Notes from Press Conference by Mr.Atsushi Saito, President & CEO, Tokyo Stock Exchange Group, Inc., on January 28 th, 2011 1. Financial Results of 1 st to 3 rd Quarters for FY ending March 2011 2. Development of Listing Rules and Frameworks for JDR-type ETNs 3. Start of Individual Equity Options Trading by Online Securities Companies 1.Financial Results of the 1 st to 3 rd Quarters for FY ending March 2011 The following is a breakdown of the financial results for the 1 st to 3 rd quarters (9 months) of Tokyo Stock Exchange Group, Inc. (TSE Group) for the fiscal year ending March 2011. As stock trading value was down approximately 7% from the same period of the previous year, trading participation fees were down 5.1% on a year-on-year basis, and income from securities settlement was also down 3.9% from the previous year. In addition, listing fee was down 27.3% from the previous year. This was attributable to the fact that the amount of public offerings by listed companies decreased approximately 50% from the previous year, when a series of large-scale capital increases through public offerings were conducted. Income from information services was up 2.5% from the previous year due to an increase in the number of terminals for real time price data subscription in connection with the arrowhead launch. As a result, operating revenue was down 8.5% from the same period of the previous year, to JPY 42.1 billion. Meanwhile, operating expenses were down 4.7% to JPY 32.4 billion from the previous year. While there was an increase in depreciation costs in connection with the arrowhead launch, system maintenance/operating costs decreased due to a reduction in IT development support, and labor costs were reduced. 1
As a result, operating profit for the period was down 19.3% to JPY 9.61 billion while ordinary profit adjusted by dividend from Singapore Exchange, etc. was down 20.5% to JPY 11.33 billion from the same period of the previous year. Net income was up to JPY6.89 billion from the previous year, in which JPY 13.2 billion was recorded as an extraordinary loss related to the Tokyo District Court decision on the erroneous order incident in December 2005. For more information: http://www.tse.or.jp/english/about/ir/financials/tanshin/index.html 2. Development of Listing Rules and Frameworks for JDR-type ETNs Tokyo Stock Exchange, Inc. (TSE) has been promoting the listing of ETFs (Exchange Traded Funds) backed by a variety of asset classes, such as stocks, real estate, and commodities to increase the variety of products and provide risk-hedge functions. In addition to the listing of ETFs, TSE will develop the listing rules and frameworks for ETNs (Exchange Traded Notes) which track the indicators including stock indices, commodity indices, commodity prices, in the same way as ETFs. ETNs were first listed on New York Stock Exchange in April, 2006. They have since been listed on London Stock Exchange, Deutsche Borse, and other overseas exchanges and are being actively traded. In Asia, Singapore Exchange began ETN trading in December 2009. Underlying assets for ETFs such as stocks and commodities are held by trust banks and other financial institutions. Backed by such assets, beneficiary certificates are issued and distributed by these institutions. However, eligible assets for ETNs are 2
not held by financial institutions themselves. Credible financial institutions issue and distribute ETNs in the form of bonds that are guaranteed to track the movement of specific indicators such as stock indices. Utilizing ETNs will facilitate investment in underlying assets that are not easily accessible to investors; for example, precious metals, which are difficult to keep in custody, and stocks of China, India, and other countries where it is difficult to bring domestic stocks out of their countries due to their laws and regulations. Since ETNs do not employ investment trust structures, issuers are able to issue low-cost financial instruments flexibly with their good credit. In addition, ETNs carries no tracking error because financial institutions guarantee ETNs to track indicators without underlying assets, which is beneficial to investors. And generally, ENTs' administrative costs are very low. As there is a great need for ETNs issued by foreign financial institutions, TSE will develop the listing rules to facilitate JDR (Japanese Depositary Receipt)-type ETNs, for the purpose of increasing liquidity in Japan. JDR-type ETNs can be handled in Specific Accounts of securities companies, therefore, the same taxation as that of stocks and ETFs will apply. Since the listing, trading, and settlement rules and other systems of JDRs have already been developed, TSE is able to develop the rules and frameworks for ETNs and list them speedily. The amendments and adjustments to the listing rules will be implemented in April 2011 after soliciting public comments. Though the details of the first ETN cannot be mentioned at this stage, if the listing rules are implemented as scheduled, TSE will proceed with promotion for listing to 3
