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1. Organizational Structure of Tokyo Stock Exchange
(TSE)
With regard to the TSE organizational structure, the Exchange
set up an Ad hoc committee last fall to have discussions based upon
the current Securities and Exchange Law. Last month, the Financial
Instruments and Exchange Law was enacted as a revision of the current
law, and as such, TSE again held discussions on what corporate governance
structure the exchange should employ in the future under this new
legal framework.
The TSE Board of Directors discussed and decided on a general outline
which would be fundamental to future discussions.
At the board meeting, the TSE Board of Directors came to the following
conclusions regarding the organizational structure of TSE.
(1) The independence of TSE's self-regulatory operations is easy
to understand when looking at their external structure. This independence
is convincing when compared with others internationally, as the
New York Stock Exchange also adopts the same scheme.
(2) TSE will employ a so-called "holding company" under
which a market operation company and a self-regulatory corporation
will be set up. This will enable the Exchange to maintain the effectiveness
of self-regulation while ensuring a high degree of freedom in development
of business strategies. TSE will consider this the primary option
for the company structure and continue further deliberation.
Under the new Financial Instruments and Exchange Law, there are
broadly two possible ways of creating an organizational structure
for TSE. One is to establish a self-regulatory committee, while
the other is to create a self-regulatory company. The latter case
can further be broken down into two different plans: one is creating
a self-regulatory company which is completely independent from TSE,
and the other is establishing a holding company under which a self-regulatory
company and a market operation company will be set up separately.
Of these two options, the TSE Board of Directors has come to the
conclusion that the latter is most desirable. When the Financial
Instruments and Exchange Law comes into effect, TSE will choose
this as the first option in adopting a new corporate governance
structure for TSE.
While having continuous discussions, TSE will report the results
of the discussions to Economic and Financial Policy Minister Kaoru
Yosano at the council on "How securities exchanges ought to
be in the future" to be held twice in September, and have further
in-depth deliberations. In the future, at the stage where detailed
regulations and such are publicized, TSE and the TSE Board of Directors
will begin discussions again this fall so as to build up a firm
outline of the organizational structure while taking the newly published
regulations into account.
2. System Capacity Augmentation
With regards to the Stock/CB trading system and the market information
system, TSE has already announced that system capacity would be
augmented by the end of the year. However, the TSE Board of Directors
decided that the system capacity increase will be implemented on
November 6th, 2006.
As a result of the latest system capacity augmentation, the number
of orders per day that can be received by the stock/CB trading system
will be increased to 14 million from the current 12 million. The
investment necessary for the system capacity augmentation will be
approximately JPY 1.8 billion
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Regarding Measures for Increasing System Capacity |
3. Finalizing Interim Conclusions Reached during
Discussions at Meetings with Trading Participants in order to Develop
the Next-Generation System
TSE set up two-level working groups (the CIO level and the working
level) last April for discussions on the development of the next-generation
system. The working groups consisted of members at the two levels
recommended by the Japan Securities Dealers Association to draw
up interim conclusions.
In the future, TSE is scheduled to have further exchanges of opinions
at these meetings and publicize the results of the discussions as
a general outline for the system plan in the coming September. In
addition to ensuring adequate system capacity, TSE is focusing on
speeding up the execution of orders as an important task to address
environmental changes caused by highly-developed trading methods.
TSE conducts necessary reviews of its systems and trading systems/business
practices, etc. from various points of view in order to simplify
its operations if they are too complicated. TSE further strives
to speed up the provision of market information and improve the
contents of this information.
In addition, TSE will proactively work to harmonize exchange / broker
interface specifications among exchanges in order to further enhance
the efficiency of the exchange market as a whole in light of improving
the competitiveness of the Japanese securities industry. TSE has
already discussed harmonization of exchange / broker interface specifications
with JASDAQ and the Osaka Securities Exchange and gained their understanding
and consent on the outline. TSE believes that cooperation among
exchanges will work well while market participants such as securities
companies and banks will benefit enormously from the harmonization.
4. Outline of Financial Results and Performance
for 1st Quarter as of March 2007
For the 1st quarter ended March 31, 2006 operating revenue was
JPY 19.269 billion, up JPY 5.893 billion from the previous year.
