 percent cut in monthly salary for three months |
| Eisuke Nagatomo, | Managing Director: | 10 percent cut in monthly salary for three months |
| Tomio Amano, | Managing Director: | Resignation |
| Toshitsugu Shimizu, | Executive Officer: | 10 percent cut in monthly salary for three months |
| Tomoyoshi Uranishi, | Executive Officer: | 10 percent cut in monthly salary for three months |
| Hiroyuki Iwakuma, | Executive Officer: | 10 percent cut in monthly salary for three months |
| Hironaga Miyama, | Executive Officer: | 10 percent cut in monthly salary for three months |
(*Resignation as of December 20, 2005; salary cut
from January 2006)
2. Strict warning
Strict warnings were issued to Masaru Tokita, General Manager of Equities, and Hiroshi Sato, General Manager of System Development for Trading.
In addition, the following Board members decided to return 10% of their monthly salaries for three months on a voluntary basis: Taizo Nishimuro (Chairman and Director), Junichi Ujiie (member of the Board), Hiroshi Okuda (member of the Board), Yasuo Kuramoto (member of the Board), Nobuo Tateishi (member of the Board), Hitoshi Maeda (member of the Board), Masahiro Wakita (member of the Board), Shigeaki Itsuki (Standing Statutory Auditor), Satoshi Shiibashi (Standing Statutory Auditor), Toshiaki Katsushima (Statutory Auditor) and Koji Shindo (Statutory Auditor).
In closing, we reiterate that all of the officers, directors, and employees of Tokyo Stock Exchange Inc. fully recognize that providing investors with stable trading opportunities is the foundation of our responsibility the operator of the market.
We are fully committed to never allowing incidents of this kind to happen again, and will continue to strive to improve market operation from the perspective of market users, thereby restoring confidence in the market.
