JAPAN SECURITIES DEALERS ASSOCIATION

Transcription

1 JAPAN SECURITIES DEALERS ASSOCIATION ANNUAL REPORT 2001

2 CONTENTS 2 PROFILE 2 MAIN ACTIVITIES 3 MESSAGE FROM THE CHAIRMAN THE YEAR IN REVIEW 5 JASDAQ Market Reform and Active Market Management 11 Public and Corporate Bonds Market 13 Revitalization of the Securities Market and Ensuring Investors Confidence 16 Implementation of Self-regulatory Functions 20 Promoting International Coordination DATA FOR FISCAL Membership 23 Balance Sheets 24 Revenues and Expenses Statement 25 Organization Chart 26 Offices and Training Centers 27 OFFICERS, ADVISORS AND SPECIAL ADVISORS 28 LIST OF MEMBERS Japan Securities Dealers Association Annual Report

3 PROFILE The Japan Securities Dealers Association (JSDA) is the only organization in Japan approved by the Prime Minister under the Securities and Exchange Law. Its membership consists of securities firms and registered financial institutions. All securities firms, Japanese and foreign, that operate securities businesses in Japan are regular members of the JSDA. As of the end of March 2001, we have 293 regular members, 52 of which are foreign securities firms. Banks and other financial institutions registering to operate securities business with the Financial Services Agency join the Association as special members. As of the end of March 2001, we have 244 such members, 5 of which are foreign banks. The JSDA s primary goals are to protect investors by ensuring fair and smooth securities business activities by all members, to open and manage the OTC (Overthe-counter) securities market and to make securities markets more sound. To achieve these goals, the JSDA undertakes the following activities. MAIN ACTIVITIES 1. Self-regulation Activities 1) Establish and implement self-regulation rules 2) Hold on-the-spot inspections of member firms for compliance and other issues 3) Take self-disciplinary actions against member firms 4) Conduct qualification examinations and register securities sales representatives 5) Mediate securities transactions complaints 2. OTC Stock and Bond Market Managing Activities 1) Supervise the JASDAQ Market a) Admission screening for JASDAQ-listing b) Announcement of prices and trading volume for JASDAQ-listed securities, etc. c) Transaction management for JASDAQ-listed securities 2) Supervise the OTC bond market a) Announcement of basic bond quotations and trading volume b) Improvement of OTC bond market system c) Collecting materials and compiling statistics regarding the bond market 3) Manage off-market transactions on listed stocks a) Announcement of prices of listed stocks and other related activities for off-market transactions b) Management of transactions of listed stocks and other related activities for off-market transactions 3. Activities as an Industrial Organization 1) Conduct research surveys and express opinions concerning securities markets 2) Disseminate information concerning securities business and securities transactions 3) Facilitate mutual understanding and dialogue between the JSDA and other organizations involved in the securities business 4) Strengthen management foundation and internal administrative system for securities firms, and train and educate their employees 5) Strengthen international communication and coordination 2 Japan Securities Dealers Association Annual Report 2001

4 MESSAGE FROM THE CHAIRMAN Entering into the 21st century, in Japan, structural reform is required more than ever to stimulate new economic development. To reform the economic structure, it is necessary to get rid of negative factors, such as non-performing loans, while on the other hand, it is also necessary to take action to promote new industry and create employment. To this end, it is extremely important to change Japan s economic structure into one based on direct finance. Considering the increasing importance of the role of securities markets, the JSDA, as representative of the securities industry, have become keenly aware of the need to take more vigorous action. To promote individual investors to participate in the market, a favorable tax system is essential as we see that in Europe and America tax revision has stimulated individuals to invest in securities. The government and the majority parties have come to better understand the effectiveness of the tax system. Taking advantage of this opportunity, we in the securities industry will actively pressure the government to expand the preferential tax system for investors to activate the securities market by promoting individual investors to participate more vigorously in the market. To have a broad range of investors participate in the securities market, it is important that securities firms, which are market intermediaries, and securities market gain investors confidence. Our association has reaffirmed the importance of its role as a self-regulatory organization and intends actively work to improve investor confidence by conducting a dialog on such problems with the persons concerned as early as possible in the current fiscal term. On the other hand, to promote proper understanding of securities investment, we the JSDA has to make more effort than ever to disseminate knowledge about securities and to enlighten the public and create an investment environment that is easy to understand for individual investors. While specific activities will be determined later, the JSDA intends to take vigorous action with member firms in this area. During the present shift from indirect finance to direct finance, our role in the securities market takes on even greater importance. Although the JSDA has many issues to address, we will do our best to deal with the problems, and we need your continued support and cooperation to establish a Japanese securities market that inspires dreams and is trusted by all. Eiichiro Okumoto Chairman of the Japan Securities Dealers Association July 2, 2001 Japan Securities Dealers Association Annual Report