launch ETN trading after Golden Week (from April 29 through May 5, a period of straddling four public holidays). For more information: http://www.tse.or.jp/rules/comment/110128-jojoproduct_2.pdf 3. Start of Individual Equity Options Trading by Online Securities Companies Four online securities companies, Interactive Brokers Group, Inc., kabu.com Securities Co., Ltd., SBI SECURITIES Co., Ltd., and OKASAN ONLINE SECURITIES will connect to Tdex+ System, which is the TSE derivatives system, after March 2011 to start individual equity options for individual investors. Some people may associate "options" with institutional investors and hedge funds that manage a huge amount of assets. However, options are also beneficial for asset management of individual investors. They are able to enjoy higher yields in investing options than solely in cash equities, and make gains even in a stagnant market if they take advantage of options wisely. For example, investors can use options to leverage trading, like margin trading, or hedge risk in their stock portfolios. Individual equity options are being actively traded in 25 countries. Out of these countries, an average of 14 million units is traded per day in the US where a wide range of individual investors invest in options. On the other hand, the daily average trading volume of Nikkei225 Mini futures, which is the most actively traded derivative in Japan, is approximately 500,000 units. The TSE options market has made two-digit growth for the past two years. The daily average trading volume is rising to 4,000 units. Considering the scale of stock 4
markets in Japan and US, TSE believes that Japan's individual options market still has considerable room for growth. TSE has made strategic efforts to increase convenience of the options market by introducing Tdex+, an options trading system with the highest global standard, and the market making scheme. Unfortunately, however, individual equity options have not prevailed among individual investors in Japan. One reason is that there were few securities companies to support individual investors. However, TSE expects that its business model will change significantly due to the participation of the four online securities companies, a gateway for individual investors. TSE will also improve futures trading and accelerate its processing speed with the NYSE LIFFE group in London. Along with such improvement, SBI SECURITIES Co., Ltd. and OKASAN ONLINE SECURITIES are planning to start TOPIX and JGB futures trading. For now kabu.com Securities Co., Ltd. is the only online securities company for individual investors in the futures market. They have also announced that they will support the options market. Interactive Brokers Group, Inc., which is important to us for their overseas institutional investors, is scheduled to start options in February 2011. As such, all the four online securities companies will launch major derivatives on TSE after Autumn 2011. This will finally open the gate of the TSE derivatives market for individual investors, rather than simply increase the routes to the market. We would like to express our deep appreciation to these four online securities companies. They will pave the way for Japanese individual investors to the derivatives market that was only used by professional investors until now. TSE will redouble its efforts to increase the number of securities companies which connect Tdex+ System and promote individual investors to participate in the TSE derivatives market. 5
In the current medium-term plan three years ago, TSE proposed evolution to what we call a universal exchange with products of various asset classes. Individual investors will be able to easily participate in the TSE derivatives market such as TOPIX futures and options via online securities companies. This will provide general investors with opportunities to invest in various products in the TSE market. For example, stock-related investment in cash equities listed on the First and Second Sections and Mothers, which ranges from major Japanese companies to startups, investment in a wide variety of derivatives covering JGB interest rates, and investment in overseas stock indices and commodities through ETFs. Speaking of investment in commodities, I would like to inform you that SPDR Gold Shares created by SSGA is listed on NYSE, SGX, HKEX, and TSE. The product is being actively traded in TSE. In addition, TSE has seen a significant increase in trading of a gold ETF, which is fungible with gold itself and created by Mitsubishi UFJ Trust and Banking Corporation in July 2010. There are many other ETFs whose underlying assets are soybeans, various precious metals, agricultural products, and other commodities. As such, a variety of investment opportunities, including commodity ETFs and REITs, which have drawn attention from investors recently, will be concentrated on TSE and provided to general investors. As a result, TSE will finally provide infrastructures as a substantial universal exchange for both cash equities and derivatives. TSE will look for the ways of increasing user convenience to further enhance the liquidity of the TSE derivatives market. Since TSE is unable to change Japanese laws and taxation, there may be things which TSE can or cannot do. We will try to resolve the bigger issues ahead with our best efforts. For more information: http://www.tse.or.jp/english/news/25/110128_a.html 6
