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Collection of expert paper& on clea~~:~:l~2~o:hJ ~~-~~?.A'h' paper are part of Study of Intemational Clearing and Settlmmt, Vol. I, lanker Truat Company, 259 pp., October 1989. Thia collection 1 organized as follova: North America, Parta 1 and 2; Europe; Northeut Aaf.a/Auatralia; and Supra Regional Topics. VOLUME IV: NORTHEAST ASIA/AUSTRALIA 1. Th Auatralian Securities Market, J. E. Gall, National Australi Bank, Ltd. Feb., 1989. 2. The Stock Exchange of Hong Kong, D. J. L. Glennie, Hong Kong Shanghai Bank, 1989. 3. Th Securf.ti Clearing and Settlement Syatem in Japan, Nomura f\ature Association, Feb., 1989. 4. settl ... nt Syatea of the Tokyo Stock Exchange, Toahitsugu Shimizu, Tokyo Stock Exchange, Oct. 5, 1988~ 5. Auatraclear, Keith Ussher, Auatraclear, Memorandum dated July 5, 1988. 6. Interview with K.V. Chan, The Stock Exchange of Hong Kong Ltd., Hong Kong, 1989. 7. Interview with Les Hosking, Sydney Futures Exchange Australia, 1989. 8. Interviewwith Messrs. Kuroda, Hirano, and Oritani, Bank of Japan, Japan, 1989. 9. Interview with Angua Richards, Th Australian Stock Exchange, Auatralia. 10. Vrf.tten reaponae of HajiM Yoshioka, The Oaaka Securities Exchange, Japan, to queatf.ona posed by Bankers Trust Co., 1989. Tbi1 docuaant vu prepared for the OTA lackground Paper, Trading Around the G 19Ski Qlplaal ,svtt;J &oH and Jnfon,,ttgn Tshnolov, July 1990 and th report 11c;t;rpptc; 1p11, 114 l11r1; P,I, surtt;J Karkt; and JnfoEll:t;Jon 'fac;hppl9V, lepteaber 1990. 'l'bil docuaent do not neceaaarlly reflect the aalytical filldinp of OTA, it1 Adviaory fanel, or lt1 Technolol)' Aa1ea1Mnt Board.
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J.E. (John) Gall Alllstant General Manager JmNtment Semces National Australia Bank Umited Melboume,Australla A paper presented at the Global Custody Services Confence on Asta cmd the Padflc Basin In New York, United States of America THE AUSTRALIAN SECURITIES MARKET 15-16 February 1989 This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology, Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or its Technology Assessment Board.
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THE FOLLOWING IS AN EXCERPT FROM: THE AUSTRALIAN SECURITIES MARKET A PAPER PRESENTED AT THE GLOBAL CUSTODY SERVICES CONFERENCE ON ASIA AND THE PACIFIC BASIN IN NEW YORK CITY ON FEBRUARY 15th AND 16th, 1989 BY J.E. (JORN) GALL NATIONAL AUSTRALIA BANK
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STRUCTURE AND REGULATION OF THE EXCHANGE It waa th Gold Ruah of th 1870' that aparked th initial growth of Auatralia' Stock Exchang It i reported that th firat raqular atock axchang in Malb0,1rn cam into axiatanc in 1857 at a Malbaurn hotal whare th share and atock brokr would t. Th Stock Exchange Melbourne was officially foraad in 1885. Th Sydnay Stock Exchange was officially foundad in 1871 after th 'coffee-housa' meeting batvaan brokara had baan th tradition for well over a dacada. Th Auatralian Stock Exchang system is baaed on the English Yt-. Following on from the Engliah organizational atructure all broker must be mam,ers of th Exchange and they achiv this atatus by holding a seat on the Exchange. currantly, 114 broke1 ar mem,ars of the axchangas. Their aiz can ba corralatad with location; th la1-gar brokers are typically locatad in Malbourne or Sydnay. There are 2400 coapanies listad on th Australian Stock Exchange. The c011panies racords ara maintainad by approximately 200 share ragistri Th formation of the Australian Stock Exchange (Refer to Chart 4) on April 1st, 1987, created a national body to raprasant the stat exchanges; Melbourne, Sydney, Perth, Adelaide, Brisbane, Hobart and their constituent brokers and to provide a vahicle to more effectively introduce and manage improvamants to the deregulated securities industry. National Australia Bank is the Banker to the Australian Stock Excbanga. Th dacision to creata a national exchange has had far raaching affects on improving overall market efficiency and economies of seal and coordination. Th nav organizational structure allows for coordination of all activities that are related to the market as a whole, (for axampl th installation of th new automated trading Yt-). Th atate axchanges are still in con~rol of the day to day adJlinistrative running of each exchange. Rules and regulations for day to day running of the state exchang in the fona of Business Rules of each exchange have developed over the years and have now been unified with the amalgamation of state exchanges. A ayatem of co raqulation exists among th mem,er organizations of the Australian Stock Exchange, that is, the legislation controls the entire structure of the securities market and the self regulating Business Rules govern the in-depth day to day matters. l
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SETTLEMENT SYSTEM: Efficiency and Solutions The Australian settlement system is baaed on an un-enforced 10 day settlement period, a physical exchange of documents for payment and the subsequent paper processing for transfer, lodgement and registration. In the past back logs have been experienced in broker back offices and registries, however, recently much has been done in the way of improvements to the system. The Australian Stock Exchange and industry participants are acutely aware that there is no adherence to the laid down settluent period and time lags are inherent in the current process of transfer and registration. The impetus for improvements to the current system stems from industry agreement on the view that the Australian securities industry needs to ensure that the market remains liquid, efficient, cost effective and competitive with foreign markets. Broker 'front office' advances in the area of market transactions have been made with the staggered impl-entation of automated screen trading for most second board and lower volume traded stock, leaving only 400 higher volume stocks being traded on the floor. Post market procedures of the settlement system are currently being improved. A team of industry representatives, including the Australian Stock Exchange, Be.alt Nominees, Stock Brokers, Share Registries and the Federal Attorney General's Department, have joined to create a Consultative Committee. Together they have formulated a proposal for a workable system for uncertificated stock holdings. A pilot program to teat the proposal will proceed in mid 1989. Particular emphasis i being placed on the introduction of an enforceable fixed period settlement date. In the interim Australian custodians are able to minimize 4:he effects of any shortcomings of the system by utilizing their expertise in the local market, their close relationship with brokers and registries and by providing stock lending facilities for the brokers. Many major foreign investors are specifically trading on a prrranged 5 day settlement basis. In such a competitive environment as the Australian securities market major broker are accepting this requirement and are making every effort to deliver in 5 days through the use of stock lending where available and through streamlining their back office procedures. 2
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Tbe future outlook for the Auatralian ttlnt ayat is bright. Both Australian and foreign inveatora will benefit froa a aore efficient and predictable national system which aupport a national trading market and will cope with auatained aurgea in tranaaction volume. It i appropriate at thi ti to introduce some future iMovationa that are being considered for the Australian aecuriti industry. Tb thrH ujor on are known to the locals as FAST, S'I~ and SEATS. FAST Tbe firat acronym atands for Flexible Accelerated Security Tranafer Syt-. 'PAST' i currently a proposed pilot prOC)rto introduce uncertificated ahare holdings. It is a prelude to the aore encompaaaing development called 'STARS'. Tbe pilot prOC)rwill conence it's 'test run' in mid-1989 and will involve approximately 25 listed companies. Among then- of Coapani in the pilot program are BHP and National Australia Bank, Australia's first and third largest coapanie by urket capitalization. FAST 1 an interi aolution to iaprove the speed and efficiency of the Auatralian registration ad settlement Ytby gaining s0111e of the benefits of uncertificated stock holdings for a fraction of the capital investment cost that will be required to implement a full electronic tranafer syatea. Under the pilot sch- buyers may elect to hold an uncertificated portfolio, in the nominated stock, in which case they surrender their scrip to their nominated broker and authorize the broker to act on their behalf in relation to tranafer signing. An exception to thi ayat relate to certain institutions including Bank H011in which retain control of their clients uncertificated holdings. Bolding will r-in registered on an issuers register of aUlber and the instrument of transfer will still be a phyaical transfer document. STARS Tb second acronym atand for Settlement Transfer and Registration Syt-. Thia proposal is still on the drafting board of the Conaultative Co1111ittee. 3
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At thi fonative atage it i enviaaged that the ayate will be iilar in cor.cept with part of the propoaed 'book entry' tranafer ach-e of the London Stock Exchange. It i propoaed to have two cl of holding: Direct Holdings will conaiat of the holding of inatitutiona who are participant in a Clearing House. Sponaored Holding will conaiat of the holdings of entiti which are not participant but aponaored by a broker participant. The STARS Yt will embody four parta: A national clearing house A national broker to broker aettlent ayatem A national institutional ttlent ayste and An uncertificated securities registration system. Tb proposed technology will aake maxiua use of electronic data tranaiion to relay necessary trade information as to uncertificated holding between participant in the Yt-. The topic of funding for the Yt-i atill a 11Bjor point of contention. The propoaal require ulti-illion dollar capital investment to establish the ayst-. At this early atage, inveatmant liability of the participants has not been determined and ha t with resistance fro so sectors of the induatry. Conaidering that daily value of Stock Exchange tumovex has been aa low a 601 down on pre-october 1987 level, there baa not yet been a firm co-itaent to the tabliatuaent of 'STARS'. SEATS The third is the 'SEAT' syatem, (Stock Exchange Automated Trading Syatem). Th Yt went into operation on October 19th 1987, and aome 2200 curities are now routinely traded through the Yt-, leaving approxiately 400 high activity atocka floor traded. The introduction of atocka onto the SEATS trading ayate ha bean ataggered over the 1987-88 period. The ayst autoatically execute trades baaed on the priority trading diacipline, without restriction on lot aiz which i the subject of so controveray at this time. 4
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CUSTODIAL SERVICES Tb cuatodial and n011in rvice ctor of the Auatralian inveatJlent urket i d011inated by the aubaidiary noain coapani of the 3 aajor private banka, one of which i the National Auatralia Bank. The rvicea provided for the doaeatic and international inatitutional inveator are tiaated to account for more than 601 of total aarket turnover. The n011in c011p&ny for the National Auatralia Bank is National N011in Liaited, Which i a wholly owned and fully guaranteed ubidiary. Sl'rl'LEM!NT AND REGISTRATION PROCEDURE (Refer to Chart !5). The flow diagr-ahow the current atapa taken in ttling a purcha intruction and sw,equent reqiatration. SAl'B DEPING After ~b coapletion of regitration, the hare certificate is iu'd in thenof the n011in c011pany. Clients share certificate are phyaically held in cure areaa. In our ca the t of National Noain Liaited are coapletely aegregated fr011 tbe parent Bank t. Inurance coverage ~n aaintained over property on premises, forged documentation and infidelity of -ploy Tb nominee operation are wholly guaranteed by the Bank which ha hareholdr fund in exc of A$4.2 billion. CUt011r at are aegregated fr011 the Banka ts. Operation are audited by the Banks internal and external auditor (Touch Ro, Co). Ace i granted to cutomers independent auditors (with cuat011era approval) CORPORATE ACTIONS An aapect of prim importance i the prompt reporting of all corporate activity. Each day' activity i closely aonitored and imediately reported to client in order for tha to aake fully iaforaed decisions relatin~ to their ecurity holdings. The aajor source of aarket inforaation is the report and list produced by th Australian Stock Exchange. 5
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IHCOIII COLLECTION All announc-nts of income distribution are cloaely onitored. It i our practice at National Australia Banlt to physically collect interest cheques on payable date and disburse proceeds that day. Dividend payments are disbursed according to client standing instructions usually within two days of receipt from the company. As Australian Bank custodians are the registered holders of curiti held on behalf of their clien~ all dividend and interest are received in the custodian' n&11e. It i the requir-nt of the Australian Taxation Office that they be issued with a complete list of inco received and tax withheld for each client. Withholding tax is imposed on unfranlted dividend and interest income paid to a non-resident who does not have a permanent establishment in Australia. Th tax must be withheld by the payer on behalf of the payee and remitted to the co-issioner of Taxation. The rates of tax are as rollows: Dividends Interest Double Tax treaty countries 151 101 Other 301 101 Th aain ex-ptions applying to withholding tax on dividend or interest are: Pranked dividend paid to non-residents Certain interest derived by trust estates, where the trust i liable to be aed on that interest Interest eamed by foreign auperannunation funds which have received exemption fr011 Australian tax. The axaptions fr011 taxation occur where a client has obtained taxation exemptions in their own country of residence. In this case the Australian custodian will apply to tha Australian Taxation Office to have that exemption upheld in Australia. 6
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II
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i J I -L____ i .. ti
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THI STOCK UCIIAIGI OF BORG KONG 1919 BY D.J.L, OLIDII HOIO D>IO SIWIOIIAI BAB This contractor document was prepared for the OTA Bickground Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology. Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or its Technology Assessment Board,
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THE ITOcK EXCHANGE OF HONG KONG LIMITED l. The Rtor.k Marker. A new unified atook exchange called 'The Slc:ck :xchanoa or Hong Kono Limited' (SEHK) has been in operation since 2 April 1986. Thia stock exchange, situated in ExchdnQe Square, replaced tour separaL~ stock exchanges which ara no longer in <."lpera ti on. Thi.a m'1rket; ia opon Muradc.,y to Friday from 10:00 hours to 12:30 hours and 14:30 hours to 15:30 houra. 2. InBtrumont Typea Ordjnary share, warra11lH, rights, partly-p~id shares, loan stock, preference shars, '8' shares aa well as a number o[ bonda and unit truaLM are all quotod and tr4ded on the trading floor of the Stoc~ Exchange ot Hong Kong LSEHK), l. Tr~ding Features As in othor fin~nclal centres, the tunction ot the stock c~ch3nge ia twofold: lo establidh a market-plac~ where eh~res may readily and freely be bou~ht and sold, and to provide lh~ me.in whereby c:oapanies, provided they sat isf}' certain atandiJrds, can obtain Cinance from the publ1C" through t!le a~le of their ehreM, Tho predominant features of trading on th& uon9 KonQ stock market are that buaines is settled im~edi~tely with payment agdinst delivery ('c:aah' settlement) -And 1ta1.1t shares are tr.1ded in 'board 101.1' and in '900d deliver\,'' (see !oll0'-1119 notoc) in which fora th~y drw fully neQotiable. Tr~ding 1 carried aul on computer terminal~ in a continuous proce! whr bid and uCfer prices at shown and all tranaaction are recorded. The system entails brokere puttjng their initial up on~ roLdLional baaia undor bid and off~r pricoa which a brok deal tor change according to the trading rul,-1. The 1 .. t'' alao ,-v~ulate the spread and vorince bcH ,.,oen pr.i.,~s. Th priceo qLloted .. ,, broker~ tflrminc1lu c1re only for board lot' l'l,er are the number <>! shares which aro traded 1B unit amount. Unfortunately, in Uon9 ~on;, di!C~rent ahar havw different number of hres pe~ bort~d lot. For vario1 1 ~,,:ions lhe11tock e>cch11nQe al \.on the boa1d lot ,,t 1,.srt icular-1tht1rea from time to t11ne; for intan, hh~u hecavy right 01 ~api l.aliaat ion ioo\lo ar~ ni,, .. lw. ro QGt r hP-v~l isnum market. price, 1