5 THE YEAR IN REVIEW In fiscal 2000, the Japanese economy continued to improve supported by the recovery of the business sector, but then steadily became weaker as a decrease in exports and producing activities and concern about reduction of investment in plant and equipment put the brakes on the selfsustained recovery. As a result, the government implemented the Emergency Economic Package aimed at financial and industrial regeneration and activation of securities market. Although rising above 20,000 at the beginning of the April 2000, the Nikkei Stock Average generally lingered between 16,000 and 18,000 up to summertime. After that, it continued to drop under the influence of the Bank of Japan s termination of its zero interest rate policy, the unwinding of crossshareholdings, a jump in crude oil prices, and an unstable U.S. stock market. In March 13, 2001, the Nikkei Stock Average hit its worst low since the collapse of Japan s bubble economy. In the JASDAQ Market, the average daily trading volume in fiscal 2000 was 12.8 million shares or 31.3 billion, dropping far below the 18.8 million shares or 65.2 billion achieved in the preceding fiscal year. The JASDAQ INDEX fell sharply from points at the outset of fiscal 2000 to points at the end of the fiscal year. Total market value sharply declined from 21 trillion in April 2000 to a little less than 10 trillion in March The yield of long-term government bonds generally fluctuated in a narrow range around 1.7% from April to July. As a result of the termination of the zero interest rate policy, however, the yield began rising and fluctuated between 1.8% and 1.9% at the beginning of September before starting to declining again after the end of September. Particularly after the start of the New Year, the yield moved down sharply due to monetary easing and reached 1.2% at the end of the fiscal year. The amount of public and corporate bonds issued through domestic public offerings in fiscal 2000 totaled 152 trillion, up 32 trillion from the previous fiscal year. Bonds issuance has set record highs for three consecutive years. Because the amount of assets held in stock investment trusts declined, the total amount of net assets held in securities investment trusts at the end of fiscal 2000 came to 52.8 trillion, which was 4% less than that of the preceding year. Stock investment trusts amounted to 14.5 trillion, while net assets for bond investment trusts totaled 38.3 trillion. 4 Japan Securities Dealers Association Annual Report 2001

6 THE YEAR IN REVIEW JASDAQ Market Reform and Active Market Management Trends in the JASDAQ market The JASDAQ Market was generally in a declining trend throughout fiscal The JASDAQ index, which stood at points on April 3, 2000, decreased to points in January 11, 2001, ending up the fiscal year at points, a loss of about 44 percent year on year. The JASDAQ-Bloomberg Lead100* 1, which is a representative index of the JASDAQ-Bloomberg Indexes, stood at points on April 3 and decreased to points at the end of this fiscal year, a loss of about 49 percent year on year. Total trading volume in fiscal 2000 came to 3.14 billion shares, compared with 4.61 billion shares in the preceding fiscal year. Daily average trading totaled million shares, down from million shares. The total value of shares traded was 7,701billion, down from 16,052 billion in the preceding fiscal year, with the daily average standing at 31.3 billion, down from 65.2 billion. Turnover was greatly reduced from the previous fiscal year both in shares and value. Total market value decreased almost continuously throughout the year, ending the period at 9.6 trillion, compared with 30.7 trillion at the end of the preceding fiscal year. The number of newly listed companies in fiscal 2000 was 88, up from 85 companies in the preceding year. Of particular note, like last year, was the increase in the listings of unique companies operating on the periphery of the Japanese economy and diverse companies engaged in unique business lines, in addition to the increase in the number of high-tech ventures. The number of JASDAQ-listed companies and managed companies at the end of fiscal 2000 was 869, down from 874 a year before. * 1 A price-weighted index of the 100 top Japanese companies traded over-the-counter, based on market capitalization and value of shares traded Japan Securities Dealers Association Annual Report

7 THE YEAR IN REVIEW The JASDAQ Market 6 Japan Securities Dealers Association Annual Report 2001

8 THE YEAR IN REVIEW Reexamination of operational structure of the JASDAQ Market In the report of the Financial System Council in February 2000, What the organization of stock exchanges, etc., should be, it was suggested that operating the JASDAQ market through use of the function of a joint-stock corporation should be considered. In response, the JSDA set up a special committee for reexamining the operational structure of the OTC stock market in March as a venue for examining concrete measures to further improve the operational function of the JASDAQ Market. The JSDA conducted an active and vigorous examination in this committee and drew up an interim report concerning reexamination of operational structure of the OTC stock market in June. Based on the conclusion of this interim report, the JSDA made a further study of concrete measures to make the most of the operational function of the JASDAQ Market. As a result, the board of directors basically approved the following in October, 2000: the JSDA, which established the market, should continue to be responsible for building the basic framework for market operational performance and self-regulation while entrusting as much of the market s operations as possible to a market operator within the limits of the Securities and Exchange Law. In December 2000, the board of directors of the JSDA approved amendments of the regulations related to entrustment of the operation of the JASDAQ Market, such as establishment of new regulations to provide terms for such an entrustment. These amendments of regulations were made in order to entrust the market operator with the operations of the JASDAQ Market including confirmation of application for listing and the documents attached thereto, business related with disclosure of issuer, and others. Consequently, the operation of the JASDAQ Market has been transferred to the Jasdaq Market, Inc., since February 1, At the same time, the Jasdaq Market, Inc., issued new shares through a private placement to the JSDA in order to increase its own capital to achieve more stability as a market operator. As a result of the issuance, the JSDA holds 70% of the outstanding shares of the company. Operation of robust JASDAQ market (1) The action program II for market reform structuring a market for the 21st century To further promote market reform, the JSDA released the action program II for market reform structuring a market for the 21st century, in April 2000, envisioning the ideal JASDAQ Market of the 21st century. In accordance with this program, the JSDA gave explanatory meetings to JAS- DAQ-listed companies and securities firms in Tokyo, Nagoya and Osaka. (2) Introduction of the settlement agency system To make delivery and settlement in the JASDAQ Market smooth and to reduce settlement risk, the JSDA amended parts of the concerned rules in November As a result of the amendments, an entity authorized by the JSDA can take the place of original parties in JASDAQ-listed securities transactions to be a counter party for claims and liabilities concerning deliveries and settlements of such transactions. The JSDA has already authorized the Jasdaq Market, Inc., as such an entity. The amendments and the introduction were implemented on April 16, 2001 after completion Japan Securities Dealers Association Annual Report