Q&A Q: I have two questions. The WFE (World Federation of Exchanges) lately announced the top ten exchanges by share trading value. In 2010, Shanghai Stock Exchange surpassed TSE for two consecutive years, and Shenzhen Stock Exchange is now catching up with TSE. Since the launch of arrowhead in January 2010, the number of orders has been steadily increasing, but trading value remains at a low level. You said that there are what TSE can or cannot do to increase the liquidity of the market. What efforts can TSE make to increase trading value in the future? A: I often have questions regarding the amount of trading. As you know, TSE's daily trading volume was 877 million shares in 1989 when TSE boasted the world's highest liquidity. The Nikkei 225 stood at 38,957 yen at that time. The trading value at that time was about the same as the current value, or around 1.4 trillion yen. As 2 billion shares are currently traded on TSE almost every day, the trading volume has more than doubled compared with that of 1989. On the other hand, daily trading value now remains at 1.3 to 1.4 trillion yen. The point is a difference in stock prices. In 1989, the average share price was 1,492 yen, but it is currently 693 yen. This means that the average share price becomes less than half of that of 1989. Your question is what TSE should do about this declining share price. As I always say in these press conferences, TSE has a lot on its hands. However, I would like to draw your attention to the fact that our trading volume has remained at approximately 2 billion shares since 2005. Except for NYSE, there are few markets in the world where trading volume exceeds 2 billion shares almost every day. Unfortunately, the stock prices declined, and the trading value of Shanghai Stock Exchange surpassed that of TSE. TSE ranks a little bit higher than Shanghai Stock Exchange in terms of market capitalization, but it is only a matter of time 7
before that change. In order to increase the trading value, first, I would like to request listed companies to raise their corporate value, as TSE itself cannot raise the stock prices of companies. Unfortunately, Japanese companies ROE, which is the ratio of return to shareholders by companies, is the lowest among other countries including China. For example, Germany's ROE is 13% on average, which is nearly twice that of Japan, 7%. The effective use of capital is very important. China's economic growth rate stands at 10% and will continue to increase in the future. Therefore, the capital efficiency of Chinese companies is higher than that of Japanese companies, resulting in a higher ROE. A large size of corporate profit itself is important, but the return per trading unit is important as well, whether it is returned in dividends or higher profits. What matters is the growth ratio. I talked to a person working at a large American securities company which invests in Japanese stocks when I visited Europe lately. When the listing of rights issue in Japan came up in our conversation, he said "the Japanese financial industry has finally started considering the listing of rights issue. Rights issue is currently unavailable in Japan, and this is the biggest reason why European investors have avoided investing in Japan". Some companies reduce EPS by half, or to 60% or 70% through a capital increase that causes a large-scale dilution, and this must be addressed through changing rules and frameworks. It is a challenge to recover the level of trading value to the previous level, so various measures must be taken. For example, TSE has worked to increase the number of tradable shares, accelerate the trading speed, and enhance transparency. TSE will continue to make efforts in the futures as well, but the most important thing is that listed companies will work for raising EPS and corporate 8
