Tokyo Stock Exchange: Measures For Preventing A Recurrence Of The Stock Trading System Malfunction, Etc.

We at the Tokyo Stock Exchange (TSE) offer our sincerest apologies to investors and many other market users for the inconvenience caused by the Stock Trading System malfunction that occurred on March 10, 2008.

Below is a summary of the cause of the system malfunction, our response to the problem, the locus of responsibility, measures for preventing a recurrence, and other information.

1. Background

At 08:59 a.m. on Monday, March 10, 2008 (during the order acceptance period), the TSE's Stock Trading System failed to properly process the registration of basket orders for the stocks of two issues - Alps Electric and Nagoya Railroad. As the glitch made trading in these two stocks impossible, the TSE took steps such as notifying trading participants of the situation, making a public announcement, and halting trading in the two stocks for the morning session.

The TSE then implemented measures to address the problem, and trading in the two stocks resumed on 01:00 p.m. of the same day.

We received an order from the FSA Commissioner to provide a report on this matter pursuant to the provisions of Article 151 of the Financial Instruments and Exchange Law, and we submitted this report to the FSA accordingly yesterday.

2. Outline of Report on Trading System Malfunction

(1) Cause of the Malfunction

The malfunction occurred in an extremely short period of time during registration processing. A massive number of basket orders made under certain conditions resulted in a competition for resources, which in turn caused processing cancellations to be repeated many times over. As the number of such cancellations exceeded the predetermined upper limit, the TSE stopped the process in order to localize the malfunction and prevent any adverse effects from spreading throughout the entire system.

The fundamental cause was the fact that the TSE did not adequately verify that the setting values that had been appropriate until this point were still currently effective and will continue to be effective in the future. The settings were not appropriate given the environmental change brought about by factors such as the enhanced processing capacity of both the Stock Trading System and trading participants' systems, as well as participants' diversified order placement methods. The TSE regrets that we did not properly address this issue.

(2) TSE's Response to the System Failure

1. Response made to resume trading

The TSE decided to halt trading of the two stocks whose trading was made impossible due to the system malfunction, and gave notification to that effect at 09:10 a.m.
After identifying the cause and determining that trading could be resumed on the same day, we immediately carried out recovery operations.

After completing these operations, the TSE notified trading participants that trading would resume in the two stocks. We began accepting orders again at 12:05 p.m. - the normal time we begin accepting orders for the afternoon session. In addition, in order to ensure that trading participants had sufficient time to confirm their orders, the TSE resumed trading in the stocks at 01:00 p.m., 30 minutes later than the normal opening time of the afternoon session.

2. Response for trading on the following day

The cause of the malfunction was found to be as described above, but the TSE conducted further log and other analyses in order to fully understand the details of the circumstances surrounding the glitch and prevent the same type of malfunction from occurring again. On the basis of such analyses, the TSE implemented necessary countermeasures, and notified trading participants and others that the TSE would conduct trading as normal the following day.

(3) Locus of Responsibility

It is the TSE's responsibility to operate the financial instruments exchange market properly and provide market functions in a stable manner. We sincerely apologize for creating a situation in which investors' trading opportunities were restricted due to a temporary trading halt in the two stocks as a result of the malfunction.

As the TSE is charged with overseeing and operating the market, our responsibility is grave in terms of failing to preemptively prevent this situation from occurring.

For this reason, strict censure was given to Yoshinori Suzuki, Managing Director (System Unit) & CIO, and Masayuki Hirose, Director of IT Development for the Trading System on March 19, 2008 in order to take responsibility for the malfunction.

(4) Measures 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. We are committed to tirelessly making such efforts to further elevate the level of fairness and reliability in the market.

1. Enhancing supervision of the Stock Trading System

Strategy Outline	Anticipated Implementation
1. Verify whether or not there is a performance specification difference by trading hour Taking into account the conditions under which this system malfunction occurred, the TSE will identify instances where performance conditions for processing electronic messages differ and re-verify that there is no problem.	By the end of April, 2008
2. Make efforts to prevent system malfunctions With respect to critical areas that may lead to a trading halt, among those settings that are related to system stability, the TSE will verify the appropriateness of warning messages and other monitoring criteria and implement effective measures as needed. Moreover, the TSE will implement processes for collecting and analyzing monitoring results with respect to these settings, making decisions on dealing with them, etc.	Verification to be completed by the end of June 2008.
3. Inspect the effectiveness of system settings The TSE will inspect whether or not the system settings which had previously been appropriate are still currently effective and will continue to be in the future. We will also conduct periodical inspections in response to changes such as system capacity augmentations. As this malfunction was triggered by basket orders, the TSE will implement verifications focusing on basket order input patterns.	By the end of June 2008

2. Overall Review of Response Measures

Strategy Outline	Anticipated Implementation
1. Improve cooperation with trading participants, etc. The TSE will collaborate with trading participants, etc. closer than ever before by taking steps such as conducting regular hearings. We will enhance our efforts to preemptively avoid any systemic risk. For example, if the TSE detects any potential systemic risk through the hearings, we will take the following actions: Inspect systems as needed Implement appropriate measures including capacity enhancement, changes in system settings, operational response, etc.	To be implemented from April, 2008
2. Improve the organizational structure for development With the goal of further improving system quality, the TSE will separate the development unit and operation unit in order to enhance the check-and-balance function between these units. In addition, the TSE will improve the organizational structure for development by enhancing the structure of the Quality Control Department established in 2006.	To be implemented in June, 2008

Strategy Outline

Anticipated Implementation

1. Improve cooperation with trading participants, etc.
The TSE will collaborate with trading participants, etc. closer than ever before by taking steps such as conducting regular hearings.

We will enhance our efforts to preemptively avoid any systemic risk. For example, if the TSE detects any potential systemic risk through the hearings, we will take the following actions:

Inspect systems as needed
Implement appropriate measures including capacity enhancement, changes in system settings, operational response, etc.

To be implemented from April, 2008

2. Improve the organizational structure for development
With the goal of further improving system quality, the TSE will separate the development unit and operation unit in order to enhance the check-and-balance function between these units. In addition, the TSE will improve the organizational structure for development by enhancing the structure of the Quality Control Department established in 2006.

To be implemented in June, 2008