Tokyo Stock Exchange to operate as a clearinghouse from May 1999

The Tokyo Stock Exchange (TSE) is to operate as a clearinghouse starting in May, 1999, in order to increase security of the safe settlements and reduce counterparty risk for market participants. Under the current system, member firms settle trades between themselves through the TSE settlement system. Under the new settlement structure, TSE will act as the central counterparty for all trades conducted on the TSE cash and derivatives markets. At the same time as a trade takes place, TSE acts as a "middle man" for the transaction between two parties, and the original contract between two parties will be substituted with two new ones; one between TSE and the selling member firm, the other between TSE and the buying member firm. TSE itself will perform all those contractual obligations and thus will guarantee the settlement of all transactions on the TSE even in the case of default by a member firm. TSE will deal with the default in accordance with its default compensation procedures, which include usage of the Default Compensation Reserve. Currently the Default Compensation Reserve is funded by member firms and maintained by TSE for the compensation of the losses incurred by member firms in case of default. TSE believes that the new settlement system will increase confidence in its market and will strengthen its position as the central securities market in Japan.