value. Otherwise, we are unable to recover to the level of 1989. Q: Moving on to the second question. Many listed companies will start to announce their financial statements towards the end of March. Looking at their schedule, most of them hardly disclose their financial results before the close of trading session as TSE requested. What do you think about this and what efforts does TSE make to promote corporate information disclosure during the auction session? A: TSE requested listed companies in November 2011 to disclose their corporate information during the trading session. I heard that approximately 23 companies would announce their financial results around 3 pm this year, changing from after 3pm. I understand many listed companies might end up with disclosure after 3 pm due to the schedule of their board of directors meeting. However, I would like to ask them to try as much as possible to reflect their corporate information in the stock price. What we can do is request them patiently. Most of the listed companies well understand the reason of our request and, I have not heard any opposition to our request directly. Therefore, TSE has to take time in its efforts step by step, and look for any good idea to address the issue. Q: S&P announced the downgrading of JGBs yesterday. What do you think about this as the president & CEO of a stock exchange? In particular, I would like to have your comments on an impact on the market. In addition, fiscal consolidation is obviously needed in the medium and long terms in response to the downgrading. What efforts do you request from the Japanese government? A: The timing of the downgrade itself was a little bit surprising to me. As the downgrading of JGBs was continuously covered on foreign newspapers, I thought this would affect the market in some way. 9
I understand that the credit rating agency downgraded JGBs after considering many facts. However, most of JGBs are purchased in Japan, the current balance is positive every year, and Japan is the world's largest creditor nation. Therefore, the situation of Japan is totally different from that of, say, Greece. I believe the credit rating agency would fully understand these facts when downgrading JGBs. I read the report and found that S&P did not write in such a negative tone. What the company wrote is, as you may all know, the government's attitude towards fiscal problems. It pointed out that the government lacks coherent fiscal policies. Therefore, JGBs were downgraded at this time, not June, contrary to general expectations. I imagine that in their review S&P doubted whether the government is seriously addressing the fiscal problems. Although the amount of national debts is increasing, the government is still introducing allowances one after another. As such, the company downgraded JGBs by one-notch. This is not a good thing at all, but the financial market reacts to the news very calmly. The stock market moves a little bit negatively, but the financial market as a whole does not react much to the downgrading. Usually, the Japanese yen is sold, but it was not so this time. Considering this situation, investors in the world, well understand the real situation and takes the report calmly. However, we cannot neglect the problem and this must be addressed seriously. In response to the downgrading of JGBs this time, I hope all the Japanese people and lawmakers will seriously address the fiscal problems. The Finance Minister said things like "the ratings are simply things decided by a private agency". However, as you well know, JGBs are actually priced in global bond markets according to the ratings fixed by private credit rating agencies. With their ratings, bond prices are up 10
and down in global financial markets. Therefore, we have to take the downgrading seriously, whether it is decided by a private agency or not. Q: In response to the media coverage on the downgrading, Prime Minister Naoto Kan commented that he is unfamiliar with credit ratings. His comment has stirred up criticism that it shows his ignorance about finance although he is in a position to appeal to the public for fiscal consolidation. What do you think about his comment? A: Possibly, he did not know the news at that point, so I decline to comment on that in my position. In my view this is a problem which must be addressed by both Prime Minister and all the Japanese people. There are many kinds of people, including those who demand various allowances and government officers who try to raise money for the allowances. However, we have to remember that it is falling to us, the Japanese people, to pay the costs, when the government issues the paper called JGB and leaves us to be plagued with huge debts. If the debts accounts for 30% to 60% of GDP, it would still be at a level seen in many other countries. Let's compare it to your household budget. If your debt accounts for 60% of your income, it would still be acceptable even though you are still borrowing to make ends meet. However, you couldn't go shopping if your debt exceeds the total amount of your income and savings. This is exactly what is happening to Japan's public finance. This is not a problem only for Prime Minister and other special parties. We should be united to overcome this financial crisis, seriously considering how to stop unnecessary and redundant demands by the people and avoid wasteful spending by the government. 11