9 THE YEAR IN REVIEW of preparations by the Japan Securities Depository Center, which is a central securities depository for shares in Japan. (3) Establishment and expansion of the market-maker system The JASDAQ market-making system was improved by some reforms. For instance, a change was made in the method for inputting quotations in April and June In addition, the market-making system was connected directly to systems of securities firms for inputting of quotations and contracted prices in October (4) Promotion of disclosure and investors relations of JASDAQ-listed companies In July 2000, to promote timely disclosure of information on JASDAQ-listed companies, the JSDA required that JASDAQ-listed companies disclose quarterly information. With the object of making the representatives more thoroughly understand the importance of pertinent and timely disclosure of information and the concept of IR in company administration, the association held seminars for representatives of JAS- DAQ-listed companies, with 754 people attending. In August 2000, to enrich the content of the web site of the JASDAQ Market, the JSDA launched TIRS (Tentou Investment Research System), a system that allows users to instantly retrieve market price and other information about JASDAQ-listed companies on the Internet. In addition, to strengthen JDS, an Internet disclosure system for JASDAQ-listed companies, the JSDA formed a link-up with TD-net, a disclosure system used by all Japanese stock exchanges, and began full-fledged services in October Moreover, to prevent insider transactions and educate company executives about pertinent and timely disclosure of information and the concept of IR in company administration, the JSDA held meetings for executives who are in charge of disclosure in new JASDAQ-listed companies. A total of 26 meetings were held and 81 companies attended. (5) Strengthening publicity activities and stimulating new listings During fiscal 2000, the JSDA registered 88 new companies on the JASDAQ Market and visited 323 unlisted companies to promote listing on JASDAQ. To deepen their understanding about the JASDAQ Market and JASDAQ-listing system and help promote new listings, the JSDA held seminars on JASDAQ-listing for unlisted companies. The seminars were held in 14 cities and 813 people from 608 companies attended. In June 2000, the JSDA helped supervise TENTOU THE MARKET, an JASDAQ- Stock Investment Game, which Keizon Ltd. operates on the Internet. In July 2000, the association started Monthly Market Flash, a booklet that explains actual conditions on the JASDAQ Market and stocks with special features in easy-to-understand language. In addition, from February to March 2001, the JSDA held lectures on the JASDAQ Market at 16 locations throughout Japan in cooperation with Jasdaq Market, Inc., with 3,466 people attending. The object of the lectures was to expand the investor base and to promote investment in JASDAQ-listed stocks. (6) Vitalization of the green sheet market In July 2000, the JSDA amended parts of the rules concerning the implementation of reforms to activate the Green Sheet Market. For instance, the issues traded on the Green Sheet Market are divided into categories. Each category has a different set of requirement regarding frequency of reporting and announcing quotations and contracts. 8 Japan Securities Dealers Association Annual Report 2001

10 THE YEAR IN REVIEW Additionally, the amendments of the rules also increased the types of the securities available to be traded on the Green Sheet Market. (7) Reduction of trading unit in JASDAQlisted companies 26 JASDAQ-listed companies carried out major stock splits (dividing one share into 1.5 shares or more) during fiscal 2000, and 82 changed the number of shares per trading unit. The JSDA took positive measures to reduce trading units. Transaction management of JASDAQ-listed securities To ensure fair price formation on the JASDAQ market and smooth circulation of shares, the JSDA investigated 4,513 transactions and suspended 11transactions. Supervision of Trading Comparison with Categories Incidents previous year Stock price information Market price fluctuated in excess of allowed range 1, Large purchases or sales Other cases considered objectionable from the viewpoint of transaction control 19 0 Subtotal 2, Insider transactions Capital increases through public offering Third party allotment of new shares 34-2 Stock splits (free distribution) JASDAQ-listed convertible bonds issue 3 0 Foreign currency-denominated convertible bond issues Foreign currency-denominated warrant bond issues 12 1 Change in majority shareholders Publication of financial statements (revised financial projection) Change in stock dividends JASDAQ-listing cancelled Other important investment information Subtotal 1, Total 4, Trading Suspension in the JASDAQ Market Reason Incidents Capital and business tie-up 2 Issue of new stocks and takeover of a business 1 Merger 3 Tender Offer 2 Change of subsidiary 1 Others 2 Total 11 Japan Securities Dealers Association Annual Report