Operating profit for the quarter was up JPY 5.840 billion to JPY
9.274 billion, while current profit was up JPY 5.716 billion to
JPY 9.567 billion. In addition, net profit for the 1st quarter rose
by JPY 3.481 billion to JPY 5.610 billion. As a result of the increase
in sales and income, it can be said that TSE is steadily accumulating
the funds for the development of system capacity augmentation, which
is the most pressing issue for the exchange.
The breakdown of operating revenue, operating expenses, and operating
profit are as follows. For operating revenue, the average daily
trading value of auction trading for domestic stock doubled to JPY
2.6294 trillion from JPY 1.2655 trillion from the year earlier.
As a result, trading participant fees and dues rose by JPY 3.411
billion from the previous year. Also, listing fees and income from
information services were up JPY 251 million and 490 million respectively,
on a year-on-year basis. These were attributed to an increase in
annual listing fees, and an increase in the number of real-time
terminals in the market information system along with an increase
in market capitalization.
Income from securities settlement rose by JPY 1.436 billion from
the previous year due to an increase in trading. On the other hand,
income from system development and operations was down JPY 116 million
from last year. Other operating income was up JPY 510 million due
to an increase in admission fees from general trading participants.
Operating expenses were unchanged from the previous year at JPY
9.995 billion, while operating revenues dramatically increased in
gross terms, thus improving the revenue situation.
As a result, TSE recorded operating profit of JPY 9.274 billion,
current profit of JPY 9.567 billion, and quarterly net profit of
JPY 5.610 billion.
5. Selection and Appointment of Accounting Auditors
Effective on July 1 2006, ChuoAoyama PricewaterhouseCoopers, TSE's
accounting auditor, suspended operations. In response to administrative
punishment of the company, TSE has conducted hearings with all the
major auditing corporations. However, TSE's Board of Directors came
to the conclusion that it is extremely difficult for TSE to select
and appoint another accounting firm at this moment, based on explanations
and reports made by the committee of Executive Officers held on
July 25, 2006. Therefore, it is expected that the Statutory Auditors
Board will take steps to select and appoint an accounting auditor
temporarily.
6. Development of Listing System for REITs (Real
Estate Investment Trusts)
When TSE conducts a comprehensive review of the listing system,
development of the listing system for REITs is the highest priority
and is in the category of areas to be reviewed as soon as possible.
It has been five years since TSE introduced REITs for the first
time in the Japanese market, but recently, some investment funds
unfortunately violated the law and were punished by the administration,
thus undermining the trustworthiness of the market. Our desire to
revise the "Development of Comprehensive Improvement Program
for Listing System" stated earlier is because TSE was concerned
about this problem, and these concerns became a reality.
Basically, there are two fundamentals: "Developing listing
examinations" and "Strengthening the disclosure system".
Firstly, for listing examinations, TSE will clearly indicate the
items regarding appropriateness of disclosure and soundness of operations
to be examined. With regards to disclosure, there are three points:
first, asset management companies are to disclose information the
same as other companies. If information is appropriately disclosed,
transparency of asset management companies will improve. The second
point is to conclude an advisory contract with securities companies
regarding disclosure for at least two years after listing. Given
that securities companies are the ones who are most familiar with
REITs, we believe that it would be desirable for the investment
funds which actually listed the REITs to be obligated not only to
acknowledge the importance of timely disclosure themselves, but
also receive advice from the securities companies which have continuously
provided them with assistance up until the listing of the REIT.
The third point is to abolish criteria for materiality and make
criteria for disclosure stricter. For example, current criteria
state that companies need not disclose information when acquiring
insignificant assets. By setting stricter criteria, TSE will require
companies to disclose information on every asset acquisition.
Furthermore, TSE will request companies to continuously disclose
the schemes for asset management, etc. Submitted reports will be
displayed on TSE's website. The contents of the reports will include
"ideas and basic policies on the scheme of asset investments",
"state of the schemes of investment funds or the like",
and "state of responses to conflicts of interest".
In addition, TSE plans to take measures such as clarifying the definitions
pertaining to real estate in its regulations.
TSE will gather public opinion and, based upon the opinions, finalize
and implement the plans by the beginning of October.
