Market Surveillance/Monitoring for Unfair Transactions

5. Becoming Borderless

Update : Feb. 29, 2008

5. Becoming Borderless

Agreements and Alliances with Foreign Organizations

The globalization of securities markets has continued to progress around the world. This includes the ability to conduct overseas transactions of products from companies listed on the TSE, as well as futures and options trading of the TOPIX and Nikkei composite indices.

However, the potential for market manipulation and or unfair trading through these types of transactions on both the TSE and in foreign markets still remains. Therefore, in an effort to protect the fairness and reliability of the market, we at TSE Regulation believe it is important to take every measure necessary to prevent the occurrence of such actions.

Joining the Intermarket Surveillance Group

• In light of the permeation of the internet, and the increasing number of alliances and joint business ventures between exchanges, we can expect that securities exchanges will continue to move toward an even more expansive borderless global financial system.

• As stated before, while the financial world undergoes such rapid change, we believe that, if relevant parties commit to enter into cooperative agreements with one another, they may establish a better system for responding to any potential difficulties that may arise.

• For this reason, as of June 22nd, 2000, the TSE has decided to join the self-regulation institution known as the Intermarket Surveillance Group (ISG).

• The ISG is composed of 37 major self-regulation institutions from areas such as the U.S., Canada, England, Germany, and Australia, etc., it was originally established in 1983 by 9 different self-regulation bodies in the United States. Members of the group exchange information on market surveillance with the goal of improving systems for discovering and preventing unfair trading.

• To become a member of the ISG, there are several uniform requirements. First, in addition to possessing laws and regulations to handle unfair trading, member institutions must also have a fully functioning system for dealing with market surveillance, etc. The TSE is the first member institution from Asia.

• At the ISG, and at the several participant institutions, information is exchanged about the rules related to market manipulation, insider trading, front running, etc. The ISG also holds general meetings 3 times a year to discuss problems and exchange opinions on major topics from the compliance and surveillance departments of the different exchanges.

• With the advancement of internet telecommunication technology combined with the escalating number of mutual listings of TSE products, etc on foreign markets, we anticipate a further increase in the number of transactions occurring across country borders.

• Therefore, at TSE Regulation we will strive to make this progress of the global financial system a reality, by doing our best to utilize information from the ISG in a prompt and efficient manner that will ensure fairness in the our market.

Maintenance of the Inquiry System for Foreign Consignors

• Considering the shift toward borderless securities exchanges, one might say that cooperation among foreign self-regulation agencies will be the most important theme, however it is also imperative that at TSE Regulation we do all that we can to properly examine the financial conditions of foreign consignors, etc.

• In the February 10th, 1999 report titled "The Future of the TSE", published by the TSE Policy Board, the TSE included a proposal, "By recognizing the existence of a large number of overseas investors, using the model of the New York Stock Exchange, we must consider establishing a system that will allow us as necessary to better understand the origins of overseas consignors in order to guarantee effectiveness, adherence to the law, and self regulation.."

• Based on this proposal, in cooperation with its trading participants, the TSE will do as much as possible to gain an understanding regarding the details of transactions made by foreign consignors. Thus, as of June 15th, 1999, the TSE will implement the rules drafted by the Board of Directors for "Reporting and handling the acceptance of transactions for marketable securities made by foreign traders from member subsidiary companies or parent companies." These rules are known as "Rule 11-2, Enforcement Rules for Trading Participant Regulations" and were implemented July 1st, 1999.

• Recognizing the vital importance of properly managing systems to examine foreign consignors through the appropriate administrative authorities, TSE Regulation, in accordance with the decision made by the Board of Directors, is asking all concerned parties for their cooperation in the combined effort to work toward the development of an international system for collaborating on examinations of cases of unfair trading..