11 THE YEAR IN REVIEW Registration Criteria of the JASDAQ Market Item Class 1 Criteria Class 2 Criteria (1) Company concerned (2) Profit amount (3) Net assets amount (4) Total market value (5) Cash flow (6) Minimum number of shares offered to the public The company's main line has existed for a maximum of 10 years, or the percentage of the amount of sales to expenses for producing on a commercial basis is at least 3 percent. Value of net income in the fiscal year immediately preceding application was in positive territory on both a consolidated and non consolidated basis. Value of net assets in the fiscal year immediately preceding application was at least 200 million on both a consolidated and non consolidated basis. The percentage of floating shares at the time of public offering was at least 30 percent or the minimum number of shares offered to the public was at least 500,000. If the percentage of floating shares is at least 30 percent and the number of shareholders meets the criteria for registration, the company can carry out capital expansion through public offering or a secondary offering. At least 500 million as of the registration date At least 500,000 shares The company must have characteristics that contribute to its future growth, and judging from such characteristics and the following items, the company must have the same level of value as that required in Class 1. The company must meet the criteria for profit amount or net assets provided to the left, or its total market value is at least 1 billion. (7) Number of shareholders (8) Audit If the number of shares issued at the time of registration is less than 10 million: at least 300 If the number of shares issued at the time of registration is 10 million or more but less than 20 million: at least 400 If the number of shares issued at the time of registration is 20 million or more: at least 500 There must be audit certificates for the last two fiscal years, and the opinion of the auditor for the last fiscal year must be "satisfactory." (9) Appointment of representative applicant member Representative applicant member (mandatory for two years) Representative applicant member (mandatory for three years) (10) Quarterly report Not required Required 10 Japan Securities Dealers Association Annual Report 2001

12 THE YEAR IN REVIEW Public and Corporate Bonds Market Secondary market (1) Trends In the bond market, the yield on outstanding long-term government bonds (over-the-counter basic bond quotations at simple interest for long-term government bonds (10 years) recently issued) generally fluctuated in a narrow range around 1.7% to July. It, however, began rising sharply in August as a result of concern over additional issues of government bonds and fluctuated between 1.8% and 1.9% at the beginning of September. The yield then declined due to the lack of a clear economic direction and falling share prices. Particularly after the arrival of the new year, the yield declined sharply due to the easing of monetary policy and ended the fiscal year at 1.2%. (2) Scale The total trading volume of over-thecounter bonds in fiscal 2000 was 4,147,824.2 billion, remaining at a high level as in the preceding fiscal year. The main contributors to this performance were a trading volume of medium-term government bonds of 301,285 billion, three times larger than that of the preceding fiscal year, and an increase in the trading volume of financial bills. The monthly balance of bond lending was 51,249.5 billion and secured bond lending by cash amounted to 42,756.2 billion. Both of these balances were approximately the same as in the preceding fiscal year. OTC Bond Trading Billions of yen FY2000 FY1999 Total government bonds 3,971,522 3,919,530 Long term (over 10 years) 54,623 56,709 Long term (10 and 6 years) 1,031,274 1,017,436 Medium term (2 to 4 years) 301,285 92,859 Discount 1, Treasury bills 1,012,675 1,372,893 Financing bills 1,570,043 1,378,757 Municipal bonds 11,992 7,410 Government-guaranteed bonds 32,694 16,826 Other special bonds Bank debentures 44,584 32,147 Interest-bearing 42,560 30,023 Discount 2,024 2,125 Yen-denominated foreign bonds (Samurai bonds) 5,116 3,703 Total corporate bonds 43,521 22,095 NTT, JR bonds Electric power bonds 12,773 8,556 Other straight bonds 30,041 12,968 Specified bonds Convertible bonds 3,110 2,916 Warrant bonds 0 0 Private placement bonds 34,816 23,746 Municipal bonds 31,581 21,047 Others 3,235 2,700 Total 4,147,825 4,028,679 Japan Securities Dealers Association Annual Report

13 THE YEAR IN REVIEW Primary market In fiscal 2000, domestic public and corporate bonds issued through public offerings amounted to 152,221.9 billion, reaching a new high. A total of 141,361.4 billion worth of public bonds were issued, a rise of 31,761.1 billion or 29.0 percent over the preceding fiscal year. This growth can be attributed to an increase in the planned issue of government securities* 2, municipal bonds and government-guaranteed bonds. The value of corporate bonds issued continued to fall, amounting to 8,262.2 billion in fiscal Although bonds issued by banks increased substantially, amounting to 2,081.4 billion, industrial bonds continued to decrease, falling to 3,620.7 billion, and the volume of asset-backed securities and convertible bonds fell year on year. Non-resident bonds amounted to 2,598.3 billion, a sharp increase over the preceding fiscal year due to major bond issues taking advantage of the low cost of raising money in yen. Development and expansion of bond transactions with repurchase agreements (hereinafter referred to as Gensaki Transactions ) To reduce the settlement risk between counter parties and improve the convenience of Gensaki Transactions, the JSDA made a new basic contract for Gensaki Transactions based on a type of repo transaction used abroad (GMRA) and established rules for its enforcement. Improvement of market practices for transactions in government bonds In response to the real-time gross settlement (RTGS) of government bonds, which started in January 2001, the JSDA issued Guidelines on RTGS of government bonds to reduce settlement risk and ensure smooth settlements. The JSDA also established Rules regarding a Resolution in respect of a Fail of Securities (Uniform Practice Code No. 4) as a so-called Buy-in rule. * 2 Including treasury bills and financing bills, but excluding bills that mature in fiscal Japan Securities Dealers Association Annual Report 2001

