Update : Dec. 25, 2006
With respect to foreign stocks, margin transactions have not been introduced in the past due to the following reasons: Firstly it has been assumed that so-called 'blue chips' are dually listed on the home country exchange as well as on our Exchange. Secondly, there has been little need to introduce speculative supply and demand as stock price formation has been liked to the market in the home country.
However, from now on the Tokyo Stock Exchange (TSE) is making concerted efforts to list companies based especially in Asia. Thus the TSE is now developing the listing system for foreign stocks with the premise of their single listing on the TSE.
As a single listing will lead to independent stock price formation particular to the TSE, there is reason to introduce speculative supply and demand. In addition, the supervision of margin transactions has been further strengthened since 2002 with, for example, the introduction of a requirement to distinguish whether a margin transaction is for a new or offsetting purpose. Therefore it is believed that investors also have increased their understanding of margin transactions.
Furthermore, circumstances surrounding margin transactions have been improving as, for instance, procedures to open a margin transaction account have been simplified, and settlement is now conducted by book-entry transfer at the Japan Securities Depository Center (JASDEC).
In light of the above situation, the TSE has decided to introduce margin transactions for foreign stocks.
As is well-known, margin transactions are classified into 'standardized' ones, the terms and conditions of which are established in advance by the TSE with, for example, a 6-month offsetting limit and 'negotiable' ones, the terms and conditions of which are determined by securities companies. The TSE has decided to introduce both types of margin transactions for foreign stocks.
In the standardized margin transactions the stock bought by an investor is reserved by the securities company or the securities finance company as collateral, thus even if rights pertaining to a stock split for example are granted the investor is unable to exercise the rights. The Exchange has stipulated rules with respect to the treatment of this kind of rights; the same kind of procedures will apply to foreign stocks.
As for the handling of dividend rights, the investor who has bought a stock on margin will receive the amount of dividend obtained minus taxes, referred to as the ex-dividend adjustment amount, from the trading participant, and the investor who has sold on margin will pay this amount of money to the trading participant.
With respect to the handling of rights regarding matters such as dividend payment and the distribution of other company's stock, the securities finance company will conduct a rights bidding to adjust by converting money in the same way as applies to domestic stocks.
The negotiable margin transactions will be conducted on the basis of the terms and conditions agreed upon between a trading participant and its customer.
However, margin transactions will not be introduced to all the existing listed foreign stocks. The TSE will establish criteria to select certain issues to which margin transactions can be applied, and to revise such selection. This will be based on the same kind of criteria for domestic stocks while also taking into consideration the characteristics of foreign stocks.
The characteristics of the selection criteria are as follows:
With respect to the "number of shareholders," the TSE adopts criteria of a minimum number stipulated in the selection criteria for domestic stocks, instead of a step-up method corresponding to the number of listed shares.
Regarding "trading volume and pricing ratio," the TSE sets the same level of criteria as those required for domestic stocks which have high liquidity in other domestic markets.
In addition, "business performance" is now used as an element to ensure its adequacy as asset value, by taking into account that shares bought through margin transactions are kept by the securities company as collateral. However there are cases when the definition of "accumulated earnings" differs from country to country due to difference of accounting standards. Therefore the TSE has added the "amount of net assets (shareholders' equity)"as a new judgment element.
The characteristics of the "criteria for canceling the selection" are as follows:
With respect to the "number of listed shares," in order to align the listing standards, no consideration will be taken regarding treasury stocks as opposed to domestic stocks.
The criteria for the "number of shareholders" do not adopt a step-up method but specify a minimum range or less.
Regarding "trading volume", the delisting criteria for domestic stocks will be applied mutatis mutandis to ensure the repayment of margin transactions.
In addition, with respect to the "Daily disclosure of the balance of margin transactions," and the "Raising of the margin requirement" etc. the TSE will basically conduct operations on the basis of the guidelines on margin transactions in the same way as those for domestic stocks.
The TSE intends to implement these measures next April after subjecting them to public comment. Standardized margin transactions in particular are expected to be introduced at or after the beginning of next April if taking into account the period required for preparation at Japan Securities Clearing Corporation and the selection examination.
Currently, the TSE conducts off-auction trading for futures and a considerable volume of transactions are executed through this method. For options trading, the TSE has received requests from some trading participants who hope to avert the risk that their options are left to be unexecuted when for example combined transactions are executed. It is under these circumstances that the TSE has decided to introduce off-auction trading for options.
