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March 2006

Update : Aug. 30, 2006


1. Formulation of the Mid-Term Management Plan (FY 2006 - FY 2008)

The board formulated the Mid-Term Management Plan for FY 2006 - FY 2008 at this past meeting.

First, with respect to management and financial indicators, figures for FY 2008 on a consolidated basis are estimated to be as follows: operating revenue of more than JPY 73 billion, operating expenses of less than JPY 54 billion, and operating profit of more than JPY 19 billion.

On the flipside of this planned increase in revenue, we are planning for an increase in capacity investment expenditures, focusing mainly on augmentation of system capability. For our specific capacity investment plan, we've determined that approximately JPY 62 billion in capital will be necessary over the next three years until FY 2008. However, we also believe that some revision of these figures may be necessary as the concept for the next generation system becomes more concrete.

Next, with regards to our specific business strategy, our first strategy is "recovering and improving confidence in TSE's market infrastructure." While it goes without saying that we are working towards augmentation of current system capability, we are also engaged in examination and development of the next-generation system.

In addition to considering this next-generation trading system, we are also promoting the construction of a backup system to ensure stable operation of the market.

In addition to engaging in these system-related issues, we will also strengthen the market supervision structure, exerting our utmost efforts to build trust from investors and others from Japan and abroad.

Our second strategy is "strengthening self-regulatory functions to bolster trust in TSE's market."

In this area, first, we will establish an organizational structure for strengthening of self-regulation. We will also continue to make efforts in enhancing the quality of listed products and the attractiveness of investment and strengthening market surveillance and inspection.

The third strategy is to establish a strong position as one of the major exchanges in Asia.

For this strategy, we will focus our energies on promoting the listing of foreign companies mainly in neighboring Asian countries, as well as on strengthening cooperation with exchanges in various parts of the world, especially in Korea, China and Singapore.

TSE will also proactively work to diversify our listed products to meet the needs of market users, in light of the enactment of the Financial Instruments and Exchange Law.

The fourth strategy is "spreading securities knowledge and broadening the base of individual investors."

To help realize the public's demand for the economy to move from savings to investment, TSE will work to broaden the base of savvy investors by spreading knowledge on securities markets and investing.

The fifth and final strategy is "reforming TSE's corporate culture and values." We will promote internal reform through "promoting communication within and outside TSE," "personnel development," and "optimizing cost allocations."

Moreover, the "IT Master Plan" is currently a provisional draft, and upon consideration of factors such as surveys from abroad, TSE anticipates finalizing the plan sometime mid-year.

2. Partial Revision to Organizational Regulations, Etc.

The purpose of this revision is twofold: first, realize the most optimal structure for all aspects of IT use through unification of system planning, development, operation, and quality control. Second, in addition to the market surveillance and participant inspection functions previously designated as such, by designating listing examination and listing administration as self-regulatory services, TSE will further strengthen its self-regulatory function. As we begin the new fiscal year, TSE will implement a review in order to develop an administrative system that makes it possible to achieve these two effects.

First, TSE will categorize the administrative structure into 4 units: Corporate Management, Self Regulation, Market Operation, and Systems.

The system unit will be overseen by the Chief Information Officer (CIO), and consists of the IT Planning, System Development and Operation, and System Quality Control departments. The IT Planning department will be in charge of comprehensive planning, promoting, and managing of all issues related to the use of information technology; the System Development and Operation department will be in charge of issues regarding planning, development, and operation of the trading, clearing, and information systems, as well as the management and operation of the data center; and the System Quality Control department consolidates the quality control functions of all departments related to systems, and will be in charge of issues relating to trading system, clearing system, and information system quality control, standardization of development, operation, and contracting of systems, and evaluation of system development and operation vendors.

The Self-Regulation Unit will be overseen by the Chief Self-Regulation Officer (CSRO), and combines the hitherto termed Self-Regulation Division section comprised of the Participants Registration and Inspection department and Market Surveillance and Compliance department, and the Listing Division comprised of the Listing and Listing Examination departments.

The CSRO is the revised title of the Chief Regulatory Officer (CRO), which was changed in order to make clear that the TSE's activities are "self-regulatory activities."

The Market Operation Unit and the Corporate Management Unit are overseen by the Chief Operating Officer (COO). The Corporate Management Unit will be made up of the current corporate staff, and the Market Operation Unit will include the Equities, Derivatives, Clearing and Settlement and Information Service departments that comprise the Market Division, and the Public Relations, Listing Promotion, and Global Business Development departments that comprise the Capital Markets Promotion Division.

These structural changes and the changes to the administrative duties of the executive officers will take place on April 3rd of this year.

3. Selection of Candidates for Board Member (Chairman/CEO)

At the ordinary Board of Directors meeting on March 22 of this year, Taizo Nishimuro, current Chairman and CEO of TSE, was chosen as the candidate for Chairman and CEO after this year's ordinary General Meeting of Shareholders of TSE.

4. System Adjustments Relating to Erroneous Orders

TSE performed a review of the market surveillance framework in January of this year. The standards for limiting order amounts and the framework for information disclosure in the event of an erroneous order were determined while taking the opinions of securities companies into account.

These institutional adjustments were made as discussions at the working group of the Japan Securities Dealers Association were compiled.

