Custody Newsflash December 6 th, 2007 Book-Entry Transfer System for ETFs ======= Category Market Practices and Infrastructure Summary The Book-Entry Transfer System for ETFs will go live at JASDEC from January 4 th, 2008. BTMU established new default procedures on the conversion to book-entry form and processing of settlement instructions. Details of the supplementary agreement, which JASDEC eligible account holders and their Account Management Institutions are required to conclude, are specified in the new JASDEC Business Regulations for ETFs. However, as JASDEC has not made these regulations available in English yet, BTMU will ask clients to sign this supplementary agreement after this is made available, and upon further notice. Impact According to new BTMU default procedures applicable to JASDEC eligible accounts, all ETFs under custody as of year end will be converted to book-entry form and from next year all settlement instructions for book-entry ETFs will be processed in the same way as those for JASDEC shares. Action Clients holding JASDEC eligible accounts should carefully review new BTMU default procedures. In case the alternative to hold ETFs in physical certificates is preferred, please refer to our separate advice to relevant clients. Relevant clients should also expect further notification from BTMU on the supplementary agreement issue, which time of notice remains uncertain. ======= The Book-Entry Transfer System for Exchange Traded Funds ( ETFs, including Nikkei 300) will go live at JASDEC from January 4 th, 2008 ( the new system ). With the implementation of the new system, the Law Concerning Book-Entry Transfer of Corporate Bonds, etc., ( Book-Entry Law ) will become the governing law for ETFs and thus entitlement transfers will be handled according to the increase/decrease in balances recorded on Transfer Account Books maintained at JASDEC and Account Management Institutions (i.e. subcustodians in Japan). The advantage to book-entry form is that there will be no loss or forgery of physical certificates, since book-entry ETFs will be completely paperless. Currently, ETFs are predominantly immobilized with JASDEC and JASDEC will convert all outstanding balance to book-entry form. Therefore, it is expected that book-entry form will similarly be the Japanese market standard for ETFs. Going forward, BTMU default procedure applicable to JASDEC eligible accounts is; 1. to convert all ETFs under custody as of the close of business on December 28, 2007 (i.e. last business day of this year in Japan) to book-entry form upon commencement of the new system as of the opening of business on January 4 th, 2008 (i.e. the first business day of the next year in Japan), and, 2. to continue to process all ETF settlement instructions in the same way as those for JASDEC shares (i.e. Copyright 2007 The Bank of Tokyo-Mitsubishi UFJ, Ltd. Page 1 of 5
shares that settle at JASDEC), once the new system goes live from January 4 th, 2008,. Clients holding JASDEC eligible accounts should carefully review new BTMU default procedures. In case the alternative to hold ETFs in physical certificates is preferred, please refer to our separate advice to relevant clients. The alternative to book-entry form is to hold physical certificates. Such certificates will remain valid, but clients would need to instruct BTMU to withdraw certificates from JASDEC in advance. It is uncertain to what extent settlement counterparties can accept physical certificates for receipt or offer physical certificates for delivery. Therefore, liquidity of any remaining physical certificates would become questionable once the new system goes live. As in the case of other instruments governed by the Book Entry Law, reverse conversion of book-entry ETFs back to physical form will not be possible. Conversion from physical form to book-entry form is possible even after the new system goes live, but is subject to a JASDEC charge of JPY500 per certificate. Please refer to attachment 1 for a list of currently listed ETFs. Also, as of January 4 th, 2008, JASDEC s Business Regulations Relating to Listed Investment Trusts will become effective. According to Article 24, JASDEC eligible account holders and their Account Management Institutions (i.e. subcustodian in Japan) are required to conclude a supplementary agreement, which details are specified in this article. However, JASDEC has not made these regulations available in English yet. Only the Japanese version (http://www.jasdec.com/fund/etf.html#070810) is available. BTMU s tentative translation of Article 24 only is attached for your information. Please refer to attachment 2. In light of the circumstances, BTMU will ask clients to sign this supplementary agreement after this is made available. Relevant clients should also expect further notification from BTMU on the supplementary agreement issue, which time of notice remains uncertain. If you have any questions regarding the above, please feel free to contact us. For related issues, please also refer to the following Newsflash: August 10 th, 2007 Operational regulations for ETFs released by JASDEC Best regards, / The Bank of Tokyo-Mitsubishi UFJ, Ltd. Past Newsflash issues are available on the BTMU Yen Custody Website; http://www.bk.mufg.jp/custody/. This site is dedicated to our clients, and accessible only with ID and Password. Should you require them, please contact us. Copyright 2007 The Bank of Tokyo-Mitsubishi UFJ, Ltd. Page 2 of 5