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THB STOCK EXCHANGE OP HONG KONG LIMITED both tor huying and oelling, shares should only be held and traded in board lots, otherwise a discount of 1-5, can be expected. It is sometimes almost impossible to trade some shares if they are not in board lot form. 3.~ Odd Lots Any number of shdres less than thdt required for a board lot is an odd lot. Share 1c1ips which are larger than one lot ara called 'special lots'. Both are u&ually traded at unfavourable prices depending on circumstances. However, a numbei-of odd lots can be combined provided they exactly equal a whole board lot and are individually of good delivery. 3.3 Stock Trades 4. VolumeA ThGee arG not necess~rily fixed at the market price; they can be at a premium or a discount depending on market conditions and the demand for or turnover of the shares in question. Turnover on the SBHK yenerally av&rages between HKD0.8 billion and HKD2.5 billion with the number ot transactions avora9ing betwGen 18-30,000. However durinq the 'bull' run ot 1987 turnover was often between HKD4-5 billion and the number or transactions was otten between 40-50,000. 15. Seti1,ment All tranaactions are sottl~d by making delivery or shares in 'Qood delivery' againt payment betore 13:00 hours on the working day following the tranaaction. For instance, business tranaacted on Friday is settled on the followino Monday. Monday's business ie settled on Tuesday. 5.1 aood Delivery Thi consi~ ot lhe share certificate(a) in board lot amount, each certificate having matching atampod transfer dd signed by the registered hareholder ao that it ia fully negotiable. Several certificates with thoir reepeetive transfer deeda can make up board lot, but one large certificate with aeveral transfer deeda in board lc>t amounts ia not good delivery; neither 1s one large transfer deed with several certi(icatea in board lot aaount1. If 10 buard lots have been traded, each individual board luL must be 'good delivory'. Ten aeparate board lots of ahare must be received or de11vnred. .. 2 -
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THE STOCK EXCHANGE OF KONG KONG LIMITED 5.2 Money SettlemenL At the samA time ae tho selling client ~ellvArs share crtiricates to the selling broker, the sellinq broker delivers to the buyinq brokGr and the buying broker delivers to the buying client, the party receiving thP. share certificates effects payment, normally by cheque, to the party delivering the share certificates. Obviously where the selling client keeps his certificates with the selling broker and where the buying client wishes to leave the purchased certificates with the buying broker, monetary payment will be effected by the selling broker/buying client without the aiaultaneoua delivery of share certificates from the counterparty. 6. Baclc <.')ftic:e Pcucedures 6.1 Ad Valorem DuL~ on contract Notes Thia is payable on both purchases and sales of any securities on a Hong Kong register at the rate of HKD6 per HKDl,000 or part thereof o! tho consideration, i.e. 0.6,. The minimum charge is HKD6. This requirement technically covers transactions in Hong Kong-registered securities anYliherct in the world. Foreign-registered stocks, Honq Kong depositary receipts and bearer warrants do Di~ at,trnrt Hnnn rnnn ,1111111111, 11 According to Uong Kon~ law, any person who effect.a a sale or purchase of any Hong K,,ng-registered securities as a broker or aqent, or who, as a principal for however short a period (technically for even moment), buys or aella any securities, is responsible tor the preparation of a contract note duly staaped with ad valorem duty and for the endorfJGment of the tranofer deed b)' a duly authoried person to the effect that ad valorem duty has been paid. All members of the stock exchanqe in Hong Kong have been authorised to make this endoraement which i known as the 'broker's chop'. Share regiatrars cannot accept share scrips and transfer deeda for reqistration if the tranefer deed has not been properly endorsed in thia fashion for both the buyer and the seller. Thia requirement appli equally to shares lodged by persons overseas or in Hong Konq. Tha brokor's chop is a recognised means o[ tracing through whose hands share ecripe and transfer deeds have paaed in the usual negotiable form in Hong -3 -
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THE STOCK !XCHANOE OP HONG KONG LIMITED Kong. In a!feet, a broker's chop should verify 4nd guarantee good delivery of the share scrip and transfer deed. In the ~as whore~ sale or purchase is concluded without the assistance ot a broker, ad valorem duty is still payable at the same rate, the buyer and seller each being responsible tor their own portion and tor the preparation of duly stamped contract notes. In exceptional cases where contract notes have not been prepared or stamped the ad valorem duty will be payable on the instrument of trans(er, but in these casos documents must be stamped by the collector ot stamp revenue in Hong Kong, who will also mako an 4ppropriate endorsement te8. 6.2 Ad Valorem Du~~ on Shares and Rights as a Gift When a transfer of shares takes placo whereby the beneficial interest paaaes otherwise than through a purchase or sale, a single aum of duty is payablo on each transfer deed equivalent to the full amount of ad valorem duty and trana!er deed duty. This is a joint and several liability of the transferor and transferee. The amount of duly levied is HKD6 tor every HKDl,000 or part thereof of the value ot the shares &t the date of 1tamping, plus a fixed duty ot HKD5. In these cases, no contract note is prepared and tha instrument o! tranofer has to be presentod at the Hong Kong Stamp Ottice ~ithin seven days of execution for stamping and endorsement. The same rules apply to allotment letters in which the beneficial interest paeaes otherwiB4:t than through a purchase or sale, e.9. where rights are renounced by way ot a gift. 6.3 Allotment Letters Th attract a fixed duty ot 15 cents per letter which normally i paid by the company issuing the righta. When the ahareholdP.r takes up his own entitlement, no further stamp duty is payable. When the allotment l~tter is renounced, transfer deed buy of KKD5 is payable on each letter and ad valorem duty is payable on the contract notes at the same rate and in the same manner as for an ordinary share tranaaction. Apart from this, the peraon in whuse favour the allotment letter is renounced pays no turther stamp duty on subscribing to the rights. t -
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Tff! STOCK !XCHANO! OF HONO KONG LIMITED 6.4 TransfAr Deeds Thea are required for all share certificates which are registered in Hong Kong, including Hong ~ong depositary receipts (which are so far only in registered form). Bearer securities are exempt. Almoat all lo~al Hhare registers are computerised and are adopting individually designed transfer deeds. The markGt normally will accept only Kong Kong transfer deed as good delivery and it is strongly recommended that the correct transt.er deeds are used. Thus the former practice of accepting London-type transfer deeds has almost disappeared. In order t, effect the delivery or transfer ot aharea, transfer deeds must be signed by th8 original traneferor (i.e. the registered shareholder who 1 the first seller). In Hong Kong, it is common practice to leave the share, in this negotiable form until it is required to tranater them, at which time the deed is signed by the last purchaser (transferAe). One the tranefer dwed has been signed by the transferee, the share are no longer good delivery and uat be lod9ed, togelher with the dee~s, with the coapany registrar for regi1tration in the tran1feree'a name. Registration procedures take approkimately three weeks and during this time it is not possible to sell tho shares (except by special arrangement or a& delayed delivery) since no certificates are available tor delivery. 6.5 Tranofer Deed Duty A atamp duty of HKD~ 1 levied on each transfer deQd PYble before execution. In practice this ia paid by the firat aeller (transferor). The transfer dGed ia normally left undated until auch time aa it is finally lodged tor registration. The lranofer deed duty ta paid by means of a franked ataap and ia dated. To meet lol requirements, the date of th tranater deed atamp must be before the date given on the transfer deed itself, even thuugh thi may already have been aigned. It is alo common practice not to accept as 900d delivery tranafer deed that have been atamped prior to the date of ia1ue of th accoapanying scrip, although thia practice is not supported by Hong Kong' Stamp Duty Ordinanr.e. -5 -
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TH! STOCK EXCHAHO! OF HONG XONG LIMITED 6.6 Certj(ied Trnatftr DeedM These are not accepted aa good delivery by the Hong Kong market; thus a purchaser ot Hong Kong shares on an overseas market who receives delivery in the form ot certified transter deeds has little option but to lodge the 4eeds for registration and transtor. 6.7 Regiwtration Procedures Th require tha~ the transferor and tranaferea personally sign the transfer deed and that their signatures are ~itnessed. A husband or wite cannot witness the signature of their spouse. Therefor, if signed transfer deeds are not already available, a broker or bank cannot act tor a client when selling shares that are in a client's name, or register shares in a client's name, without first sending the necessary trans!er deeds to the client tor signature. The apecimon signature oC the transferee is also required by the company registrar and it is normal practice to ask for a specimen signature on each lodgement of~~~==, even if the transferee is already a ~nareholder of the company concerned. There is a apace for the apecimen signature at the bottom of each transfer deed, but only one apecimQn need be signed. Transfer deeda executed by an incorporated body do not require the application of the company's seal, only duly authorised eignatures properly witnessed. When a purchaser sends snares for regiatration he should: date tho transfer deed, making sure that the date ii not earlier than the date of the transfer deed tamp: complete all the particulars: sign aa tranaferee; have the eignature witneased; and send the deod and corrponding share certificate to the regiatrar. If this 1 done to qualify for a dividGnd or acrip issue, the aharea must arrive not later than th day before the date on which the company's books are cloaed. In general, the completion of Hong Kong transfer deed 1 relatively simple provided that it ia done with reasonable care; any alterations muat be properly signed by the tranaferor or tranafaree, ae appropriate. Tho re9iatrar levy a scrip fee, currently HKD2 per board lot, for each new certificate, -6 -
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THE STOCK !XCHANO! OP HONO KONO LIMITED 6.8 Dividend& Theae are paid to harohuldera regiater .. d on the date on which the share register of the company closes ('books close'), but are only paid attar the book reopen, usually 10 to 20 days after they were closed. 6.9 Dividend Cl~imA TbAse may not bo legally entorceable and are not provided for under the rule of the Stock ExchanQe of Kong Kong. There is a legal requirement on the claimant, under the Hong Kon9 Stamp Duty Ordinance, to have the shares transferred into hie beneficial name before making a claim. Because of this requir~nt, further claims for subsequent dividends arisino on the &hare certificates will not be entertained. The correct p1ucedure tor 11akin9 a dividend claim is as follow&: a> lodge the har~s ror transfer out of the old name, evidence of this muat be produced and currently photocopies of the completed transfer deeds (both front .and reverae) and of the share certificate are required: b) a photocopy of the purchaee contract issued to thG claimant is alao required (as e~idence ot ownership); c) if thao documenLs cannot be produced, reimbursement can sometimes be obtained provided that a confirmatory lP.tter rrom the share registrar is produced to prove that the shares have been transferred into the claimant's name. Failing thia, dividend claims in Hong Kong will bo passed back along the line of selling brokers and, in order of preference, the claim, which must include the aupportino evidence mentioned above, ebould be addressed to: a) th laot aelling broker: b) the firat elling broker; c) the registered shareholders. -7 IY?
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TH! STOCK EXCHANGE 01 HONG KONG LIM!TED 6.10 Claims for Right Iaaue1, Bonua Cash Payurents, Scrip Issues etc. ThA procedures tor these are the same aa those for dividend claims given above. When capitalisation iaouea are involved, it is vital to ensure that the &hares are properly registered in ;ood time, 7. Bonk-Entry C~pability There is presently no bookentry settlemeD: capability in Hong Kong. All trades transacted on t .. e trading floor ot the 8EHK are settled on a trade-for-trade manual b~sis. Since the stock market crash in October 1987 serious effort has been and is still being made to design a suitable book-entry settlement system !or Hong Kong. This will involve the un~erti!ication (dematerialisaLion) of share certificates and :.ll not involv~ a Central Depository, where all share certi[iccttea are immobilised in physical form in one placG, i.e. as in Oepo11it.ory Trust Co111pany in New York. The exact workings of thG sy~lem undor design have still to be finalised and it will be end 1990/beginning 1991 before the aystem is implemented and therefore the existing physical settlement environment will continue for at least 18 months. e. Role of Banks (Custodians) Many banks in Hong Konq run securities departmente through which they offer the wllole ran~e ot securities services i.e. purchase-sales, receipt and dGliveries and nominee services. Indeed shares registered in lhe names of bank nominee comp~njes account for well over so, ot all registered shareholdings. 8.l Purehaaee and Sales customers of a bank can buy or sell on the Stock Market by placing their orders throuQh the Securiti,s Oepartaent of their bank. The bank will give the order to a broker, via the dealin; section, and the bank will deliver the shares to the broker against receipt of payment, normally a cheque, for their customer from the broker in settlement of a sale or receivG share certificate for their customer from the broker against delivery of payment, normally a caahie-r' s order, bank draft, from the bank in settlement of a purchaae. 8.2 Receipt.. Delivery Many invealora, parLicularly Institutions, whoso scrip may be in.the nominee name of a bank, place their orders directly with broker and upon confirmati.on from the broker that their orders have been ekecuted, -8 ..