14 THE YEAR IN REVIEW Revitalization of the Securities Market and Ensuring Investors Confidence The Japanese securities market is in the process of successful implementing various reforms, such as an enactment of the Law on Sales of Financial Products, complete liberalization of stock brokerage commissions, the rapid spread of trading via the Internet, and the promotion of measures to vitalize the securities market. The JSDA has continued its lobbying efforts directed at various quarters including policy-makers, and administrative and economic circles to obtain their support for upgrading and revitalizing the functions of the securities market. The JSDA has also actively campaigned for the materialization of a comprehensive reform of the securities market. Survey of stock brokerage commissions The JSDA surveyed securities companies and institutional investors to learn the state of stock brokerage commissions at the end of December 2000, about one year after complete liberalization of stock brokerage commissions in October Compared with the results of the last survey conducted a year before, the commission rate of face-to-face transactions at the counter was almost the same. But on a practical level, stock brokerage commissions likely decreased because securities firms have increasingly been setting up a variety of commission discount systems. Commission rates did decreased from that of last survey for transactions by telephone or facsimile, a 10% drop, and for Internet transactions, a 20% drop. Compared with the rate before the complete liberalization in October 1999, commission rate had decreased: face-to-face transactions at the counter dropped 10%, transactions by telephone or facsimile fell 40% and Internet transactions sunk 70%. According to the survey of institutional investors, the commission rate was almost the same as that of the last survey. Survey of Securities Companies Regarding Stock Brokerage Commissions The JSDA surveyed securities companies to learn the state of stock brokerage commissions in January 2001, about one year after the complete liberalization of such commissions. The questionnaires were sent to 297 firms, and answers were obtained from 200 companies or 67.3 percent of the companies polled. Japan Securities Dealers Association Annual Report

15 THE YEAR IN REVIEW Toward implementation of the Law on Sales of Financial Products The Law on Sales of Financial Products was approved in May 2000, and was implemented in April This law was made to clarify accountability to customers and to promote making and publishing policy for solicitation. To help securities firms comply with the Law on Sales of Financial Products, the JSDA issued guidelines for product explanation to customers by executives and employees of securities firms. For their reference, the guidelines were accompanied by some solicitation case studies. The JSDA also held explanatory meetings, to deepen executives and employees understanding of The Consumer Contract Act, which was also implemented in April Toward improvement of securities settlement system The JSDA presided at a reform meeting deliberating the securities delivery and settlement system. Participants from a broad range of related fields argued about how to achieve T+1 and DVP in the Japanese securities delivery and settlement system. The meeting had working groups focused on three themes: New settlement system for industrial bonds, What form should the organization and administration of the Japan Securities Depository Center take?, and Promotion of the DVP settlement system and application of the clearance function. The JSDA also urge the authorities concerned to enforce the new law regarding improvement of securities delivery and settlement. Reforming securities-related taxes The abolition of the withholding option, one form of taxation levied on capital gains from stocks, was planned in April If this plan were implemented, the abolition would leave the taxation system whereby individuals must declare their capital gains on stock transactions. The JSDA devoted efforts during the fiscal year to requesting the extension of the withholding tax system. In addition, the JSDA actively lobbied the government and various other quarters for revision of the tax on bond trading, abolition of double taxation on dividend income, and revision of the tax deriving from liquidization of real estate. 14 Japan Securities Dealers Association Annual Report 2001

16 THE YEAR IN REVIEW Pamphlets promoting the stock Market Game Disseminating knowledge concerning securities business and securities transactions The JSDA conducted a campaign to promote securities-based saving throughout the country during fiscal 2000 aimed at having every class of Japanese people recognize that securities saving is a sound and effective measure of saving for the future. In fiscal 2000, the JSDA held 743 lectures on securities for savings with 47,141 people attending. In addition, the JSDA dispatched lecturers to address 333 tie-up seminars held by securities companies to promote participation by a broader range of people, which were attended by 16,559 people. The JSDA also held 33 securities seminars throughout the country with 4,647 people attending. These seminars were held with the object of having the participants systematically acquire grounding in stocks investment and securities saving on the whole. The JSDA also played its Stock Market Game at junior and senior high schools around the country. The purpose of this game is to help students understand the mechanisms of economy and securities via simulated stock transactions. A total of 54,701 students from 968 schools took part in these games. With the development of the Big Bang in Japan, it is necessary to establish a market environment that promotes fair and efficient financial transactions by participants. The report of the Financial System Council published in June 2000 suggested that it was essential for the securities industry and administrative authorities to educate consumers in the financial field systematically and efficiently in response to consumers needs. In response, the JSDA established Project by 5 association for dissemination of knowledge about securities in cooperation with the Tokyo Stock Exchange, the Association of Tokyo Stock Exchange Regular Members, the Investment Trusts Association, and the Japan Institute for Securities Information and Public Relations. The concept of this project is to provide a comprehensive education in economy and finance, aiming to supply a long-term and continuous dissemination of knowledge of securities based on the application of information technology like the Internet. The JSDA created fiscal 2001 action plans for this project both for school education and for consumers. Japan Securities Dealers Association Annual Report

