Update : May 23, 2007
For the fiscal year ending March 2007, buoyant market conditions resulted in Tokyo Stock Exchange, Inc. (TSE) recording an 11.5% increase in trading participant fees from the previous fiscal year. Information services-related revenue was also up 16.2% from the last fiscal year due to a steady increase in the number of Market Information System real-time terminals, and securities settlement-related revenue was up 6.5% on a year-on-year basis, attributed to an increase in clearing fees resulting from increased trading volume.As a result, operating revenue was up 8.0% to JPY 75.478 billion.
As for operating expenses, depreciation costs were up due to trading system capacity augmentation and full activation of the Clearing System, and consultation fees pertaining to the construction of the next-generation system as well as internal control and litigation fees were also recorded. As a result, operating expenses were up 3.2% from the previous fiscal year.
Consequently, operating profit was up 14.8% to JPY 33.016 billion, current profit was up 14.4% to JPY 34.260 billion, and net income before taxes and other adjustments for the period was up 6.1% to JPY 19.985 billion from the last fiscal year - the highest income since the TSE demutualized in 2001. Current net income per share was JPY 8,789 and a dividend of JPY 2,200 per share is scheduled to be paid.
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|Consolidated Financial Results for year ended Mar. 31, 2007|
The TSE is scheduled to convert to a new organizational structure on October 1, 2007 as publicized earlier, in response to the official announcement that the Financial Instruments and Exchange Law will come into effect in September, 2007.
To convert to a new organizational structure, the TSE needs to receive approval from its shareholders at the general shareholders meeting scheduled to be held on June 22, 2007. If approval is received, the TSE will set up a holding company by stock transfer in August, and the current TSE will become a market operation company that is a wholly owned subsidiary of the holding company. Furthermore, following the implementation of the Financial Instruments and Exchange Law in September, a self-regulatory corporation will be established by and under the holding company. After the self-regulatory corporation is approved by the authorities, the market operation company will entrust self-regulatory operations to the self-regulatory corporation. This is the basic scheme for the TSE's conversion to a new organizational structure.
The holding company will be "Tokyo Stock Exchange Group, Inc." ("TSE Group"), which manages the two subsidiaries - the market operation company and the self-regulatory corporation. With regard to governance, being aware that it will list its shares in the future, the TSE Group will employ a committee-based company method to ensure prompt performance of operations while strengthening its supervisory function. The number of directors will be 16 or less, consisting mainly of directors and auditors of the market operation company and the directors of the self-regulatory corporation. In addition, a nomination committee, a compensation committee, and an audit committee will be established with three or more directors each, and a majority of the directors will be invited from the outside. The term of office will be one year for both directors and officers.
Next, the market operation company will be the same "Tokyo Stock Exchange, Inc.", whose business will be to establish exchange markets for financial instruments. The market operation company is an auditor-based company with up to 12 directors and up to 4 auditors. A market structure committee will be set up as an advisory committee in an effort to continue to take in public comments on important issues.
Lastly, the self-regulatory corporation will be "Tokyo Stock Exchange Regulation", which conducts self-regulatory operations under a consignment contract with the market operation company.
Specifically, rule-making for listing and delisting standards, etc. will be conducted by the market operation company upon consent given by the self-regulatory corporation. However, actual decisions about whether a listed company will continue to be listed or be delisted will be made by the self-regulatory corporation based on these prescribed rules, and the market operation company will inform the listed company of the decision. In addition, the TSE will develop self-regulatory operation specifics in the future while consulting with the Financial Services Agency.
With regard to governance, the self-regulatory corporation will have up to 5 directors with a term of office of two years, a majority of which will be outside directors. The president, directors, auditors, etc. will be restricted from serving as directors of the market operation company at the same time in order to ensure the independence of self-regulatory operations. As an advisory committee, the TSE will maintain a discipline committee in order to take public comment on disciplinary actions against trading participants.
While at the same time ensuring the independence of the self-regulatory corporation, the three entities must maintain appropriate cooperation in conducting their operations. Therefore, the TSE will also establish a meeting for the entire group consisting of directors, officers, etc. of the three entities.