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TH! STOCK EXCHANGE or HONG KONG LIMITED give inatructionA to their bank0 (custodians) to deliver/receive share certificates to/from the broker against receipt/delivery ot payment. Banks confirm that where they deliver shares to a broker against receipt of a broker's cheque, ev8n if that cheque is subsequently rejected by the broker's bank, the bank receiving the cheque on behalf of a client will not have recourse to the client. Naturally banks charge for this service. 8.3 Cheque Clearing Because there is tradefor-trade settlement in Hong Kong and therefore vast number of cheques going trom one party to another in settlement o! the monetary element of these trades, the cheque clearing process is very important to aucceseful settlement in Hong Kong. Under the existing physical environment there is no electronic !unds transfer settlement of trades. The monitory element or trades is settled by uae o! the normal cheque clearing process. In the new system under design it is intended that monetary settlement by chequG ~ill make way for settlement by electronic funds transfer methods. 9. Role of Registr~r The role of iho rvgislrar is outlined in 6. Back Office Procedures. This gives specific emphasis to the role or the registrar in the settlement and registration of trades. 9.1 Registered Shareholder-Registrar The regiatrar is the link between a listed company and its registered shareholders. All documentation issued, and dividends declared, by the listed company are distributed to the registered shareholders by lhe regiatrar. 9.2 R~giatration Period Becauae of ~hG amount of paper generated in the aettleaent and registration process the issuance oC new &hare certificates takea 3 weeks. During lhe bull run of 1987 the regietration period was frequently in excesa of 3 weoks. 9.3 Street Name Trading Recaus of the length or time it takes to register sharee in Hong Kong after an Investor has purchased those shares, street name trading abounds. Thia ia where a buying Investor chooses to hold the share he -9 -
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THI STOCK IXCHANO! or NONO KONG LIM?TED ha pur~hd in a "Streel Naae", 1natead of regitering thRm. The hare aay be bought and aold any ti over a period ot ti betor a buyer finally decides to register th During thia tiao the firat aeller i.e. the ahareholder in whose name the hare are isuod raaaina the registered ahareholder. Street name traders tend to send their ahara1 tor reviatration at a book close to enable thea to benefit fro any dividend diatribution. Thia, of cour1e, puts a lot ot presaure on the regi~trar t~ice a yoar when investor re91ater their shares to collect dividend, bonuaea etc. to. RAgulatory Tho Securities Ordinanco, which until recently was administered by the Office of the Coaaiaaioner for Securities and Commodities Trading, governs the running of the securities industry in Hong Kong. However, there is a certain aaoW1t of aelt-re9ulation by the SEHK and thi ia defin~d in the SEHk rulea and regulations, With the reorgan111atiC1n of th financial aarketa in Hong Kong lhe work of the O[fice of the Commiaaioner of Securitie1 and Commodities Trading was taken over on lat Hay 1989 by the newly formed Securitiea and Future Commission [SFCJ. Although th8 SFC haa much wider power than its predecessor, it ia the atill intended to retain tho self-reQulatory nature ot the arket which haa ;enerally rved HonQ Kong well in the pa1t. rn addilion to the SfC varioua indu1try participants also have their own channel ot c011aunication i.e. Stockbrokers ARsociation, Federation ot Share Registrars, Stock Exchange Council. 11. Ar.c'!GS8 11 1 lrokern Application to ob~in a ton the SEHK can bo received froa all parti but prior to granting seat to an applicant, th coapliance divieion of the BERK will enure that the minimua requirement to be adhered to by brokers are aet. Thia includes liquidity requireaente and Minimum aaet requirements which depend on the ize of the applicant i.e. aole, partnerhip, institutional. When a broker it operatinQ the coapliance division of the S!HK aake frequent check to ensure the requirement are being met .. 10 -
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TH! ITOCK EXCHANGE OP HONG KONG LIMITED 11.2 Banke Bank may apply for a licence thtough the Office ot the Coiaaioner !or Bankin; to aet up and run a banking operation. Banks 11ay apply regardlees or their country of incorporation. 11 .. l Regiatrars TherA io no Ordinance regulating the operation, of a registrar and aa auch there are no stringent requireent on th~ setting up of reoiatrar coapani 11., Inveator11 l~. Prnbl A~ far ao Hong Kung ia concerned there is no retriction on Inveatora of any nationality buying and selling aharea on the trading floor of th SEHK. 12.1 Bcttlemen\. Per"od rt i recOQnised that the 24 hour settleaent Priod in Hong Kong ia unworkable for the whole aarkt. The inatitutional brokera, in particular, are unable to accollllOdate this rule. lnatitutional 1nvetore in Europo or U.S.A. find it alaoat iPoaibl to get delivery inatructiona to their cuatodiana the following day and therefor ttleaent in Hong Kong ia reorded aor a ca of 'wben one can rather than abiding by a specific period. It e certain thal under the propoed new dealing aystea the ttleaent Priod will b amended to between T+2 to T+!: but at tbe preaent time there 1 coniderable debate and disagreement between the eaall and large broker to what that period ehould be. 12.2 Caah on Delivery When tho eellinv client/elling brokor/buylng broker deliver ahar certificate to the selling brokr/buying broker/buying clint, he noraally receive a cheque in payant of tho ahare crtificatea. There ia alwaya th poeaibility that the cheque aay be rejected by lhe draw' bank and the beneficiary will thua be without paymnt but tho 1hare certificate ar no lonor under hi control. If thi1 ahould happen and the drawee do not make good the payment, there are channel through which the innocent party can recovr hi money but this is time-conauaing proc 11 -
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TBS ITOCK UCIIANOE OP IIONO kONG ~IMITED In the deign of th~ nev Yt th Ron9 Kon; ~~urities Clearing Coaany L1a1ted [HklCCJ will guarantee 'good fund aoainal del 1 ,ery of ah1rea. Thi will be poaeible by the introduction of 1 Guarantee Fund. 12.3 ltock Lending on Borrowing Stock lendin9 and borrowino 1 permit~d in Hong Kong but the transaction 1 clrified a purch and ale by the authoriti and ad vlor 1taap duly [AVSDJ 1 payabl at the atandard rat. During the bull run of 1917 unofficial tock ler.ding and borrowing helped to contain the aettleaent b1ckl09. However the authoritiea claaped down on thi practice and deaanded the payment of AVSD on th tr1naaction. Not aurpriaingly broker were unwilli,.g to pay tbia duty and therefore atock lending ind borrowing dried up rultin9 in an accenluation ot the aettlHent backlog. The Flnancil se~retary haa recently decreed that from an, yet, undecided d1te, the charging of AVGD on atock lendin;/borrowin9 act1v1tie will be waived. Thia bould help to iaprove the ex1tinq 1ettl~~nP 'ftt r.1 ~nrv .,. ... --'-aav '"''"' c.a.aa19n or the uture 1yatea to include thia facility which hould deer the nuaber of fa111. 12.4 Pail111 8c~ of the unrealitlc 24 bour eettleaont period, fails are a c011110n occurrence although they are not looked upon 'fil11 in th true n of tho word. A trade ettled 3 day after tradint day 11 till conaidered good 1ettlent and there 1 no queation of that trade being conidered a fail becau it waa not 1ettled on ti If there 1 an unreaaonabl delay in tbe delivery of hr ceriiticatea tr011 th lling broker to tho buyin9 brokor, the buyin9 broker can apply to the SEJIK for a 'buy-in' to be effected to ettle tbe outatandint trade. Under th new Yt tbere will be autoa1tic buy-in if dlivery of ahare b not been honoured after a apectfied period. 12.s Phyelaal 8ettlnt Probably the vrt~ problea facing the aecurit1es induatry in Bone Konv 1 th paper-driven nature of the aarket. lecauae of tbe aaount of paper that ha to be proced, whenever there 1 an incre in tock aarket activi~y. th aettloaent of trad in a tiaely aanner becoaea ditCieult. Thi cu probl to invetor, broker and cu1todi1n alike, 12 -
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TR& ITOCK IXCIU ~I or KONO KONO LIMIum u-,,. tr. un1.-,i-t1 .. boot-entz:. -~ ayatcm, hare w111 becoaw and the 8Attlnt ot trdft will be bt 12.& Trade-for-Trd ; ; ... .tut Ono of the reaon tor there, g ~ much paper circulating in lbe aarkt is t,._ trade-for-trade ttlnt requ1reaent. Broker. dotng ore than one t 1de in a atock witb the aaae rvur.orpart y broker, do ~~ti net the trades and cash and sett.~ one aaount but under the exit ing en"ironaent there i.J no foraaliaed aecbania for netting tradva. As a result aany ahar certificate are needlessly cir,ul.lti.nQ in tbe aarket. One of tbe fWlduentl print:'la t.:-. 1,,~1n9 ac :oModatod in the dea19n ot the n,\,; !j\ tt t:6itat 1 nettin9 1i1bereby all the purcba::; ... : .,11-! ,11 .. ,~ d 1 by a broke. nn any gi\n day are nttr l 1 uau, receipl or dlivery (likewiae for cah). This will Qr~atly reduc tne nllllber of entr1e that aust be Ped tu settlo broker obligttona. Jl.7 lrokcr Di~cipline Prio~ to October 1917, becau the atock aa,K~~ haJ tended to run aac,othly without any outsido interference, tbe lack ot dlaciplin\: wa lo!cH--t~~d. No11ever inveet1otion into the rua.nin\l (Jr thn financial aarketa in Kong Kon._, baa, aac,ng nr.1:~r thinoa, hi9bli9hted the lax apprQach oftn deaont-rted by broker to1i1arde their clients, the1r banker and the uthori tie. .\l though th ent"rcemv,, of broke1 d1c1p11n ha n~ n a high priority durinv the deaiCJn of tb 8) ,1 ii ha been rec09n1s:1 tbat the n eyatea ahould ~. ~bter, broker diacipl in nd togetber Mith tbe incr>d t,1 .-~.. urveillanee fuct1ona betnv introduced ahould h. l,. c. l~a~en Lhe ften held view that Bono Kong la .. i~ :d r,-:; but ~ophiticated finnclal centre. ll -
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This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology, Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or its Technology Assessment Board. The Securities Clearing and Settlement System in Japan February 1989 The Nomura Securities Co., Ltd.
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CONTENTS l The Surities Clearing and Settlement :5)stem in Japan 1 l. Outline of the S~stem (1) Securities Tradina on the Stock Exchange (2) Delivery and Settlement of Shares Japan Securities Clearing Corp. I Exhibit Al -Unit share S)-Stern 1Exhibit B> 13) Delivery and Settlement of Bonds -Central Oepositan. System for Government Bonds in Japan 2. Outlook -Outline of the Central Securities Depositary Srstem in Japan II Inv~tment in Japan from Overseas 1-+ l. Reaulation 2. Difference in Trading System m Invesanent in the United States from Japan ............................................. 15 l. Settlement 2. Raaulation 3. Difference in Trading Srstem [V Anticipated Diversification of the ~Iarket and Its Impacts llnrernal Factors> .................................... .. .. ......... ...... 16 V Outlook for Technoloaical Innovations and Relaxation of Regulation and Their Impacts (External Factors) ...................................................... li Exhibit A: Japan Securities Clearing Corp. Exhibit 8: Unit Share System
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I The Securities Clearing and Settlement System in Japan 1. Outline of the System In Japan. shares are traded on stock exchanges and the over-the-counter 10TC) market. Transactions effected on the former are called "exchange trading. and those effected on the latter, "OTC trading". The market provided by the securities exchanges is highly orga nized. and a large majority of shares changing hands in this country are traded on the stock exchanges. Bonds are also traded both on the securities exchange and the OTC market. but the bulk of them are traded on the OTC market. (1) Securities Trading on the Stock Exchange Securities currently traded on the Tokyo Stock Exchange (TSE) include the following: Equity Shares : Domestic shares : those traded on the first section those traded on the second section Foreign shares Bonds: public bonds (government and municipal bonds. etc., private bonds (corporate straight bonds. convertible bonds. and warrant bonds) foreign bonds (yen-. or foreign currency-denominated bonds) Government bond futures Stock index futures These securities and their derivatives are traded in accordance with the following methods: Epuity Shares : i Stock transactions effected on the floor la total of 150 most active!~ traded issues are traded on floor) ii Stock transactions effected through the trading system I shares other than these of the 150 issues are traded through this system) Bonds: i Bonds are traded on the floor of the bond section. ii. Large-lot deals of government bonds (with an aggregate face value of \i 10 million or more) and special deals of yenor foreign currency-denominated foreip bonds (with an agregate face value of 10 million or more. in princi ple) are made in the large-lot goverment bond trading room. Futures: Futures contracts are traded through the trading system. ) For detaill of the stock trading system in Japan, see the materials forwarded by the Tokyo Stock Exchan1e.