17 THE YEAR IN REVIEW Enforcement of segregated custody of customer s assets To ensure that member firms carry out segregated custody of customer s assets completely, the JSDA required that the member firms should make an internal examination of the administration of segregated custody and that they should inform the JSDA of its results. Members that submitted an incomplete report received warnings from the JSDA in writing or other necessary disciplinary measures. In April 2001, the government s unlimited safety net system for the securities industry was abolished. Consequently, compensation under the investor protection fund per customer is now limited up to ten million yen. In the run up to April, the JSDA put advertisements in newspapers and made posters to inform investors of the segregated custody of their assets at securities firms. Other activities Regarding a review of the capital adequacy requirement, the JSDA gathered opinions and made requests to the Financial Service Agency. The JSDA made the member firms aware of the content of the Cabinet Office Ordinance concerning regulation on net capital of securities company that was amended in March The JSDA made requests several times to the Financial Service Agency for establishment of a new system of the reporting form delivered to customers. The JSDA also gathered and compiled the opinions of the securities industry, submitting them to the Financial Service Agency. Implementation of Self-regulatory Functions To ensure the smooth operation of the securities market, the JSDA has enacted various self-regulatory rules for securities firms and registered financial institutions, and is attempting to guarantee fair and smooth securities transactions. The main rules laid down by the JSDA concern overthe-counter (OTC) transactions of stocks and public and corporate bonds, underwriting of securities, transactions in foreign securities, acceptance of securities for deposit and safekeeping, employee conduct, internal administrative systems, registration of sales representatives, advertising, solicitations to invest, client management, and settlement of disputes between securities firms and clients. Expanding Internet transactions In September 1999, in order to maintain and expand investors trust of Internet transactions, the JSDA made and published Guidelines on important matters in Internet transactions for securities companies. One year has passed since this guideline was made and the Internet transaction environment has continued to change. Consequently, the JSDA considered a revision of this guideline and released it in April Effective April 2001, securities firms are now permitted to deliver the documents that they issue to customers under the Securities and Exchange Law electronically under the IT Comprehensive Law. In view of this law, the JSDA amended 15 related rules to make it possible to deliver the documents electronically. 16 Japan Securities Dealers Association Annual Report 2001

18 THE YEAR IN REVIEW Internet Transactions Survey Number of Securities Companies that Handle Internet Transactions As of Oct. 31, 1999 As of March 31, 2000 As of Sep. 30, 2000 As of March 31, 2001 Number of member Companies polled Handle Internet Transactions Do not handle Internet transactions Making preparations Studying plans Have no plans % % % % % % % % % % % % 7 2.4% % % % % 8 2.8% % % Number of Accounts for Internet Transactions Number of accounts (Unit: Account) As of Oct. 31, As of March 31, As of Sep. 30, As of March 31, , ,456 1,325,795 1,933,762 Value of Sales Value (in stock transaction) (Unit: millions of yen) Internet transactions Sales value(c) Percentage Cash trading(a) Margin trading(b) [(a)+(b)]/(c) During Oct ,778 29,178,182 During March , ,700 62,546, % During Sep , ,324 29,855, % During March ,254, ,009 31,319, % (Note) A survey was not conducted regarding the sales value in margin trading during October Japan Securities Dealers Association Annual Report

19 THE YEAR IN REVIEW Broadening inspections The JSDA conducts on-the-spot inspections of securities firms at regular intervals to ensure they and their employees are observing laws, regulations and self-regulatory rules regarding sales activities, and also to check their internal administrative systems. (1) Inspections of member firms Based on the results of the fiscal 1999, the JSDA inspected 90 member firms in fiscal 2000 after reexamining the method by which the inspection was conducted. Emphasis was placed on 1) compliance with laws and regulations, 2) segregating client assets, 3) compliance with the suitability principles, and 4) expansion andstrengthening of the internal administration system. In addition, at the request of the Tokyo and Osaka stock exchanges, the JSDA cooperated in investigations into 96 stock transactions at 433 securities companies that are not members of a stock exchange. (2) Inspections of special members The JSDA also conducts inspections of special members such as banks, trust banks, credit banks (shinkin banks) and insurance companies either on-site or through document-based inspections. The fiscal 2000 audit focused on compliance with laws and rules relating to the sales activities in the securities business including registration, compliance with the suitability principle in retail sales and the internal administrative system. A total of 60 institutions were audited on-site, and 11 others were inspected based on documents. Items Inspected in Fiscal 2000 Items related to laws including the JSDA rules and regulations relating to the items specified in laws Compliance with suitability principle Accepting discretionary accounts Transactions aiming at profiting through excessive speculation No loss guarantee and loss compensation Bucketing Segregating client assets Sales activities by unregistered and unqualified personnel Compliance with the laws concerning off-market transactions Representation of a false statement Compliance with other laws concerning prohibited acts Items related to the JSDA rules items mainly prescribed in the JSDA rules and regulations Whether or not a member securities company has internal rules Acceptance of orders from salespeople working for other securities companies Unapproved buying and selling Undertaking transactions using a fictitious name and lending or borrowing of a name or address Lending and borrowing of cash or securities to or from clients Other activities that executives and employees should not engage in Confirming each client s identity Compliance with guidelines concerning Internet transactions Compliance with laws and practice of internal administration 18 Japan Securities Dealers Association Annual Report 2001

