September 2005

Ensuring Proper Auditing

On September 13, the certified public accountants in charge of auditing Kanebo, Inc. were arrested on charges of being significantly involved in fraudulent entries in the company's annual securities report. CPAs are specialists in auditing and accounting, who are charged with protecting investors with ensuring the trustworthiness of financial documents and other information by evaluating them from an independent standpoint. As those who established the securities market, we understand that the Kanebo fraudulent entry problem, which had a significant impact on investors' trust in the market, as well as the fact that the CPAs were arrested, greatly shook investors' confidence in the adequacy of disclosure.

With this understanding, TSE President/CEO Tsurushima recently met with Chairman Fujinuma of the Japanese Institute of Certified Public Accountants, and, in light of the current situation, urged "a verification of auditing quality management circumstances with regards to CPAs and auditing firms, and to thoroughly inform them of points in being doubly sure in ensuring the adequacy of annual securities reports." President Tsurushima made this formal request in writing on September 16.

As the full facts of this case come to light through legal proceedings in the future, the Tokyo Stock Exchange strongly expects auditing firms and CPAs to work even harder in ensuring trustworthy audits, and will continue to be committed to improving confidence in the securities market.

Transitions in the JBG futures market - Looking back on 20 years since the inception of the market -

On October 19, the JBG futures market at TSE will celebrate 20 years since its establishment.

In commemoration of this event, a 20-year anniversary of the establishment of the JGB futures market corner has been created on TSE's Japanese website, which features a quiz in addition to information such as the 20 year history of the market, all designed to familiarize as many as possible with JBG futures trading. Also, on October 18, trading participants and institutional investors will be invited to a reception held at the TSE Hall.

Despite the fact that the JGB futures and options market at TSE is one of the derivatives markets with the highest liquidity in the country, it is generally unfamiliar to many people. As such, we would like to introduce the history of the market below:

Outline

10-year JGB futures trading began at TSE on October 19, 1985 with the purpose of offering a method of hedging against price movements, taking into account the increase in government and corporate debt and developments in the liberalization of interest rates. Also, trading of options on 10-year JGB futures began in May 1990, from the viewpoint of answering the need for diversification in risk management methods. This options on 10-year JGB futures market marked 15 years since its establishment in May of this year.

History of the market

• 1. 10-year JGB futures trading
  A) Trading volume and open interest
  After the average daily trading volume of 10-year JGB futures reached 7.6 trillion yen in 1989, it showed a significant downward trend until 2002 following the burst of the economic bubble. In recent years, however, there has been an upward turn towards recovery, and average daily trading volume reached 3.6 trillion yen from January to August of this year.
  Open interest showed a sharp decline in 2000 after the implementation of market price accounting in financial products, but with the increase in trading volume in recent years, open interest has also showed an upward trend, exceeding 10 trillion yen as of the end of August of this year.
  B) Market participants
  In the beginning, JGB futures market participants mainly consisted of securities companies and banks, but as transactions from banks and foreign investors increased, the three main players in the market today have become securities companies, banks, and foreign investors.
• 2. Options on 10-year JGB Futures Transactions
  A)Trading volume and positions
  Options on 10-year JGB futures transaction volume and open interest took a downturn from 1999 with the drop in trading volume for long-term JGB futures, but have recovered in recent years, with average daily trading volume until August of this year reaching 6,800 units, and open interest numbering 64,000 units as of the end of August of this year.
  B) Market participants
  In the beginning, securities companies accounted for a large portion of participants in the options on 10-year JGB futures market, but as with 10-year JGB futures, transactions from banks and overseas investors have expanded, and foreign investors now account for an extremely large share.

We at TSE will continue our tireless dedication in providing a highly convenient market that can gain the support of a wide variety of investors in Japan and abroad by continuously listening to the voice of those involved in the market.

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