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(2) Delivery and Settlement of Shares All stock transactions effected on the T11kyo Stock ExcanJ,le are settl~d throu~h th~ clearing agent of the :;tuck ~xchan~e. and s~ttlernents .1re di\id~d into the fc,ll11win~ ; .. ur methods: i ) The regular way: Contracts are settled on the fourth business da~ from the date ,if contract. This is the most common method of settlement. and 99 % of stock transactions effected on the stock exchange are settled in this method. ii) Cash delivery: Contracts are settled in cash on the date of contract. However. settlement can be put off to the following day if agreed to by both parties. iii) Special agreement (Seller's option) : Contracts are settled on such a date not exceeding 15 business days from the date of contract as the seller ma~ designate. This method is employed when the parties to a contract are far removed geographi cally from one another. iv) When issued: This method of trading is applied to issues which have not been issued or not available for delivery, and contracts on such issues can be written on any date during the period from the day on which the underl)ing stock goes ex-right and such a day following the issue of such shares as the stock exchange mar designate. and settlement must be made on the fourth business dar immediacei~ follo\ving such last trading day. The total number of share certificates of all listed companies currently outstanding stands at 250 million pieces. and the number of share certificates delivered daily amounts to a substantial size. To expedite the daily settlement procedures. the Tokyo Stock Exchanie instituted in 1971 a central stock clearance system under which shares are tranierred and cleared through accounts of its member securities companies which are managed by Japan Securities Clearing Corporation. a wholly-owned subsidiary of the exchange. t:nder this method. shares bought or sold on the exchange by and between its member companies are cleared through their accounts maintained with the clearing agency. For details of the working mechanism of this system. see Exhibit A "'Japan Securities Clearing Corporation and materials it has forwarded to OTA. Foreign Stock Certificate Clearing S)stem,-In recent years. foreign financial communities have been paying increasing attention co the securities market of this country. in the course of which the capital markets ha,e :aken on a growing weight in the financial markets of Japan. This is e\ident in a sharp increase in the number of foreign business corporations listing their stocks on the Tokyo Stock Exchanp, which increased to 112 and are likely to increase ever larger in the coming rears. Shares of these foreian firms traded on the Tokyo Stock Exchange have been cleared by Japan Securities Clearing Corp. In corporation with its counterpart of other countries. In fact. clearing of foreign shares has turned out to be more efficient than that of domestic shares. Foreian shares listed on the stock exchan1es of Japan are held in custodial agencies (mainly banks) in their domicile countries in the name of Japan Securities Clearing Corp. And those bought and sold on a stock exchange are cleared through the accounts maintained in the clearing agency. More specifically, when customers of a member securities compan) of the stock exchanp effects transactions in foreign shares. the member compan) issues depositary receipts to its customen and clears such foreign shares through its account maintained at the clearing agency. Voting rights of their beneficial owners are exercised by a stock handling a1ent. and dividends due to such owners by a dividend paying agent. all pursuant to the instructions given by Japan Securities Clearing Corp. on behalf of the beneficial owners.
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l"nd~r the l91'1:! am~ndm~nt to the Cummfrcial C,,de. Japan has instituted a unit share system. uniqu~ to Japan. L'nd~r thi~ amendn1tmt. ~orpurati11ns which have issued shares ~ach with a face ,alu~ ,r 'ti :;11 are required to lump 1.01111 of them together to increase the cradinJ,l unit 11t th~ir ~har~:-t,, :;11,111111. Odd lot of thi::.unit ~har~ tfalling short Jf ~0.1,1,111 r~ulting fn,m a fr~ distribution uf shares ~annot be issued: th~r must be registered with their issuing compan~. As these registered odd lot of a unit share cannot be traded on the stock exchange. holders uf such odd lot are gi\en the right to demand the issuing company to buy them back at market price. This provision is designed to protect the legitimate interest of the holders of odd lot of a unit share and at same time encourage an early elimination of odd lot of shares. For further details. see Exhibit B "The Unit Share System" published by Japan Securities Dealers Association;
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(3) Delivery and Settlement of Bonds .-\s with stocks. tradin~ n,lume of bonds in chis country has increased drnmacicallr in recent years. Huwe,~r. only a small number 11f hond issues are li~t~d ,n th~ ,-c,,ck exchange. As a result. except government bonds. select debt issues ithose with a lar~e number of bonds outstanding on the market and actively traded among individual in\'estors: yen-denominated foreign bonds fit this description). convertible bonds and warrant bonds. the bulk of debt issues are traded on the OTC market through direct dealing between securities companies and investors or between licensed bond-dealing banks. Clearing of government bonds (including their futures) traded on the exchange is effected (1) through the central clearing system in the case of bond certificates and those eligible for the bond clearing system of the Bank of Japan and 12> through the transfer of registered name in the case of registered govemmentbonds. ~leanwhile. convertible bonds are cleared basically in the same manner as stock certifi cates. In this section. we will review the "Central Depository Srstem for Government Bond in Japan" of the Bank of Japan. For further details. see the rele,ant materials of the Bank oi Japan. Japanese go,ernment bond holders deposit Japanese Go,emment Bond 1J.G.8.1 :nco trustee 1Bank of Japan, in ad\'ance and then in settlement >i deihery between participants (for example purchase or sales of J.G.B .. collateral transaction and so on1. they can 5ettle by account transfer on book in Bank of Japan or participants without sending name transfer oi holders or delivering certificates physically. Central Depositary System in Japan We hope it to cause splendid result (rationalization of depository. simplication of delivery, facilitation of loan. finance by J.G.B.l (A) Outline of this system In present. qualified persons or organizations for participation are as follo"s : : Investors tax-exempt from withholding at source of registered bond and holding medium or long term coupon government bond. ,Securities company. financiai agency. tax-free corporation and Go\emment> : Individuals under the application of tax-exempts system for small amount sa,ing and so on and holding medium or long term go\emment bond. : Holders of medium discount government bond. By the way, corporations aggregate holding long or medium term coupon govern ment bond cannot participate in this system, because they are imposed a tax on their holdin1 registered bond. Now we show herewith outline of this system.
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Fl''.':DA~lE:-.:T.\L ~YSTE~l Rt.'gistrnr I Bank ,if Japan, l Registration in the lump Trustee ( Bank of Japan) ,Book for Participants> Re-deposit/ 'Re-deposit Participants Securities Co.etc. Financing agency Book for Customers.: Book for Customers, 'Re-deposit Re-deposit/ Indirect Participants Book for Customers, 1 Deposit f Deposit Deposit Customer The object of this srstem is defined to medium or long term coupon go\e!'ment bond and medium discount government bond. 1) Trustee (Centmal depository organization): Trustee accepts deposit of J.G.B. from participants under this srstem and re_gister his own name in the lump. At the same time. the) aggrange "Book for participants .. and check the quantity of deposit about each participants. -In the concrete. the Government Bond Dept. in Bank of Japan. 2) Participant : They have "depostit account" in the Book for participants. If ther ha\e customers. they must arrange the "Book for Customers" and check the quantity of deposit about each customer. -In the concrete. securities compan). securitees finance companr. security exchange. bank (city bank. long term credit bank. local bank. trust and banking company). foreign bank. mutual loans and savings bank. ~ational Federation of Credit Cooperatives. Central Cooperative Bank for Agriculture and Forestry, Central Cooperative Bank for Commerce and Industry. life and non-life insurance company. Bank of Japan and so on. 3) Indirect Participants : Besides holding deposit account on the Book for Customers in participants with the approval of trustee. they have their own customer. They, u participants arranp the Book for Customers and check the quantity of deposit about each customer. -In the concrete. securities company and financial aqency except participants. 4) Customer : They have deposit account on-the Book for Customer in participants or indirect participants and deposit their holding J.G.B. -In the concrete. credit association. mutual benefit association. agricultural cooperative. credit cooperative. laborer's credit cooperative. local public body, federation of mutual benefit association. school corporation. legional corporation. tax-free corporation (fundational corporation etc.), individuals
PAGE 35
with the application of tax-~xempt system ,,f small amount sa\"ing, foreign corporation with the smereiel(n uf tax immunity. corporation aggre~ate holding medium-term discount government bond. I B> Depostit and booking 1) J.G.B's which customers or indirect participants holding them deposit into participants. were registered on the Book for Customer in the participants and then deposited into trustee once more. ( But. they must deposit them. distinguishing participants' own holdings from their customers' holdings.I 2) Trustee must make an entry of J .G.B's deposited from participants on the Book for participants and register them by the name of trustee in the lump. 3) J.G.B. which they can deposit. must be matched with the following conditions. 1) In the case of registered bond. it is difined to registered bond without non-registered term. 2) In the case of bearer bond. because it causes non-registered term due to registration by the name of trustee in the lump on deposit. it cannot have enough quality for tax-free from withholding at source. So they can deposit them only on the interest day and the next dar. tC) Delivery caused by purchase and sale. loan and so on. 1) Under this s)stem. delivery. caused b> sales and purchase. collateral transac tion and so on between organizations. can be settled br account transier on the Book foi: Participants and the Book for Customers. if they deposit J.G.B. into Bank of Japan. In other words. regarding transactions between customen who deposit their bonds into the same participants. they can settle br account transfer on the book for customers in participants and regarding transactions between customers who don't deposit their bonds into the same participants, they need account transfer on the Book for Customers in each participant and on the Book for Participants in trustee in order to settle. Regarding transactions between participants themselves. ther settle by account transfer on the Book for Participants in trustee. But trustee closes the book for transfer on redemption and 2 business dars before interest date in order to make clear to \\"hom the~r should par amount of principal and interest. 2) As soon as trustee completes transfer and r~stration caused b~purchase and sale, trustee issue .. notice of completion for delivery and registration about Japanese Govemmant Bond" to participants who is transferrer and issue "notice of completion for receipt and registration about Japasese Government Bond" to participants wbo in transfee. But. because trustee never deal with settlement of fund. the parties concerned muat complete payment and receipt of fund each other. 3) On borrowina fund from Bank of Japan. they admit participants give their holdin1 depository bonds as collateral. and when participants use deposi tory bonds as call loan. for the present Bank of Japan receive request from financin1 apncy which takes part in call market and then issue collateral certificate instead. based on present collateral certificates >stem tor regis tered 1ovemment bond of collateral by call loan. 4) When they use depository bonds as collateral of loan under present bond circulation and finance system. they must settle delivery of collateral by account transfer betweeen securities company concerned and securities finance company.
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1Dt Rt'turn \\"hen :o:omeon~ xant~ to ~hanJ,le their depo~itory bonds into bearer bond ,,r regi~tered bond. tht'y have only to otfer it t1> trustee for the follo\,dng term. 11 ~art'r be ,nd : From intere::-t date tu -;-bu~iness day::-before the nt:xt inter~st date :!> Registered bond: From interest date to 5 business days before the next interest date (In short. the term except the book closing period) (E) Payment of principal and interest Participants receive principal and interest from trustee in the lump and pay them on interest date and redemption date. (They cannot be applied tax-free from withhoding at source.) (F) Depositary system for tax-exempt government bond held individuals Trustee and participants newly open exclusive account in their controlling book for depository system about government bond in order to control tax-exempt government bonds and they manage them apart from other go\emment bonds. When individuals sold their holding bonds. untii interest date. it cease the application of tax-exempt system. So participants derhe them from deposi tory system once and then after the}' change them -ii.to bearer form or registered form. they take steps of purchase and so on. j'Ji -7-
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2. Outlook As the tr.idinJl \"olume of the capital markets of this country increased dramatical I::. :hi: Tl,kyo :=-tock Exchani,te has b~n ~kini.t tu :-tcp up tht: dfa:it:nc:: Ji :t:-, ,pt::-a~:, ,11 1~ introducing system trading. lts effort for the rationalization ,,i its di:arinl,{ pr11c1:dure:-i: lagging behind the amount ui backoffice work. which has increased so much in the meantime that its trading process could be in danger of a breakdown unless measures are taken quickly. With a view to expediting the processing of stock transactions by overhauling its depositary agent. the Tokyo Stock Exchange had made extensive studies for the creation of a highly efficient stock clearing system. which had led to the enactment of the Law concerning Central Depository and Book-Entry Deliveries for Share Certificates and Other Secu rities in ~lay 1984. Pursuant to this law. Japan Securities Deposito~ Center 1JASDEC1 was launched in December the same )ear. With the design of a mainframe computer for the Center in progress. preparations are well under way for its operation in 1991. 1At present. Japan Securities Clearing Corp. is acting as a clearing agent under an agreement signed with the Tokyo Stock Exchange. When the JASDEC comes on stream. it mar mainly act as a vault for the Center.I Outline of the Central Securities Depositary Srstem in Japan In Japan the securities market is playing an increasingly important roie in che naciona; economy as a place for both im-estment fund management and corporate financing. Accordingly the volume of transactions has been increasing consistentlr in recent rears. Under these circumstances. efforts to strengthen market functions have been made. in such areas as the computalization of transactions and development of electrnic market informa tion system. But at the same time. rationalization has been dela)ed in the areas of safe keeping and delivery connected with buying and selling transactions as well as in collateral transactions for share certificates and other securities. Indeed. the volume of clerical work connected with these transactions has become so massi,.-e as to present the \'ery reai possibility of safekeeping and delhery becoming entirelr hamstrung in the fut1.1re. Despite rationalization efforts on the circulation front during recent years. :ncluding measures such as the partial implementation of a pro,isional central depository system. the securities indusm., has not been able to achie\e satisfactory results due to a iack of :~gal support. In ~lay 1984. however. the Law concerning Central Depository and Book-Entrr Deli\ eries for Share Certificates and Other Securities \Vas enacted for the purpose of fundamen tally rationalizing the safekeeping and delivery of share certificates and other securities. with an eye to facilitating their circulation. Following its enactment. Japan Securities Depository Center (JASDEC) was established in December of the same year. with the all-out cooperation of securities and financial circles as well as of indusaial circles. In May 1985, this foundation was designated as the statutory Securities Depository and Bookkeeping Organization by the competent ~linisters concerned. And currentl3,. \Vith the cooperation of various circles concerned. practical discussions are being held as to opera tional procedures in an effort to !nitiate a central depository and bookkeeping business.