Attachment 1 Currently Listed ETFs QUICK ISIN Name Notes Tokyo Stock Exchange 1305 JP3027620008 DAIWA ETF-TOPIX 1306 JP3027630007 TOPIX EXCHANGE TRADED FUND 1308 JP3039100007 NIKKO EXCHANGE TRADED INDEX FUND TOPIX 1310 JP3040100004 DAIWA ETF-TOPIX CORE 30 1311 JP3040140000 TOPIX CORE 30 EXCHANGE TRADED FUND 1610 JP3040110003 DAIWA ETF-TOPIX ELECTRIC APPLIANCES 1613 JP3040150009 TOPIX ELECTRIC APPLIANCES EXCHANGE TRADED FUND 1612 JP3040130001 DAIWA ETF-TOPIX BANKS 1615 JP3040170007 TOPIX BANKS EXCHANGE TRADED FUND 1329 JP3027710007 I SHARES NIKKEI 225 1330 JP3027660004 NIKKO EXCHANGE TRADED INDEX FUND 225 1319 JP3013190008 NIKKEI 300 STOCK INDEX LISTED FUND Cross-listed on TSE and OSE Osaka Stock Exchange 1319 JP3013190008 NIKKEI 300 STOCK INDEX LISTED FUND Cross-listed on TSE and OSE 1320 JP3027640006 DAIWA ETF-NIKKEI 225 1321 JP3027650005 NIKKEI 225 EXCHANGE TRADED FUND 1309 JP3046510008 SSE50 INDEX LINKED EXCHANGE TRADED FUND 1312 JP3046520007 RUSSELL/NOMURA SMALL CAP CORE INDEX LINKED ETF 1328 JP3046490003 GOLD-PRICE-LINKED EXCHANGE TRADED FUND Copyright 2007 The Bank of Tokyo-Mitsubishi UFJ, Ltd. Page 3 of 5
Attachment 2 JASDEC BUSINESS REGULATION RELATING TO EXCHANGE TRADED FUNDS [BTMU Provisional Translation] This translation has been prepared by BTMU at its own discretion, solely for reference purposes. Article 24: When opening an account of a Participant pursuant to the provisions of Article 22, an Account Management Institution shall enter into an agreement with the Participant, which shall include the following provisions: (1) The Participant s account shall be opened under the Book-Entry Transfer System for Exchange Traded Funds (ETFs); and, in connection with the handling of the Participant s account, the parties shall comply with the provisions of the agreement, the Law and other laws and ordinances, these Regulations, and other provisions prescribed by JASDEC in connection with the Book-Entry Transfer System for Exchange Traded Funds (ETFs). (2) Documents, etc., necessary for the confirmation of the Participant s identity to be conducted by the Account Management Institution pursuant to the provisions of Article 22, Paragraph 3, shall be submitted. (3) Only those beneficiary rights of the Exchange Traded Funds (ETFs), in which the Participant has rights/interests, shall be recorded or written in the Participant s account (excluding Customer Accounts of any Participant that is an Indirect Account Management Institution). (4) If any change to the Participant s name/trade name or address occurs, the Participant shall so notify the applicable Account Management Institution without delay. (5) The applicable Account Management Institution (except when it is one of those prescribed in Article 44, Paragraph 1, Item 15, of the Law) shall jointly guarantee, for the benefit of the Participant prescribed in Article 11, Paragraph 2, of the Law, the performance of all of the obligations which are owed by the Participant s Upper Positioned Institution to the Participant under Paragraph 2 of Article 80 and Paragraph 2 of Article 81 of the Law. (6) If the applicable Participant is an Indirect Account Management Institution, the Account Management Institution shall communicate to such Participant the matters which are noted by JASDEC to the Account Management Institution. (7) If Customer Accounts are to be opened for an Account Management Institution or its Upper Positioned Institution by multiple respective Nearest Upper Positioned Institutions, the applicable Account Management Institution shall so notify the Participant and advise the names of the Nearest Upper Positioned Institution and its Upper Positioned Institution(s) (other than JASDEC) which will open the Customer Account(s) where the number of units in the issue of Exchange Traded Funds (ETFs), in which the Participant has rights/interests will be recorded or written. Copyright 2007 The Bank of Tokyo-Mitsubishi UFJ, Ltd. Page 4 of 5
(8) If an Account Management Institution does not handle certain Exchange Traded Fund (ETF) issues which are handled by JASDEC under the provisions of Article 8 (limited to those instances where it does not constitute an unfair discriminatory practice prescribed in Article 14 of the Law, which is applicable under Article 46 of the Law), the Account Managing Institution shall so notify the Participant. (9) In case an issuer stipulates that beneficiary registration through JASDEC is feasible, the Account Management Institution shall forward such request for beneficiary registration to the relevant trustee, as prescribed by JASDEC, for Participants relevant to the beneficiary right of such Exchange Traded Funds (ETFs) as of the last date of the calculation period for trust assets. (10) The Participant shall have the right to request the applicable Account Management Institution to make book-entry transfers with respect to the beneficiary rights of Exchange Traded Funds (ETFs) (other than those subject to attachment and those with respect to which book-entry transfers and applications therefore are otherwise prohibited under laws and ordinances), which rights/interests are recorded or written in the Participant s account. Copyright 2007 The Bank of Tokyo-Mitsubishi UFJ, Ltd. Page 5 of 5