All options listed at the TSE can now be traded during off-auction trading. For some time into the future, the TSE will accept orders by facsimile and match the orders manually. However, this options trading, with the exception of some trades, is expected to be computerised when the existing derivatives trading system is replaced with a new system in October 2007.
The trading hours, trading units and such details will be decided based upon the current system for off-auction futures trading. The TSE will gather public comment about this matter and will then implement this plan by the end of March next year, taking into consideration the period of time to make it known to the public.
For non-listed investment trust beneficiary certificates, the book-entry transfer system based on "the Law Concerning Book-Entry Transfer of Corporate Bonds and Related Instruments" is scheduled to start operating at the Japan Securities Depository Center, Inc. (JASDEC) on January 4, 2007.
As the products to be transferred by JASDEC based upon this system are non-listed investment trust beneficiary certificates, there is no direct effect on the TSE's trading system, etc. However, the non-listed investment trust beneficiary certificates are accepted as substitute securities for clearing margin, participant bond and trading participant security deposit for futures and options trading. Therefore, it is believed that the system needs to be improved to continue accepting these deposits and margins as substitute securities even after the new transfer system is implemented next year. In the system, in the event that investors deposit non-listed investment trust beneficiary certificates as substitute securities for trading margin with a trading participant who receives consignment transactions, they should receive prior approval from the trading participant before the trust beneficiary certificates are transferred to the trading participant's account at JASDec. In the same way, if a trading participant deposits substitute securities at the TSE, they will be handled through accounts held at JASDec.
The system is expected to start operating on January 4, 2007 in keeping with the schedule for implementation of the new transfer system at JASDec.
Following an erroneous order pertaining to J-com stocks last December, the "Working Group to Improve Stock Order Management and Risk Management Systems" was set up at the Japan Securities Dealers Association to discuss how to respond to an erroneous order in the future.
After meeting on 11 occasions, their final report was published on November 14, 2006.
Based on this final report, a formal request to establish rules regarding the cancellation of an executed contract has just been submitted by the Japan Securities Dealers Association to stock exchanges across the nation and also to the Japan Securities Clearing Corporation.
The TSE also received this request on November 15, the day after the final report was announced. It is believed that unified rules can be developed more efficiently if all stock exchanges work together from the beginning to establish rules to cancel executed contracts, rather than separately discussing the issue at each exchange. It is under these circumstances that the "Working group to debate rules to cancel executed contracts of exchange trades" has been established. The TSE plans to undertake any administrative work necessary for running the working group.
As for its future schedule, the first working group meeting will be held next month. The TSE will then finalize results of the discussions by the end of March next year after gathering public comment.
The structural outline of the Development of the Comprehensive Improvement Program for the Listing System was published last month, and the program was incorporated into regulation after a period of public comment.
The TSE set up a liaison council with the National Police Agency and the Metropolitan Police Department to stamp out antisocial forces on December 8, 2006 and at the same time held its first general meeting. The purposes of setting up this council are to strengthen joint relationships with police organizations, prevent illegal acts by antisocial forces including organized crime syndicates which interrupt the TSE market, and contribute to establishing a sound and fair securities market.
At this liaison council, as part of its "Activities for eliminating antisocial forces in the TSE market", the TSE will look into engaging in educational activities to eliminate organized crime by holding seminars for listed companies and trading participants as well as providing listed companies with a consultation service.
As part of activities for "Strengthening collaboration and exchanging information between police organizations and the TSE", we will discuss the exchange of information necessary for activities to remove organized crime syndicates and reciprocate the dispatching of lecturers to in-house workshops at local police organizations and the TSE.
In addition, as part of activities for "Proactively participating in and cooperating with activities to eliminate organized crime syndicates conducted by police organizations", the TSE will look into dispatching lecturers to workshops and seminars sponsored by the National Police Agency and the Metropolitan Police Department and police stations across the nation as well as devising methods of cooperation that the securities industry as a whole will engage in to eliminate anti-social groups. With this aim, the TSE also plans to discuss strengthening relations between stock exchanges through activities to remove organized crime syndicates.
The TSE will make the utmost effort to further strengthen activities to eliminate antisocial groups and thus enhance confidence in its market.