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, 1) Basic function of the system The following is the outline of the Central Surities Depository System under the Law concerning Ctntr.il ~pository and Book-Entry Deli\eries for Share Certificates and Other Securities thereinafter referred to as the Lawl which was enforced in ~o\ember 19~-l. (A) Object The object of this system is to rationalize the safekeeping and delivery of share certifi cates and other securities. thereby helpin1 to facilitate their circulation. (Bl Securities eligible for admission The Law stipulates that securities eligible for admission to the Central Secuities Del,ository System are .. those share certificates and other securities which are listed on a stock exchange or those share certificates and other securities !hereinafter referred to as share certificates. etc ... l which are circulated in a similar manner and ha\e been designated by the competent Ministers... The Law also provides that a Central Deposito~ and Bookkeepiq Orpnization shall .. obtain the consent of the issuers of the share certificates. etc.. concerned." Accordiqly, Japan Securities Depository Center (JASDEC) current!~ plans to handle such securities as those stated below. The following securities as eligible for admission to the s)stem. subject to ministerial designation and the consent of the issuing companies : 1) Share certificates listed on a stock exchange !including the securities issued br foreian corporations and having the nature of share certificates). 2) Share certificates of OTC-resistered issues and OTC-managed issues of Japan Securites Dealers Association. 3) Warrants listed on a stock e.~change. Note: .. Competent ~finisters" denotes the :Minister of Finance and the ilinister of Justice. (Cl Constituent members This System is composed of the following four panies. l> The Central Depository and Bookkeeping Organization The Central Depository and Bookkeeping organization is the nuc!eus vi :his System which is desiKDed for the safekeeping and book-entrr deli\err oi share certificates. etc. As its business-aifec:tS issuing companies. Clients and Partici pants. both reliability and public interest-orientation are required. For this reason. the Law provides that the competent ~finisters shall designate and supen.-ise the Central Depository and Bookkeepin1 Organization. In order to be designated as the Central Depository and Bookkeepin1 Organization by the competent ~Iinisters. the orpnization must comply with certain requirements. includin1 the condition that it shall be a non-porfit foundation established pursuant to Section 34 of the Civil Law. Also, the orpnization must be reprded by the competent Ministers as an entity that can conduct the central depository and bookkeepin1 business justly and reliably. JASDEC was designated as the Central Depository and Bookkeeping Organiza tion in May 1985 and it is the sole Central Depository and Bookkeeping Organiza tion in this System. 2) Participants The Law defines Participants as the member institutions that have opened accounts with the Central Depository and Bookkeepin1 Organization. Entities eliaible to be Participants are :
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(1) securities firms: 1:?> banks: 13> securities finance corporations : and .u thuse instimtions which conduct stock and other securities transactions buyin~ and sellinc u well u collateral transactionst similar to chose or che entities listed ,n I l 1. t:?> and t3> and which ha\e been designated by the competent ~linisters. ::i'.lriu~ finns and banks include foreign securities firms and banks which ha\"e a branc:1 license under the Law on Foreip Securities Firms or the Bankina Act. The procedures for participation will hereafter be worked out and pro\;ded for in JASDEC"s Operational Replations. 3) Clients Clients are thOR who have deposited securities to Participant! for custod). 4) lsluina companies Iw1in1 r.ollll)anies are those firms which have issued the share certificates. etc .. bandled by this Sysrem. CD) Depoait of share certificates. etc. In depolitina tbe share certificates. etc.. deposited by Clients with che Cenual Dei,ository and Bookkeepina Orpnization. Participants should have to obtain written appro\al of the Clients. open deposit accounts for the Clients concerned. and keep the clients' account boot\3 for them. E."' in joint custod). The Central Depoaitory and Bookkeepins Orpnization provides safe and reliable custod) and administntion tbroush its utilization of larp-value denomination ('"jumbo") certificates and '"naa-pa11111 on'" ., ..... and by oms mans. (Pl Accw-to-accoum deliftrf of Iba.re certificates. etc.. by book-enaies Qlmta or Panicipum can requac tbe account to-account delivery of the share Cfflifi. cata. etc..entered into the clillltl' account book or participants' account book. Clients lbou1d make the account-to-account delivery request to Participants. while Participants make u:h reqUlltl to tbe Central Depoaitory and Bookkeepins Orpnization. Wbea tbia Syst1111 i1 put into operation. most of the settlements of stock exchanp tranactio111 and deliveri in connection with OTC tranuctiona will come to be conducted tbrouah book-emry deliveria (G) Withdrawal of share certificates. etc Undlr tbia S)'lta!m. Cllenta and Participants can at any time nqueat the Central Dlpaaitor, and Bookulpins Orpnization to withdraw dapoaited lhare certiftcat11. etc..
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,tiena requisa for wirhdnwal are made thrt>uah Participants. The Central Depository and Bookuepinc Qraanizatiun ma) retum th~ same amuunt and type of share cert1fic:1tes. etc .. as were del,oeited b) the Clients ur Participants for custody. 1 Hl Request tor con\ersion uf convertible bonds and other requests Requaa for conversiun of convertible shares or convertible bonds. as well as requescs to e.urme sumcripaon ricbts or purctme odd-lot shares are made by the Cena-a! Deposi torJ and Booldcapins Orpnizacioa to iina companies (hereinafter includin, transfer qmll). upon reqma from Participants or from Cliena throulh Participants. c n Relatiombipa UIIOIII tbe Central Oepoaitory and Bookkeepin1 Orpnization. issuifli companies and raJ sbanbolden tin tbe cue of Japanese firms, Cader du S,-..m. tbe sbarel depoaited with tbe Central Dei,ository and Bookkeei,ina 0,paizarion are tramfetTed to tbe name of tbat orpnizarion. However. with reprd to the receipt of dmclllllll. tbe acquilitioa of Ibara on tbe occasion of free distributions. and the eumtioa of vocins rislm and odllr ripa. tbe so-called dinct memod is taken in which the Climll or Panicipaaa. wbo are tbe depaaitors.cc,nduct dlell actions throuah direct contact widl iri ~Dia Aa:ordinllJ, tbe Cencra1 Oepoaitory and Bookkeepin, Orpnizatioa ii obliald to identify than u depositors and real shareholders. U Identification of real shareholders is coaduaed u follo-s : at \\nm iins .:ompaniel cloae their stock ledprs and or set :he ailocment dare for new shares. convertible bonds and or u.-arrant bonds. Participancs report to tbe Cemra1 Oepoaitory and Bookkeepinl Orpnizarion the :,ame. addl-and tbe 'IIIIDber '>f sbans of the real shareholder as of the date of :he art of clGlina. tbe bue dare or tbe alloamnt dare. on the basis of their cliaa" ICCOllllt books. bt The Central Oepoaitory and Bookkeeoins Orpnizatioa compiles the reported dara c:oncemiaa tbe real sbarebolden and provides notice to the issuina COIIIIJIIDY, ct Bued on tbe idmtification of real shareholders ,iven b)' the Central Depository and Bookkeepinc Orpnization. the issuin, compan) prepares the reai sbareboldlrs lilt with 1eapea to die shares in the name of the Central [)epoaitory and Bookkeepins Orpnintion. l"nder the U\\". the real ihare. boldln lilt bu tbe same force u a KOCk ledpr. cl) Whm a ra1 sbarlbolder lilted on me real shareholders list and a shareholder lilted oa tbe ltoCk leqer are identified u beinl the mne.the issuina compan~ lbaukl craca tbem u a linll lbarebolder. 2) ~ocificarioa of dlledoa atc.widl 111P1Ct to real shareholders Upaa requllC from tbe illllinl company made in order to follow c:hanps amon1 mnboidll'I ad for odllr Pllf1)01. tbe C.tral Oepoaitory and Bookkeepina 'Painrioa nocifia it of die real lbarebolden wbo have l01t tbeir status u such or wbo haft._ .. tbe mnnber of lbarll in pa11111fon. on tbe buia of a report from Putidpma. en COllll)llllllioa for lbona,-Tbe Law provtclll that wbm lbonqa in share certificata on depoeit occur. the Central Dlpaaitory and Boolculpina Orpaizadoa and tbe Participant keepina the clients' account book an obUa-1 to jointly make up for the lbonqa Th111. Cllena who have deposited mn Clftiflcata and otblr IICUrid under tbia S,-.m have the risht to receive comi,enudoa uadlr die Law. J~ -u-
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(2) Non-residents t..\) Participation in this System To participate in this Srstem. non-residents are required to give consent to Participantii to deposit share certificates. etc .. with the Central Depository and Bookkeeping Organiza tion. (8) Entry into real shareholden list Currently, the names of non-residents are entered into a stock ledger. But when non-residents participate in the System, the name of the Central Depository and Book keepin1 Orpnization is entered instead. Shortly after each settlement day or allotment day, the Central Depository and Bookkeepin1 Organization provides notice of non-residents as real shareholders to isauin1 companies. And the names of non-residents are entered into the real shareholders list of the issuin1 companies. (C) Dividend payment Dividends are paid directly by the issuin1 companies to the standin1 proxies for the non-residents and then paid by the standing proxies to the non-residents. (0) Free distributions and stock dh;dends The share certificates alloted to the shares deposited by non-residents in connection with free distribution. etc.. are sent by the issuin1 companies to the Central Depository and Bookkeepin1 Orpnization. and they are treated as deposited by the non-residents. (El Notification to real shareholden Notices to real shareholders are always made to their standi1 proxies. (F) Advantaps of this System for non-residents By participatin1 in this System, non-residents can enjoy the followin1 advantages. 1) Deliveries connected with buyin1 and sellin1 transactions and collateral transac tions are made by book-entry alone. which allows for simpler. quicker and saier delivery. 2) Under the traditional system. sellin1 was impossible durin1 the transfer period. But this System allows for sellin1 at any time. 3) This System facilitates buyins and sellin1 transactions for odd-lot shares. J7 ~ -
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I ORGA:-;IZATION OF JAP.-\~ SECL"RITIES DEPOSITORY CE~TER 1JASDEC1 Council Counselors I 24 I Adviser 1 Board of Directors I Directors President r--Managing Directors Auditors 3 3f -13 -I I I I 8 I -2 -General Administration Division General Affairs -Department General Account1ng Department Operational Division Systems Development Division I
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II Investment in Japan from Overseas The le\el of foreign in\estor participation in the Japanel-t' ,.ecuritit-~ m.:1rki:r ha:-r::-t.::1 markedly in recent rears. This is apparent in the sharp increast' in tht' \,,(umt' ii Japant"~t' securities traded by foreign investors. in the volume of the foreign securities ,,tiered br foreign governments or corporations on the Tokyo market and in the sharp increase in the number of foreign securities firms opening branches or offices in this country. As the scale of the Japanese market expands and as the level of foreign investor participation rises. legal constraints on foreign investors and difference in trading systems between Japan and other countries have come to the fore. 1. Regulation Under the provisions of the Foreign Exchange Control Law. acquisition of shares oi companies belong to a certain industry groups (communications. broadcasting and airlines. etc.) by foreign investors or foreign corporations is restricted. Restriction against margin trading by foreign investors is one example of statutory constraint. However. to help foreign investors not to miss out on good opportunities co ::ell their stock holdings. or on the ground that a gh'en margin trading is comparable co a ca::h transaction. foreign investors are authorized to effect the following kinds of margin tradin~ 1 11 Hed1e-sellin1 of shares acquired in consequence of conversion oi comertible bonds !2l Hedge-selling of shares acquired in exercise of warrants attached to warrant bonds (3) Hedge-selling of shares to cover the period for name registration of their holdings 14) Hedp-selling of shares to be acquired through an issue of new shares or stock split (if the shares are designated as those eligible for when-isued trading, ther can be hedged by such method). However, hedge-selling of shares to cover the period for the conversion of depositary receipts into domestic common shares is not authorized on the ground that such hedge-selling runs counter to the purpose of issuing depositary receipts. Where futures trading is concerned. there is no restriction against foreign imestors. 2. Difference in Trading System The stop loss order system practiced in some countries is prohibited b3, the Securities and Exchange Law in Japan. The reasoning behind this is that unlike ordinarr orders. stop lou orders tend to interfere with the formation of fair prices by precipitating a sharp rise or fall in share prices"""all with the aim of making unfair gains. In addition. interest arbitrage transactions between domestic shares and original share listed on an overseas stock market or their depositary receipts or between foreign shares listed on the Tokyo Stock Exchange and the stock exchange of their home countrr are actually impossible on account of the difference in the clearing systems between the coun tries concerned.
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III Investment in the United States from Japan Some of the probl~ms facin~ Japanese ill\estors who trade .\merican :;ecurities thr,,u~h American securities firms are attributable to the difference in securities laws and their interpretation between the two countries. As they can be ultimately blamed on the legisla tive purports underlying these laws.we will not go into that. In this section. we will review problems which arise from the defference in securities trading practices and philosophies underlying such practices. 1. Settlement [n Japan. failure to deliver stock certificates or pay for the stock certificates received on an appointed date is considered extremely irregular. and investors at large have a strong aversion to such failure. It is a common practice among broker-dealers to charge to the defaulting party interest lost through such failure. regardless of whether it is a positive or a negative failure. The difference in attitude toward such failure between Japanese in,.estors and American securities companies have sometimes given rise to problems. 2. Regulation Japanese investon buying or selling securities in the United States are required either by law or by company rules to submit a number of documents (for example. a statement oi resolution of the board of directors for opening an account) which do not exist under the company law or are simply not customary practice. ).,[any investors complain that the rules in the United States should be made more flexible to allow Japanese investors to substitute other documents for such required papers. 3. Difference in Trading System The most serious bottleneck that discourages Japanese in,estment in American 5ecurities is the exchange risk arising from the time lag between the two countries. L" nder the current system where the confirmation of a securities transaction (including the dollar amount of settlement> is forwarded to the Japanese investors on the following dar. And many Japanese investors complain about the exchange loss they have to bear on account oi the time lag.