First, in "Development of Trading Participants' Systems for the Prevention of Erroneous Orders," TSE obligated trading participants to develop a system for proper order administration in order to prevent erroneous orders before they occur. Through this measure, TSE has made it clear that trading participants are obligated to develop a system for proper order administration, and with this, examination of the order administration during inspection of trading participants will be stricter than before, and if any deficiency is found, TSE will instruct the participant in improving the situation.

Second, as a part of "TSE System Response and Operation with Regards to Erroneous Orders," the system will not accept orders that exceed 30% of listed shares, as these orders are of a scale that is not usually seen with normal orders. This system response policy is expected to be implemented within June.

Also, TSE will confirm with the trading participant for orders that exceed 5% of listed shares, as there is a high possibility that such orders may be erroneous. In the event that the order is indeed erroneous, there will be a temporary hold placed on the order, and TSE will request the trading participant to cancel the order.

Third, TSE will pursue "Disclosure of Information Relating to Erroneous Orders" in cases in which a temporary hold is placed on the order or TSE deems that there has been a significant impact on the market. "Cases in which TSE deems that there has been a significant impact on the market" will be determined based on factors such as the number of executions that were completed and the price volatility.

Information to be published is as follows: issue name, details of the erroneous order, the course of events, and the trading participant's name. Also, in the event that TSE publishes this information, we will ask that the trading participant who placed the erroneous order also disclose the information.

5. Discussion Paper on Improvements to the Listing System

After the recent incident with Livedoor Co., Ltd., many various issues relating to several of TSE's processes were pointed out.

Among these, issues relating to the securities exchange system, such as the clarification of rules for suppressing large-scale stock splits, were pointed out.

As such, TSE organized different suggestions given from many different aspects into a discussion paper, which the exchange published with the purpose of harmonizing vigorous business activities by listed companies and protection of investors.

Specifically, we gave as many illustrative examples as possible of measures that could be thought of from the aspects of "ensuring soundness," "improving transparency," and "strengthening the surveillance system for preventing improper activity before it occurs," while making an effort to bring up items that would serve as topics for discussion.

TSE will request feedback on the issues brought up in this paper until April 28 of this year, then use the opinions as a reference when organizing issues into the following categories: things that should be implemented promptly, things that should be considered further for the creation of a specific plan, and things for which basic research should continue for the time being. TSE plans to compile a plan for implementation for around May of this year.

6. Adjustments to Listing System, Etc. Accompanying Enactment of Company Law

As the Company Law, etc. is anticipated to be enacted in May of this year, TSE will make the necessary technical and other adjustments to the listing system, etc.

7. Introduction of the Equity Option Transaction Support Member System

Although the market for equity options at TSE is in its 9th year since establishment, investor participation has been low and trading volume has remained sluggish. In contrast, the equity options market in America and Europe is active, and equity options are expected to be a primary financial product for TSE as well in the future. In fact, many individual investors have stated that they would like to participate in equity option trading, but they don't know which securities company to go to. As the first step in an effort to vitalize this market, TSE will work to make the equity options market easier to access - particularly for individual investors - and increase convenience for investors who wish to conduct equity option trades by designating trading participants who are active in equity options trading as "Equity Option Transaction Support Members."

We plan to request that Support Members fulfill largely two roles. The first is to make complementary quotations as much as possible. By doing this, we can avoid situations in which an order is placed but no execution is made, thereby ensuring smooth transaction completion.

The second role is to proactively participate in activities to make equity option trading more widespread among investors. TSE would like Support Members to actively make efforts to expand equity option trading by holding instructional seminars and creating pamphlets, etc.

TSE will designate all trading participants who are able to provide cooperation in this system as Support Members, and will widely encourage participation.

8. Trading Participant Penalties, Etc.

In December of last year Mizuho Securities Co., Ltd. (below Mizuho) made a large-volume erroneous order of shares of J-Com Co., Ltd. Mizuho was already subject to administrative punishment by the Financial Services Agency as a result of this incident. TSE consulted with our Discipline Advisory Committee, and based on those results, we decided to fine Mizuho 10 million yen for negligence, and request that the company submit a business improvement report.

Upon analysis of Mizuho's actions up until the point where an irregularity in TSE's systems impacted the situation, namely, the ordinance violations of placing an erroneous order and subsequently greatly influencing the determination of the opening price of J-Com shares, it was determined that there were two violations committed by Mizuho. Those violations were the reason for these punishments.

The first violation was that Mizuho was in a "situation in which management of the electronic information processing system relating to securities services is deemed inadequate." In other words, there were flaws in the internal management structure at Mizuho for preventing erroneous orders such as inadequate training of employees who are in charge of orders and inadequate functions on order-placing terminals for removing abnormal orders. The second violation was that Mizuho was found to commit a "violation of the principle of faith and trust" as defined by TSE regulations.

Mizuho has a past history of being alerted to erroneous order risk through inspections. When Mizuho placed the erroneous order, although they had claimed to be paying attention to prevention of erroneous orders, they did not maintain an adequate internal structure for such. As a result, they placed the recent order for J-Com stock which, at about 40 times the total number of issued shares, was obviously abnormal, and greatly distorted the supply and demand for the issue at the time the opening price was decided. With regards to this, even in consideration of the fact that there was no intentionality, TSE has come to the conclusion that prevention of a reoccurrence would be appropriate by imposing a fee on Mizuho for negligence, and requiring the company to submit a business improvement report.


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