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July 2006

Update : Aug. 17, 2006

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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


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 2006

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.


Consolidated Financial Results for three months ended Jun. 30, 2006

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.

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