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IV Anticipated Diversification of the }larket and Its Impacts (internal factors) The emergence of new markets and diversification of financial products in the comin~ years will largely be influenced by changing economic environment and investors needs as well as by the stance the regulatory agencies will take. And given the growing tendency toward the integration of the world's economies. Japan will have to fashion its new markets. financial products and clearing system not based on its narrowly-defined national perspec tives but those which are compatible with. and closely linked to. the markets and clearing systems of the United States. Europe, and Asian countries. :Moreover. such new markets and clearing system should address not merely the needs of broker-dealers but also those oi other financial institutions. One recent development suggestive of future direction is the idea of creating an interest futures market now being seriously considered in this country. because it will provide a common market for the participation of broker-dealers as well as banking institutions. Indications are that in fashioning new markets and clearing system. the regulatory agencies will pay closer attention to their linkage with those of other countries. the participation or different categories of players (securities firms and banking institutions) and harmonization of clearing systems of different countries. In anticipation of such developments. and from the standpoint of insuring the financial soundness of broker-dealers and the protection of investors. the securities industry and the regulatory agencies will come up with new regulations and create a more efficient clearing system. 41 16 -
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V Outlook for Technological Innovations and Relaxation of Regulation. and Their Impacts (external factors) T ~dmological im10\a.tiuns for more dficient and faster processing 1Jf backoifice work through the introduction of ad\anced computers will no doubt continue in the coming years. And pressure will grow for making matching technological innovations in order to help the market's clearing system cope with the growing volume and complexity of its work. In keeping with such developments. rules for the protection of investors and self regulation of broker-dealers will be strengthened and streamlined. -(j -17 -
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THE SECURITIES DE.ALERS ASSOCIATION OF JAPAN 5-8, Kayabacho 1-chome. Nihonbashi, Chuo-ku, Tokyo, Japan June, 1982 To : Non-resident Customen Notice re: Unit Share System Dear Custo~: A. you know, the Law Amending Part of the Commercial Code was promulgated on June 9, 1981, effective as &om October 1, 1982. The pnaent amendmct covers a wide range of matters and, with regard to the share s,-em. it c:reate1 new unit sbaze system and makes seveml new provisions relating to shares c:omtitatiq lea than one unit. A. a remit, upon emu:anmt of the amendment,, the entitlements and transferability of sbana short of a unit will be subject to substantial restrictions. Following, we give an outline of the unit share system. to which we wish to call your special attention. Ver, truly yours,
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1. Purport of the unit share system : The present amendment increases the par value of each share of a company to be ~aiz:ed on or after October 1, 1982, to an amount not less than ,000. ID keeping with this, the aistin1 listed companies will be required to consolidate into one share the number of shares c:oastituting one unit as of a certain date (undecided at preaem) so as to inc:reue the par value of each share to not less than ,000. For this pmpme, the unit sbare System will be introduced as a transitional measure, and on and after October 1, 1982, it will 1-mandatory for all mating listed companies to adopt as one unit of sbua. either: (1) The number of sbares obtained by dividing ,000 by the amount of par value of each par value share, or (2) Such number of sbues as may be specifically provided for in its Articles of Incorporation. ID cue such number is to be spec:ifiailly provided for in the Articles of Incorporation, tba mnber of shares to CODIC:itute one unit must be such that the total i;ar value of the shares c:omtitatuc oae unit or the net uaets per unit of shares as shown in the latest balance sheet is DOC m than ,000. U the illuing company fails to adopt either of (1) and (2) above, the number of sbares of (1) above will be deemed to have been adopted as one unit. Non-lilaed companies are &ee to adopt the unit share system or not. This means that all of the listed companies will have to determine the number of shares to comtitute one unit of shares not later than September 30, 1982. It seems likely at present that with a few exceptions, most of the listed companies will determine the number of shares COllltituting one unit by the method mentioned in ( 1) above. At pnaeDt, the par value of each sbue of most of the listed companies is This meam that IDOi& companies will have 1,000 sbanl u one unit. A company whose shares are in par value per share will have 100 sbanl u one unit. Haniinafter, sbares c:omtituting -than one unit will be merred to u '"lest-than-oneuDit sbanan and certificates of shara 1epusmtin1 less than one unit of shares will be referred to u "c:ertific:ates for la.than-one-unit shares." Z. Tradlas on tbe 1tock eschan1e : ID coanection with the enforcement of this unit share system, the Japanese stock -2-
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acbanges have detennined that. effective on and after October 1. 198:?. transactions on the a:cbani,e will be executed as follows : (1) Trading unit: the number of shares constituting one unit as adopted by the issuing company. (2) Share price quotation: price per share as has been the case so far. 3. Blshta to which 1 ... &laaa-one-unit slaar an entitled: In the cue of less-than-one-unit shares, they will be entitled, as before, to such economic benefits as: (1) Riaht to receive cash and stock dividends (including interim dividends). (2) Right to receive shares and/or cash upon free distribution of shares. consolidation or subdivision of shares, capital decrease or merger. (3) Riaht to subscribe for new shares, convertible bonds, or bonds with warrants. (4) Right to ieceive distribution of surplus uaets upon liquidation of the company. (S) Right to demand conversion of bearer share certificates into registered share certificates. (8) Riabt to demand reiuue of share certificates. 4. Blshta to whiela leu-tlaan-one-anit slaar are not entitled : In the cue of lea-than-one-unit sbue1, they will not be entitled to any rights (the so called common beneficiary riahts) other tba thcee mentioned in 3. above, such as for instance, the riabt to 'IOl8 ac a meeting of sbueholden. Thia mam that a bolder of slma comatutin1 m integral multiple of one unit and ..... camtitum11 Im tba one unit will be entitled to the number of votes which is the aamber of ..__ COIIICiU11ing such inrepa1 multiple of tbe sbazea CODltitutinc one unit. For the parpoae of c:alcaJaaon of a quorum for a meetina of sbareholden, a total m1mber of such 1--tban-oae-unit shara will not be counted in the total number of issued ---3-
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5. Prohibition of i11uance of certificates for less-than-one-unit shares: Under the present amendment, all listed companies will be prohibited, on and after October 1, 1982, &om isaui!ll certificates for shares constituting less than one unit, except: ( l) in the cue of conversion of bearer share certificates into registered share certificates; and (2) in the case of reiaue of share c:ertificates bec:a'Ule of loss, theft, mutilation, etc. of sbue certificates. It, tbmefme, follows that on and after October 1, 1982, no share certificates at all will be i--1 in ,espect of any lelHban-one-unit sbans to be newly iuued as stock dividend. free distribution of shares, additional capital share issue or the like and only the number of such share will be registered in the register of shareholders (Such less-than-one-unit shares which have been so registered in the register of shareholders but in respect of which no share certificates have been issued are hereinafter referred to as the "registered less-than-one-unit shares"). Also the division or coasolidation of share certificates wbich has so far been allowed to be made without any reslrictioas will be subject to the following restrictions on and after October 1, 1982. If an application is made for consolidation of a plunl number of certificates for lesstban-one-unit shares exceeding one unit in total, a certificate for one unit of shares will be iaued in respect of so many of the shares u will constitute one unit, but no share certificate will be iaued in the future in respec:i of the remainder of the shares falling short of one unit, which will remain as the registered less-than-one-unit shares. It will not be permitted to subdivide a certificate for one unit of shares or a certificate for ~t sbans into a number of certificates for lea-than-one-unit shares. Fm11 the foreaoinl, it followa that on and after October 1, 1982, so far u the less-than oae-uait ..._ an c:oammecL there will be two enof 1--tban~t shans : the lesa-tbanoae-aait .._ for wbic:h are certific:aaes have alnady been illued and the registered 1esa tm11411Hmic shares for which no sbare certificates have been isaued. ID c:ae tbe reptered 1--tban-one-unit sbans have inc:reued in number beca'Ule of a mbNquent capital incnue, etc., so a to esceed one unit, the iuuing company will be required to iaue, without delay, a certificate for one unit of shues in respec:i of so many thereof as c:amdmre one unit. -4-
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The registered less-than-one-unit shares will not be transferable to third parties, except in CISe demand is made upon the issuing company for purchase of such shares as explained in i. below. I. Besiatratioa of traufer of leu-th--oae-unit shar : Shani comtitutin1 any number of units of shares will be allowed to be ttansferred on the reamer of shareholders without restriction as bu been the practice so far, but in case of lea-than-one-unit shares, care must be used because the registration (of transfer) of such shares on the register of shareholders will be subject to restrictions on and after October 1, 1982, as stated below. Namely, if lest-tban-one-unit shares are acquired throu1h assignment, the registration of t:mmfer on the reaister of shareholders can be made only if the assignee is at that time a shareholder already registered as such in the resister of shareholders. A.s used here, the term shareholder means a holder of shares whether such shares constitute a unit or less than a unit. If. therefore, the assi,nee who has acquired less-than-one-unit shares through assignment is not at that time a shareholder already registered in the resister of shareholders, the resistra tion of naasfer into his name is not pennitted, with the result that such assignee will not be entitled to the subacription rights, dividends, etc. mentioned in 3. above. This means that the aaaianee in that case cannot secure such entitlements, unless he bu,-such additional number of shares as are sufficient to constitute together one unit or more and bas such shares registered in his name in the register of shareholders. The regisaation of transfer of shares will, however, be allowed in the case of acquisition of 1 ... man-one-unit shares for causes other than assipment, such as for instance, inheritance, corporate merger, etc. 7. Demaad for parehue of lesthaa-one-unit shar : OD ad after Oc:rober 1, 1982, a penon holdins lea-than-one-unit shares, whether they an tbme for which c:mtificata have been iaaued or the regisrered t ... than-one-unit shares, may my time demand the iauin1 c:ompmy to pu.rcbae such shares at such a price u apleiaed below. Ally sbanholder, whether already regisrered in the register of shareholders or not, may make mda demand for purcbw, in the cue of "leu-than-one-unit sbares" for which share cenific:ata have been iaued, but only thole shareholders who are regisrered in the register of sbareholden may make such demand in the case of "registered lea-than-one-unit shares" for -5-
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which no share certificates have been issued. \ 1) Purchase price : The purchase price will be the closing price on the stock escbanp OD the day OD which the written demand for purchue in the prescribed form reac1m the iauing company or its purchue agent's b11sinese office, or if there is no sale and pmcbaa tnnection OD such day, then the price at which tbe fine sale and purchase transac tioa is made thereafter. If tbe shares are lisced OD two or more stock acbanges. the purchase price will be, in principle, the price oD the scock escbaDge nearest to the isumg company. This means that a sbanholder can name neither tbe stock escbange nor the purchase price. (2) Fee : The iwdng company will charge as a fee an amount equal to the brokerage cnmmwnn prescribed by tbe stock eschange. For such a sale, the Japanese securities transaC tion tu will be imposed at the rare of the "purchase price x 55/10,000'', just as in the case of ordinary sale OD the market. Noa-reaident investms will make their demand for purchue, aaturally, through their scaadin1 prmdea. If you inread to demand purchaae, pleue instruct your mnding prosy. Your prozy will act u an imermediary in filma tbe pmcbue demand with the issuing c:ompay. In that cue, a cmnmipion will be c:barpd for such proxy's acting as intermediary. The date due for payment of the purchase price by the issuing company to the wndin1 prozy is Dow under study by the issuing companies. It seems likely that such date will be about 4 to 7 days &om the day OD which the pmcbue price was determined. 8. Couolidatioa into one share under law of the shares conatitutins one unit. A. Slated in "L Purport of the unit share s,mmn above, tbe present amendment to the Ovnawrw Code provides tbat sbares c:omtitutins one unit will be c:omolidated into one share 011 mandetmy buia u of a c:enaiD date to be detmmined by special leplarioa. It is as yet not known wbm tbe bill pnmdms for such date will be submitted to tbe Diet. Thia mam tbat by c:ontinwns the unit share system u aplained hove for some time to come, to adjust and reduce in number, u far u paaible, the c:ertific:ates for lesa-tban-oneunit .... already iMued and DOW' in c:irculation, and dependial OD tbe effect attained by this, to dare, m;ne when the c:ompmory 1UIII. -6-
PAGE 53
9. Be: traufenbilit7 of 1 .... thaa-oae-uait shara a summary. To sum up the transferability of lea-tban~ne-unit shares on and after October 1, 1982 mar be summariaed u follows : i ) U tbere ue share c:erti&ala 1epc 11 aia1 the wt number of the shares to be sold, such sbans may be 101d to a third party tbzouah a securities company, u bu been the cae so far or demand may be made upon the iauins compmy for purchue of such sbar& ii ) If there ue no share certificates zepcmtms the met number of the sham to be sold, it will bl-impwible t.o sell shares in such mamber The only alternative in that cue will be to sel1 to a third party tbrouch a securities company shares only in such mamber as are 1epcmted by the share cenificates or to demand the issuing company to purcbue such shares. i ) It will be pallible to demand the iMuin1 compl.DY to purcbue the whole or pan ai mch .... ii ) It will DOC be pallible to sell such shares to a third puty. (3) Aaawaitim of 1111 bea4le-Ulli1: sbua: i) In the cue of lea-dwa41e-11Dit sbues. ii: will be poaible, u bu been so far, for you to uquin such sbara duoqb a -=mida compl.Dy, if you can 6nd a seller who bolda sbue certificala zes-a1n1m1 rba ma number of rbe sbares which you desire ID aapre. Howevm, it .... likely TO becama incralinsly difficul TO acquin 1111-tba~t ..... ii) Yaa IDIJllld bar in mmd dlll& npJemed in 6. abowe, if you acquized te...tban-one-mm ..., ao ....... rian oi rnnwr of a:h sbua into ,our name would be aUond. ualaa you .... anboldar in die reptar of sbanbolden. iii) ID Japua. the 1llliacar of sbanboldla ia c10Nd uaually for about thrN monl:ba follow iq tba dare of cloein1 ,,f ICCOUDta of rba ialin1 company and no repmtion of rnn1 rm be mada dmiq IUCh pmod. -7-
PAGE 54
... ... ... -- ---Coa..qandy, it should be nocad dial if sbara of a company wbicn closes ia accouna at die md of June. July or AupM are acquired a&er me dace of cloaiq of ia C ..... DO NpaUian of aamfel, of such ... CUI be made for about tbne n-.onrhs ad 111111 mil mam dm if ,ou acqaind ~t s&.. oi such company at -, dalll aflllr die dllll oi dneina oi i rm11 bat an ar befm. Sqeober 30, llm.lbl saalt waald law ma -e&ctifdlaaaitsbll'es,-mwaemade lppM"INe ID 11111:b IClpPWDJD .... thaup it wa made before me effective dale of TBI IICU81TIIS DIALl89 ASSOCIATION or JAPAN H. Ka,-lacbo 1-c:homa, Nihaabaabi. a.laa. T-,o, Japan --
PAGE 55
Ja}1an .s~curiti~~ [ltarir~ [orvoration
PAGE 56
APAN SECURITIES CLEARING CORPORATION 1111"1a1a. 1" ..... lfllllllllftlliltl t111llayflllllllll ...... .,. 1111 ci.tae c.,enllll ,., ... .., ............. ...... 1111111111111...-11r111111111111 .. llllrlllllllllMMr'IIII 111n I 1'1111 If 1111 l'ICIII I ,.28'11111 ti mm war .... I 111111 11117 ... If .... .... II 1111 Mi nt. 11 u, factlr II II flrllllr u,111, tit If 1111g1tMII 7 lfwlliilrlllltla111t .............. laflll. ................. .......... .,.,.,..._ It II 1111 --fl JSCC II .,.... ....... ,..., ......... ,,, 1111, 1111. JICC 1111 1111 11 I ill ...................... ----JSCC wl Ill _, If 11161 lllfllt lll1llt .. fltlrl Ullrl ti r:.1. I 111111. -*' JSCC'a ,_ .. / ~
PAGE 57
Contents: Hiscoric:tl b:ickground of JSCC Operation and org:iniz:itioml )"UUCtUl'C of JSCC Funaiom and servias of JSCC Users ofJSCC Overseas reJatiomhips of JSCC I !-....... .. ____ ...,-'""r::,. "'"' ., .. .......___ .. rm .. -. I,, ,~ I '\ I )t -. ., ..... .... 1 m1I --, -----...;_. '> ""'":""". ~~,-----. .. '. ... ,. . ,.