20 THE YEAR IN REVIEW (1) Training of executives and employees In recognition of the remarkable changes in the environment surrounding the securities industry, the JSDA vigorously carried out training courses during fiscal In training for executives and employees of member firms, the JSDA held a new practical internet transaction business lecture and attempted to enrich the content of existing courses by holding night seminars on defined contribution plans, etc. In all, 9,573 people attended 31 courses in 25 fields. In addition to the training courses planned originally, the JSDA held a special lecture on new businesses and products. Securities transactions and traded products have been getting more diverse, advanced and complicated with the globalization of financial and securities markets and the development of electronic transactions. Based on these trends, the object of this new course was to assist administrators in acquiring knowledge of derivative products and other new financial products. For special members, the JSDA conducted internal administration supervisor and subsidiary supervisor training courses for executives and employees and a sales instruction course for employees. A total of 565 people attended these courses. (2) Qualifying examinations During fiscal 2000, the JSDA conducted five qualification examinations for its members employees, including examinations for Class 1 registered representatives. A total of 19,132 people passed these examinations. In addition, in response to the expanded scope or requirements for sales representative registration and the globalization of the securities business, the JSDA introduced an English version of the exam, and held an exam in English for both Class 1 and Class 2 registered representatives. The JSDA also held five examinations for special members, including an examination of Class 1 registered representatives, with 97,647 people passing the examinations. Dealing with securities transaction complaints The JSDA has a mediation system to settle disputes between member firms and clients. If a complaint is received from a client of a member company, a member of the mediation committee holds hearings with the client and the securities company concerned, and tries to settle the problem through negotiation. The JSDA also has securities complaint consultation offices located at each of its district offices, which deal with client complaints and answers questions about securities transactions. In fiscal 2000, the JSDA received 100 requests for mediation. 43 cases were settled through mediation and 35 cases were dropped without resolution. The JSDA s office of securities complaint consultation received 5,746 inquiries in fiscal Japan Securities Dealers Association Annual Report

21 THE YEAR IN REVIEW Promoting International Coordination Promotion of international relations The JSDA participated in various international meetings related to the securities industry. These include the13th annual general meeting of the International Councils of Securities Associations (ICSA) held in Taipei in April 2000; the annual general meeting of the 5th International Organization of Securities Commissions (IOSCO) held in Sydney in May; the 6th APEC Financiers Group Meeting which took place in Burney in September; the annual general meeting held in Santa Fe in October 2000 of the International Standardization Organization (ISO), which studies standardization of securities-related topics. In addition, the JSDA held the 6th Asia Securities Forum meeting in Tokyo in October 2000 for representatives of the securities industry in Asia. By attending these meetings, the JSDA contributed to the internationalization of the Japanese securities market and exchanged views with securities-related people from various countries throughout the world. Promotion of foreign securities investment In Japan, there are no laws or regulations restricting or regulating investment in foreign securities. For the protection of investors, however, the JSDA has requirements governing what sort of foreign stocks or bonds securities firms can encourage investors to invest, and what sort of foreign investment trust securities that they can sell to investors. As of the end of March 2001, the balance of foreign investment trusts in custodies of securities companies in Japan stood at 3,734 billion, which showed 3.7% increase from the previous year s 3,600 billion. The balance is expected to continue to increase. Having with the implementation of the amended Investment trust law in December 2000, the JSDA revised its rule concerning foreign investment trust, easing its limitation to invest in unlisted stocks and real estates. 20 Japan Securities Dealers Association Annual Report 2001

22 DATA FOR FISCAL 2001 Membership Three less regular members, three more special members (Total members: 552) The JSDA consists of regular members and special members. Regular members comprise all domestic and foreign securities firms with securities branch licenses in Japan. Banks and other financial institutions registered by the Financial Service Agency to operate securities business in Japan under Paragraph 2, Article 65 of the Japanese Securities and Exchange Law are special members of the Association. Regular members Regular membership came to 293 firms at the end of fiscal 2000, a decrease of three firms from the previous year. This reflects the enrollment of 23 new members and the withdrawal of 26 members resulting from mergers and other activities. The breakdown includes 241 domestic securities firms and 52 foreign securities firms. Foreign regular member firms accounted for 18 percent of membership. The United States has the greatest number of firms with 18, followed by the United Kingdom with 8, France with 6, Germany with 6, Canada with 3, the Republic of Korea with 3, the Netherlands with 2, and Switzerland, Singapore, Australia and Belgium with 1 each, and 2 others. The total number of people employed by JSDA regular member firms at the end of March 2001 was 94,448. This figure has continued to decline from a peak of 167,000 at the end of June The number of offices of JSDA regular member firms has also decreased steadily. At the end of March 2000, the figure stood at 2,309, a decline of 30 percent from its peak of 3,298 at the end of January Regular Member Data Japan Securities Dealers Association Annual Report