The self-regulatory corporation will have up to 5 directors, a majority of whom will be outside directors. As of April 24, 2007, the following two people have been selected as candidates for outside directors; the first is Mr. Masakazu Hayashi, who is ex-administrative vice minister of the Ministry of Finance and currently serves as chairman of the Japan Investor Protection Fund. The other is Mr. Tsuguoki Fujinuma, who is the chairman and president of the Japanese Institute of Certified Public Accountants. Both Mr. Hayashi and Mr. Fujinuma will also serve as directors of the holding company. Next, in addition to these two people, as well as Mr. Atsushi Saito and Mr. Taizo Nishimuro as announced in the press conference held last month, the following people are also candidates for holding company directors: Mr. Yasuo Tobiyama as director and senior representative executive officer, Mr. Yoshinari Hara, Chairman of Daiwa Securities Group Inc., as director of the TSE and director of the holding company, and all of the TSE's current outside directors and auditors as directors of the holding company as well.
As the TSE intends to list its shares by 2009, the company will re-select a lead managing securities company for its IPO in preparation for the listing.
In December 2004, the TSE selected Nomura Securities Co., Ltd, Daiwa Securities Co. Ltd., and Nikko Cordial Securities, Inc. as lead managing securities companies. However, in light of the rapidly changing circumstances surrounding the TSE, such as developments in international mergers, alliances, etc. between exchanges, the role that the lead managing securities company is expected to play has changed. As such, the TSE believes that it must keep a global offering in mind when constructing a future scheme for its share offering, and has therefore decided to re-select a lead manager.
After receiving proposals from securities companies applying to become lead manager(s), the TSE will conduct fair screenings to select the lead manager(s) by June 2007. In re-selecting the lead manager(s) the TSE will invite securities companies from both within Japan and from abroad to apply.
While proceeding with development of the next-generation system since last year, the TSE has at the same time phased in augmentations to current system capacity. On April 24, 2007, the TSE announced plans to increase the number of orders that the current Stock/CB Trading System is able to process per day from 14 million to 17 million by the fall of 2007. However, it will be necessary to implement these plans ahead of schedule in light of recent trading conditions. To be specific, the TSE will increase the number of orders per day to 15 million by June 2007 and then 20 million by the fall of 2007.
In addition to the Stock/CB Trading System, the capacity of the Market Information System is also scheduled to be augmented by the fall of 2007. The amount of additional investment pertaining to this capacity augmentation will amount to approximately JPY 1.2 billion.
All of the stock exchanges in Japan together established the "Deliberation Working Group with Regard to Rules for Canceling Executed Transactions Pertaining to Exchange Trading" in November 2006 in response to a request by the Japan Securities Dealers Association related to the issue of an erroneous order placed for J-COM stock.
One of the basic premises in a stock market is that in order to ensure fairness and continuity, once a transaction is executed, it should not be canceled. Therefore, canceling executed transactions should only be permitted if the market is expected to be markedly disrupted due to circumstances such as settlement proving extremely difficult, etc.
Currently, if the TSE receives an order which is more than 5% of the number of listed shares, the trading system displays a warning message. The TSE will then contact the trading participant who placed the order to confirm whether or not the order is erroneous, and if so, the Exchange will suspend execution of transactions. Moreover, if the amount of the erroneous order executed exceeds 10% of the number of listed shares, the TSE will temporarily suspend trading in order to minimize sequence transactions.
Under these circumstances, trading participants may apply to cancel executed transactions within 60 minutes of the beginning of the trading halt if the trading participant judges that smooth settlement will be extremely difficult.
In principle, "smooth settlement being extremely difficult" will be limited to cases where said transactions exceed 20% of the number of listed shares. However, even if the transactions are less than or equal to 20% of the number of listed shares, the trading participant may apply for cancellation under special circumstances; for example, the number of floating shares is extremely small due to a TOB.
The TSE receives the application and will conduct a series of hearings with the trading participants. The TSE will cancel executed transactions if, upon conducting hearings with trading participants, the Exchange determines that there is a high possibility of settlement default. Even in the event that no application is made by the trading participant to cancel executed transactions, the TSE may do so if it deems necessary.
When the TSE decides to cancel executed transactions, it will promptly announce the details of the cancellation to the public and halt trading in the issues for one full day. In cases where the executed transactions are not cancelled after the trading halt, the TSE will publicize the details and then resume trading 30 minutes later.
The TSE shall permit trading participants to reinstate any transaction executed during the period between the execution of an erroneous order and the beginning of the trading halt. However, in the event that trading participants will not be able to procure settlement funds or securities for sequence transactions, the TSE shall permit trading participants to conduct trading to reinstate the executed transactions only under certain conditions.
The TSE will set forth a period for accepting suggestions and comments by the public by the end of May, and implement these rules by the fall of 2007. Other exchanges also plan on introducing the same rules.