PAGE 58
.f '1 p ,'f, .. ,-.-, ,,.'p .,. .. -~ ,.. t ,~ i i l I : 1-/ ., I .: I. .. -~ \
PAGE 59
I HislDrical t-=kgmund I dJSCC I The Tokyo Secu-: rities Clearing Corporation. the original body of JSCC was established in December. 1953. in Tokro as a whollr owned subsidiary of the Tokro Stock Exchange 1 TSE) in order to contribute to the streamlining of the settlement procedures of securities transactions. after i research and study book-I entry transfer systems. .. -I __.,.,.,-----
PAGE 60
I JSCC was established in its present form in May, 1971. 1n July of the same year. the book-entry transfer system was tentatively introduced and then extended to f1Jll scale in :,.iovember. 19i2. to all corporate equities listed on TSE. The effort to inuoduce this book-entry transfer system was accelerated by the sharp increase in the nwnber of shares in drculation and by the heavy trading of corporate equities in the market. The trading volwne of TSE swelled by about four times during five years prior to the full operation of the book entry system in 1972; this caused a paperwork crisis in the back offices of securities companies. which led to the inevitable suspension of trad ing on TSE. The introduc tion of a new settlement and clearing s>-stem was urgently needed in the securities indus-1 try.
PAGE 61
.f e!lr-' -I :_, ;-. ,; 1 ''. -~-~. .. ---. .. ~-,:. .... ---.......... _________ __ .f .., -,i. ... ,1 .....
PAGE 62
I O pc:nrion and organizational sau:rurc ci JSCC JSCC is a wholly owned subsidiary of TSE. with fulh paid capitalization of 3 million yen. JSCC is managed by the board of directors. consist 1 ing of ~ve members led by '. the preSldent. : Besides its head office in j Tokyo, JSCC has seven local offices at Japan's seven I resional stock e.'
PAGE 63
F unaioas and services of JSCC (1)Ftmc11ansof JSCC JSCC has two ke, functions: co clear securities transactions and to safe guard securities. Employing these fwx:tions all the secu rities transactions effected on : TSE are cleared by JSCC. as entnJSted by TSE. This serv-i ice is one of the most imporI tant roles of JSCC. I Transactions in corporate I equities are cleared through ; the book-entry transfer sys tem. in which more than 12 billion shares deposited by participams are put under the custody of JSCC. Owing to this transfer sys-i tern, the laborious physical movement of shares has been reduced to a minimum and clearing operations are perfonned more efficienth. Furthermore. absolutely safe custody and ma:
PAGE 64
I
PAGE 65
; I I Ill I ,,1 m Sna lffnl JSCC I Although the primary task 1 of JSCC is to offer clearing i services on behalf of the member securities companies of TSE. JSCC has been making its best efforts to diver sify its services along with the expansion and interna tionalization of the TSE market. The development oi networks with JSCC's coun terpartS overseas is one good example of this. JSCC offers following services to potential users overseas. such as clearing organi, zations. depositories and ultimately individual investors overseas: 1) Custodial service for secu-: rities: JSCC keeps securities I safely in vaults that have i a capacity of tens of bil-i lions of shares. ;~-'.~-----~.-~~-. ,._ !". .. 'SI:: -~ : . ~..: :: ..
PAGE 66
,, "\f\!\H'i r ,r ,; .: I I .. ..... ,,.._. C ,)ap-an ,...:,~curitl~.$ .. _:.,[ltarina ,._[orrcoration ----:.;-,::;;;-: :, 7-::-~ .. z-.:(!-l~-:;~: .-.;:;~:~"'.~!~~~:~'I."--.:~:..~-~---: --
PAGE 67
BO-\RD or DIRl:CTOI~:" HARUO HISHL~UllA ,,,,,,,.,., KOICHIRO KANEKO l ..... Dilfll,,I HIROMITSU :'tfA TSIOTO ~IASAHISA HAYASHI _I,,_, ,JI tllt IJlll'd ,Ji T uh> Sb* E.maii.ar1 SHIRO URA.\IA TSU UIIDllin ri,l' ,,,_., "'. Tift ** &:imft1 :\l"OITORS ~IASA-AKI KOBA 'l.~HI KIKUEISOMURA ,...,. ,,; tit, s,,,. al To6,o .WE'.aaarl {~;.) -~ f.,. .di!( .J~h~ -.-~;~:-. j .; .. dnl:Z-d: ,,. Huuo Hithinuma Hiiomiau ~laaumoco --'
PAGE 68
,:,.i \l~I \In or ~T Hl:"Tll .:ii .\,.,.rmoc Dlib"T1rm:.aai --.... .. IZ,D ,, .. .... ... z.a .. ,ICC co .. .. ..\,-.nae \111m ,,c Dali~ TraraDOIII __, .\,erqe \'aiue ,1 Duh Trnacoons :iemed Bonds, :. :oc ::c '!o: ::e I .Jall ,co -zoo
PAGE 69
LIST OF P:\RTICIP:\NTS '!ot,.";11 i',rtlqJam, \JZ.,\\'.\ ~arRIT~ \.U LTD .-\K.-uil\" .\ SEl.:L'RITIES W LTD THE .WT.-\ BA."\K. LTD. -"-~DO SCl. 'RlTIES CO. LTD THE .OIOIU BA.~K. LTD. THE .-\SHIK..\GA BA.'iK. LTD. THE.-\\\".-\ 'BA."\K. LTD THE BA.~K OF Fl 1\l" ~H.~E mSH.-\TT.\.\ ~Eel'RJTIES J.\P.t\ THE(HIB.-\ BA.XK. LTD. THE (HIB.~ KOG\"O 8."-XK. LTD THE CHIBA SOGO BA.XK. LTD THE CHl\"ODA :iCl."RITIES CO LTD THE CHL"GOKL" BA.~K. LTD THE CHtll."\"O SOGO 8..\.. \K. LTD (HL"O SECl "RCTIES CO. LTD THE CHL"O SOC,() BA."\K. LTD THE CHL"O TRl"ST .f.: BA.\KIXG CO. LTD COSl!O:iCl."RITIES(O .. LTD !HE D.-UICHI K.\.XGYO 8.-\..\K. L TO 0.-U-'.CHI SECl"RITIES (0. LTD D.-U.\.-l.X.-\ 5ECt:RITIES (0 LTD !HE 0.-US.~.S SOGO 8..-l'-K. LTD D.-USEI SECt:RITIES CO L TO THE D.-USHI 8..\.XK. LTD D.-UTO SECt:RITIES CO. LTD THE OAJ\\".-\ BA.\K. LTD. DAJ\\".-\ SE.ct:RJTIES CO .. LTD. DB C..\JIIT.-U. llARKETS .. ~L\1 LTD EF HL'TTON & CO.\IPA.W l~C. THE EHL\IE SOGO BA.~K. LTD. THE EliHTEENTII BA.~K. LTD. El\Y A SE.ct.'RITIES CO .. LTD. FIRST DTON '.-\SL\J LTD. THE Ft:JI BA.\'K. LTD. THE Fl1CL1 BA.~K. LTD. THE FllCt:00 SOGO BA.'iK. LTD. THE Fl1Cli0Kt: SOGO BA.~K. LTD Fl1C1.'\" .\.\L\ SECt:RITIES CO .. LTD THE GIFl' SOGO BA."\K, LTD. GOLD~L\.~ SACHS I.STER.~,mo~AL CORP THE Gl::\'lL\ BA.~K. LTD. THE HACHJJt:.SI BA.~K. LTD THE ~'lSHIN SOGO BA.~K. LTD THE HliO BA.\'K. LTD. HINOOI Sf.C1.'RITIES CO. LTD HIIMlKA SICL'RITIES CO. LTD. THE ll!kl,._111~!.\ :-'1t,1J 1-:.\.\K !.Hi HIROTA :iEU RJT!ES \.:CJ LTD THE HOKK.-UOO BA.\K. LTD THE HOKK.-W)() TAKL'SHOKL' BA.SK LTD THE HOKKOKt: BA.SK. LTD THE HOKl"ETSt: 8."-XK. LTD THE HOKt:RIKL' BA.\K LTD THE HOKt:\"O g.,o BA.SK LTD THE HHKL'GO BA.SK. LTD THE HHKL'JL'SHI 8.~.SK. LTD THE H\"OGO ~O 8.~.SK. LTD ICHJ\"OSHI SECt:RITIES CO LTD L\L\GAW.-\ 5Ct:RITIES CO LTD TH IXtX:STRL-U. 8.-l.\K OF J.-\P.\.S LTD ISSEl :iECl'RITIES CO L TO !TQ-1;1.s SECt:RITIES rn LTD l\\".-U SECt:RJTIES (0 LTD THE !YO BA.SK. L TO THE tZDII 5ECL"RIT!E (0 :-:, JAP.i..s ~r:,xRJT1E., r!~ ;~(: ~') :-~-JAROl~E FLE.\ll~G :-E~l atT:E! I THE JO~.\.\ ~HI.SKi~ B.\~K THE JO\'O a.\.'.K. LTD JL'JIH SECL'RITIF.S (0 LTD THE Jl'ROKt B.\SK. LTD THE K..\GO:SHL\L~ B.\.\K. LTD THE K.-USEI 5ECL'RITIES (0 LTD K..\.~EJUECt:RITIES CO LTD K..\.XDl.\."\ SECL'RJTIES (0 LTD K..\.XE\".\.\l\ SECtRJTIE.s CO L 70 M K.\.XS.'l 50GO B..\.\K. LTD THE K.-l.XTO BASK. LTD i\.\.STO ~ECl'RITIES (0 L 70 :\lDOER. ?E.\800\" ,~:'ER~; i'.O~ :..i. ~nRP THE KI.SKI SOGO 8.-\.\K. L7D THE KIYO B .\.\K. LTD !\I..El.\i\"ORT BE.\50.\ l~TER.\.r:m ;L :~( THE KOFl lit: ::;o;Q B.\.SK LTD KOKt:S.-U :iECt:RITIE5 (0 LTD KOlffO :iECL'RITIES CO. LTD THE KOSEi :iECt:RlTIES CO. L TO Kl 1lOIU \\'.-\ KITOKL" :iECt:RITIES (0 LTD K\'OKL"TO SECt:RJTIES (0. L TO. KYORITSt: SECl "RCTIES CO LTD THE KYOWA BA.'iK. LTD. KYO\VA SE'Ct.'RJTIES CO. LTD. THE KYL'SHt: SOGO BA.~K. Lro. THELONGTER.\ICREDITBA.~KOF J.-\P.-\.\ LTD lL\EDA SCl.'RJTIES CO .. !:.TD ~L\RL'HACHJ SECl"RCTIES CO .. L TO ~L\RL1CHl SCl.1U11ES CO LTD ~wt.m SECl"RCTIES CO. L TO ~L-UlL'KO SCl.'RITIES CO .. LTD ~L\RL1Ct:~I SECl1U11ES CO LTD ~L\RL11A.'i SECl1U11ES CO .. LTD ~L\RL'SA.~ SECt:RJTIES CO L TO ~WlL'SO SECCRJTIES CO. LTD. ~L\Rl.'WA SE.ct,1U11ES CO LTD ~IA TSUI SF.Cl.'RJTIES CO. LTD. ~IEIKO SECURIT1ES CO .. LTD.