23 DATA FOR FISCAL 2001 Special members During fiscal 2000, one financial institution joined the JSDA as special member, and 13 institutions lost their membership as a result of mergers or for other reasons. Consequently, the total number of special members rose to 244 as of the end of fiscal A breakdown shows that 197 banks account for 80.7 percent of this total, while insurance companies, money market dealers and securities finance companies constitute 16.4 percent, 2.5 percent and 0.4 percent, respectively. Special Member Composition (March 31, 2001) 22 Japan Securities Dealers Association Annual Report 2001

24 DATA FOR FISCAL 2001 Balance Sheets (As of the end of March 2001) Assets Millions of yen Thousands of U.S. dollars Liabilities Millions of yen Thousands of U.S. dollars Cash 4 $30 Deposits 2,007 $16,111 Prepayments 1 $9 Loans 641 $5,140 Accrued revenue 1 $11 Advances 1 $9 Subtotal 2,655 $21,311 General fund under management: Deposits 401 $3,221 Loans 252 $2,022 Securities 2,652 $21,284 Guaranty money deposits 292 $2,346 Buildings and equipment 121 $972 Subtotal 3,719 $29,846 Training fund under management: Deposits 59 $473 Prepayments 0.3 $3 Accrued revenue 500 $4,013 Securities 1,979 $15,880 Buildings and equipment 0.5 $5 Subtotal 2,539 $20,374 Deposits received 52 $419 Accrued retirement benefits 1,178 $9,457 Surplus income from current fiscal year 1,425 $11,435 Subtotal 2,655 $21,311 General fund 3,598 $28,874 Contra account for general fund buildings and equipment 121 $972 Subtotal 3,719 $29,846 Training fund 2,038 $16,356 Bad debt reserves 500 $4,013 Contra account for training fund buildings and equipment 0.5 $5 Subtotal 2,539 $20,374 Securities transactions liability reserve deposits: Deposits received 22,485 $180,461 Investment income from reserve deposits 172 $1,383 Subtotal 22,658 $181,845 TOTAL LIABILITIES 31,571 $253,375 Securities transactions liability reserve deposits under management: Deposits 9,392,000 $75,380 Securities 13,264,000 $106,449 Accrued revenue 2,000 $16 Subtotal 22,658,000 $181,845 TOTAL ASSETS 31,571,000 $253,375 Japan Securities Dealers Association Annual Report

25 DATA FOR FISCAL 2001 Revenues and Expenses Statement (Fiscal 2000) Revenues Millions of yen Thousands of U.S. dollars Expenses Millions of yen Thousands of U.S. dollars Fixed membership fees: Fixed fees 247 $1,980 Proportional fees based on branches 183 $1,471 Proportional fees based on mini-branches 14 $109 Proportional fees based on registered representatives 590 $4,737 Proportional fees based on capital 422 $3,390 Floating rate fees: Proportional fees based on stock trading amounts 2,131 $17,103 Proportional fees based on bond trading amounts 872 $6,996 Proportional fees based on operating revenue 980 $7,864 Total membership fees 5,439 $43,650 Representative registration fees 14 $113 Training and education 275 $2,211 Other net results from activities 24 $193 Subsidies 93 $746 Investment income 95 $762 Revenues from special members 254 $2,039 Special revenues from the Bond Underwriters Association of Japan 378 $3,034 Other revenues 16 $132 Surplus income from previous year 604 $4,845 Reversal from accrued retirement benefits 443 $3,555 Compensation and salaries 2,743 $22,012 Social security and welfare benefits 387 $3,109 Payments of accrued retirement benefits 443 $3,555 Accrued retirement benefits 255 $2,047 Conferences and meetings 65 $524 Travel and communication 145 $1,161 Printing 50 $401 Surveys 88 $706 Entertainment 4 $36 Office rent and others 642 $5,150 Taxes and public charges 66 $526 Miscellaneous 26 $206 Membership fees in various organizations 352 $2,829 Entrustment of Operations 136 $1,095 Examination of securities companies 21 $167 Training and education 231 $1,857 Securities ATM special account 219 $1,759 Advertising 337 $2,704 Subtotal 6,210 $49,843 Offset for surplus income from current fiscal year 1,425 $11,435 TOTAL EXPENSES 7,635 $61,278 TOTAL REVENUES 7,635 $61, Japan Securities Dealers Association Annual Report 2001

26 DATA FOR FISCAL 2001 Organization Chart Japan Securities Dealers Association Annual Report