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The TSE has formulated its basic implementation policies for improving the listing system into the "Comprehensive Improvement Program for Listing System 2007," based on an interim report finalized at the "Advisory Group on Improvements to TSE Listing System" last month.
In the "Comprehensive Improvement Program for Listing System 2007", the measures to be taken are classified into the following three time-based categories: "items to be immediately implemented", items to be implemented after consideration of a specific plan/proposal", and "items to be considered on an ongoing basis".
With regard to "(3) Response to a listed company owned by a parent company" under "Improving the System Regarding Corporate Activities", the TSE will not prohibit under its listing regulations the listing of any subsidiary with a parent company. However, as some cases may be problematic, the TSE will publicize and make known to the relevant parties its views on the listing of the subsidiary.
Also, with respect to "(5) Development of the system for classified share listing", the TSE will begin deliberations with practitioners on the necessary requirements, etc. for admitting listing of classified shares.
As for "(1) Enhancing confidence in Mothers" under "Improvement of the Market System", the TSE will improve the listing system for Mothers in order to clarify the nature of the Mothers market. Specifically, the TSE will abolish the listing rules regarding reassignment to Mothers from the First and Second Sections. The TSE will also abolish the existing listing examination criteria related to sales, and delisting criteria will not be applied for five years after listing. In addition, the TSE will consider implementing a substantive examination for companies which have been listed on Mothers for a certain period of time by the end of the year.
The TSE will coordinate with related parties regarding the "(2) Review of trading units" while cooperating with other exchanges in Japan. The TSE will then formulate an action plan for consolidating trading units into two categories - 100 shares and 1,000 shares for one basic lot. For the implementation schedule, the TSE will set a specific transitional period following the full-fledged introduction of the dematerialization of share certificates in 2009.
For "III. System Improvements for Ensuring Listing Rule Effectiveness," the TSE will immediately begin considering imposing penalties on listed companies which have violated the listing rules. Also, the TSE will make a structural adjustment to establish a new market segment for problematic stocks which do not fall under the delisting standards, but have committed a serious violation and require some type of improvement. These stocks will be transferred to and supervised in the new market segment, which will be separate from the First and Second Sections and Mothers.
Furthermore, the TSE will consider introducing a system in which, should the exchange decide to take some measure disadvantageous for the listed company, such as delisting, the listed company is able to appeal such rulings it finds objectionable.
With regard to "Response to the Listing of Various Financial Instruments", the TSE will revise the rules so that investment corporations with a wider range of managed assets / investment policies will be able to be listed on the TSE market.
At the same time, the TSE will work to revise the system for the listing of new ETFs, as well as improve the listing system for yen-based Japanese Depositary Receipts (JDRs). The TSE will take appropriate action in strengthening cooperation with certified public accountants and other issues. When making the actual revisions to the rules in the Comprehensive Improvement Program for Listing System 2007, the TSE will publicize the outline of each revision as it is drawn up, take in public comment, and then implement said revision. When a revision is actually implemented, President Nishimuro will explain the details of such at a press conference.
From May 2007, companies are now able to conduct forward and reverse triangular mergers, so-called "triangular organizational restructuring". Foreign companies yet to be listed on Japanese stock markets may be the main parties of the triangular merger. Under these circumstances, the TSE will give proper heed to the protection of existing shareholders on the one hand, and work to contribute to the revitalization of the economy through expanding investment in Japan on the other. In order to achieve this, the TSE will make adjustments to the listing system by applying the technical listing system - which has been applied to the organizational restructuring of listed companies - to triangular organizational restructuring as well.
Under the technical listing system, when a listed company merges with an unlisted company, the TSE will approve prompt listing of the unlisted company after confirming whether or not that company's issued shares, etc. conform to the liquidity standard stipulated in the delisting criteria.
In cases where the unlisted company is a foreign company, the TSE will confirm whether or not the company can ensure ample liquidity in light of the state of development and operation of legal systems in its home country. In the event that a listed company is expected to have no real sustainability due to an inappropriate merger, the TSE will request an applicant for technical listing submit a document outlining the company's prospects for continuity and profitability for the three years after listing, and require the company to conform to standards equivalent to the listing examination criteria during this period. In addition, applicants for technical listing will be requested to consult with the TSE on technical listing in advance, as the TSE needs to sufficiently confirm the legal system / practices and the handling of the company's stock at depository organizations in the home country. The TSE will set forth a period for suggestions and comments by the public to implement the revision of the listing system by the beginning of July 2007.
The TSE has decided to incorporate these rules into the regulations, after publicizing the outlines in February 2007 and setting forth a period for suggestions and comments by the public.