PAGE 70
:\IEIW.-\ SE1XR1Tle-(0 LTD llERRILL LYXCH J.-\P.-\X IX(. THE )OCHL'.OKl' &l'.K. LTD. THE )IIE BA."iK. LTD. ima SECt.'RrTIES CO .. LTD. lDS.\\rAY.HECt.'RITlESCO .. LTD lllTO SECL'RlTIES CO .. LTD. THE lDTSL'BISHl &l'.IC. LTD. THE lDTSl'BISHI TRL'ST & BA."KlXG CORP THE lUTSl1 8.-\."K. LTD. THE lllTSl 1 TRL'ST & B..\."KJ..-.;t; CO LTD THE lD\',\Z.-\Kl &l"K. LTD. llORG .\." ST .\."LE\" IXTER."..\ nox.-u. LTD lll'RQSEI SE.Ct.'RITIES CO .. LTD THE lll'SASHIXO B..\."K. LTD THE x .u-,on 50GO 8.-\."K. LTD X.-uG .\I SECl 'RIT1ES CO. L TO. \' .-\ITO SECl 'RITIES. (0. L TO \' .\K..\H.-Ut-\ ::.1."RlTIE: i.:O L TO \' .\K.-\1 SECl'RITIE (0 LTD THE \' .\.'\TO B.-\.\'K. LTD \' .\RL:SE SECl1UTIES (0 .. LTD \' .\TIOX .\I. SECl1UTIES CO .. LTD. THE ~Ew J .\P.-\." SECL:RJTIES (0 .. LTD. \'ICHIE SECl"RITIES CO .. LTD. \'IHOX h.i"OEI SECt.'RITlES CO. LTD. THE ~11i,\T .\ 50GO &l\'K. LTD .. THE ~1KKO SECl'RITlES CO. LTD. ~lPPOX CREDIT BA."K. LTD. THE XlPfO:S IC..\."G'a"O K..\h."l:.L\RL: SECl'RlTIES CO .. LTD THE ~lPPOX SECl1UTIES CO .. LTD. THE ~lPPO\' TRL'ST & B..\.'-'KJ..'\;G CO LTD. THE \'!SHI ~lPPOX B..\.'-K. LTD \'155 .\." SECl'RIT1ES CO .. LTD. THE XO)ll 'R..\ ::ECL'RfTIES CO. L TO THE \'ORL'\;CHl'Kl." 8.-\.'\K. LTD THEOG..\Kl K\'ORITSL' B.-\XK. LTO. THE OIT.-\ B..\.'-'K. LTD. OK..\CHI SECL'RITIES CO .. LTD. OK..\S..\." SECL'RITIES CO .. LTD OK..\ TOKL' SECt:RlTIES CO.. LTD C&WA SECt.'RITlES CO. LTD. OTSt.'K..\ Si'Cl"RITIES CO .. LTD. PRL'DE.'1'TLU. BACHE SE.ct:RITlES JAP.'-"l LTD. RYTHERS 1.-\SIA) LTD. SA.\'EI SE.CL'RfflES CO .. LTD. THE SA."HN QXX> BANK. LTD. TIIE SA.WA SA&"iK. LTD. SA.'ffl> SE.CL'RfflES CO.. LTD. sa:z SBl.'IITl!S IASW LTD. THE SENSHU BA.\'K, LTD. s.G. WAIBUIG SE.CL'RfflES JAPA.'.i ~c. SHEARS0N LEHMA."i BROTHERS .-\SIA L"C. THE ii BA."iK. LTD. TIIE SHliA BA."iK. LTD. TIIE SHIK0KU SA&"iK. LTD. THE SHIMIZU BANK. LTD. THE SHINWA BANK. LTD. TIIE :iHl\'\'El ISHN> :-E<.l'RITIE.~ 1..0 i. T!J THE SHIZlOK.-\ BAXK. L TO THE SHOKO CHl'KI\' 8.-\.'-K S)DTH BAR.\'EY. HARRIS l."PH.-\.\1 l~iER."ATIOX.-\L iXC. THE StOOTOMO BAXK. L TO. THE St:)IITO.\IO TRt:ST & BA\'Kl\'G CO .. LTD THE Sl'Rl'GA 8A."K. LTD. T..\CHIB,\."A SECt:RITIES CO .. LTD T .\IHEIYO SECl"RITIF.S CO L TO THE T .\ISEI SOGO 8.-\."K. LTD. THE T.-UYO KOBE BAXK. LTD i .\K.-\Gl SECl'RITIE.SCO. LTD THE TOCHIGI SOGO B.-\XK. LTD THE TOHO 8.-\XK. LTD THE TOHO ~O B.-\XK. LTD THE TOK..\1 8.-\.'-K. LTD THE TOK..\1 :-ECl'RIT!ES CO LTD THE TOKI\\'..\ ~iO 8.-\\'K. LTD TOKYO R.'\lj() ::EffRlT!~ '70 TOKYO ::ECt'RlTIES CO. LTD THE 70KYO :OGO B .\.'\K. LTD THE TOKYO Talll\' B .\.'-K. LTD TOW.-\ SECL'RJTIES CO LTD THE TO\'.-\.\L-\ ~GO 8.-\XK. LTD TOYO SECL'RITIES CO. L TO. THE TOYO TRL:ST & B..\.'-:Kl.'\G CO .. LTD THE l'GO 8.-\."K. LTD. L'Xl\'ERS..\I. SECl'RlTIES CO .. LTD. l'TSDIIH SECl'RIT'lES CO .. LTD. \ 1CKERS 0 .\ COST.-\ LTD. \\"..\KO SECl1UTIES CO .. LTD. \\'ORLD SECl 1UTIES CO LTD Y.-\H.-\ n ~ECL'RITIES (0 LTD YA.\L.\Bl'\' ~ECl'RlTIES CO :. 7::> THE \'.-\.\L-\li.-\TA 8.-\.'-:K. LTD THE \'.-\.\U(;l"CHI S.-\XK. : TD Y.-\.\L.\ICHI SECl'RJTIES (0 .. LTD \'.-\.\L.\K.HECl'RlT!ES ~O .. LTD. \'.-\.\L-\KICHI SECl'RlTIES ~O .. LTD \".-\.\L-\.\L\Rl' SECL'RITIES CO .. LTD. THE Y.-\.\L.\.'1,-\SHI CHl'O 8.-\.'.K. LTD. Y.U~\1 SCt.1UTIES CO .. LTD. Y .\.\L\T.-\.\'E SECl.'RfflES CO .. LTD Y.-\.\L\WA SiCt.'RlT!ES CO .. LTD. THE Y.-\SL'I>A TRUST & 8.-\.'.ICL'-G CO .. LTD. \'l.'T.W SECl.'RIT!ES CO.. LTD. THE ZL\'SHL\'RE.'l BA.'.K
PAGE 71
REl.\TlO:\~IIIPS \\:. ITII CE.'.\TR .\ L OIHj \ .\" IZ. \ TIO.'.\."i ()\'ERSE \~ -------~-.... ....... =:;:=.;: ::::-=------~-~: ----. ---THE C.-\.'UDIAX DEPOSITORY FOR 5ECt:RlTIES LTD. CDSi DEL'TSCHER .-\l:SL-\.'\DSKASSEX\"EREL'-: .-\G Alff. THE IXTERX.-\ TIOX.-\L STOCK EXCHAXGE OF THE L"XITED KIXGOO~I .-\SD THE REPl"BLIC OF IREL.-\SD LTD. THE STOCK EXCH.-!. \"GE. LO.\"DO.\" Jt:XT.-\ 5IXDlC.-\L DE L-\ BOL5.-\ DE ~l.-\DRID .11.-lDRID STOCK E.YCll-l \"GE: X0:\11.~EE .-\.\lSTERDA.\l STOCK EXCHAXGE X. \". .\rl.S SOCIt [NTERPROFESSION~ELLE POl:R L-\ cmrPE~SATION DF.s VALEURS MOBIIJtREs 1.S/COV..Ull CAISSE INTERPROFESSIONNEllE DE DPOTS ET DE\ 1RE MENTS DE TITRES (C./.K.l INTERNATIONAL SECURITIES CLEAIIDlG CORPORATION !/SCCl NEDERL-\NDS CENTRAAL lNSTITIJUT VOOR GIRAAL EFFECTENVERKEER 8. V. r .VECIGEFl SCHWEIZERISCHE EFFEKTEN GIRO .-\G l SEGrll -=:. -===--: ---
PAGE 72
Ill CORPOR.\TE D\T\ 1_. ,: ... u,.-, JAPAN SECt,;RITIES CLEARI:-;G CORPORA TIO~ Established: December 15. 1953 Capitalization: 300 million Offices: Tokyo Head Office 1-1. ~IHONBASHI-KA YABA-CHO 2-CHOME.CHUO-Kt. TOKYO 103 JAP.Ou" TEL 103)666-0141 03l 668, DIRECT TELEX 2~74-l50 FA.'< !03)669-03"8 : Osaka Branch Office : ~ago~a Branch Office : Kroto Branch Office : Hiroshima Branch Office : Fukuoka Branch Office : ~iipta Branch Office : Sapporo Branch Office ~wnber Of Participams: Regular Participarus : 93 92 TSE .l""'6rr Stcu,iti,s Fimrs anti f/JfJtJII 5ra111nes Fi111JJ,ce LJ .. Lid. Special Participants 1.13-ll !l Soritia Fimrs 100 8tlllJs Trust a.is 3 Ot/v, Fi111111Ciai blStlntffOIIS Ser.ices Offered: Clearing of Securities Trades Saie Custocb for Securities Book-En01 Transfer oi 5ecurities Standing Proxy Ser.ices Other Ancillary Ser.ices
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Settlement System of Tokyo Stock Exchange -its mechanism and development currently under way--Toshitsugu Shimizu Senior Assistant Manager Oearing Administration Department Tokyo Stock Exchange This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology, Sept. 1990. Th f s doc um en t does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or its Technology Assessment Board. Oct. 5, 1988
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1. Contents of Presentation I. Mechanism of TSE Settlement --featuring equity trade settletient--D. New Central Depository m. Development of International Linkage of TSE/JSCC
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I. Mechanism of TSE Settlement ---featuring equity trade settlement Introduction In Japan, there are eight stock exchanges (Tokyo, Osaka, Nagoya, Sapporo, Niigata, Kyoto, Hiroshima and Fukuoka). In recent years, Tokyo Stock Exchange (TSE) accounts for nearly 901 of overall trading volume. Given its leading role in Japan, I would like in today's presentation, to focus on the settlement.procedure of TSE. The settlement for all trades done on TSE is performed solely by its wholly owned subsidiary, Japan Securities Clearing Corporation (JSCC). JSCC controls and administers clearing accounts opened by TSE member firms, of which there are now 114, and by Japan Securities Finance Co., Ltd. Japan Securities Finance Co., Ltd. is an organization which offers, through JSCC's clearing system, the facility for lending margin funds and share certificates to member firms. JSCC's settlement services for its members cover their TSE cash-market equity trades (both domestic and foreign), a wide variety of bond trades, and futures for Japanese Government Bonds and TOPIX. Under the TSE settlement approach, the settlement of a trade is scheduled to occur on the settlement day specified by TSE rules, according to the nature of the trade and the type of securities concerned. For equities traded in the cash market, for example, settlement procedures are basically carried out under the book-entry system of JSCC, in which the underlying shares are kept in JSCC's safe custody in fungible bulk. Normally, settlement day comes on the third business day after the trade. Statistically, some 991 of the net positions (in terms of the number of shar~s) are settled on settlement day as expected. Failing to deliver shares on settlement day -account for only about 11 of the net positions. In fact, any -1 -
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failing trades must be cleared within four additional business days, without exception. 1. Settlement process Now, I would like to explain the process for equities in detail, from trading through settlement. In general, equity trading on TSE is almost done in "regular way", i.e., to be settled on the third business day following the day of the trade. (1) Trade Day CT): On the TSE, trading is done either manually on the trading floor (for leading 150 issues) or through computer interface (for remaining 1,400 issues). Upon trade agreement, if done on the trading floor, information about the trade is sent through an OCR terminal to the member firm's office for comparison with the firm's own internal records. If the transaction is done through the computer interface, the trade data is transmitted to the member firm's office through the computer. After this process, the trade data is accumulated and compiled at the Tosho Computer System Co. (TCS, another TSE subsidiary) for subsequent processing. (2) T+l: These trade reports are processed overnight by TCS, and by the morning of T+l the processed data is also forwarded to JSCC. Once the members have found any error or discrepancy against their own internal records, they must duly note to TSE, requring correction by the afternoon of T+l. (3) T+2: The TSE clearing system is on a net basis. JSCC deals with only the net balance of the total transactions of each member broker, both in terms of the number of shares traded and the payment due. The net balance of shares in each issue which have been traded by each member firm is settled by delivery from the net selling member to the net buying member through the book-entry system of JSCC. -2 -
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By the morning of T+2, post-trade data has been organized into JSCC's accounting formats for settlement. JSCC provides net settlement instructions to each net-seller firm and netbuyer firm, notifying each of its receive or deliver obligations, specifying the number of shares due. By 4 p.m. of T+2, each net-seller firm pre-advises JSCC as to the means of delivery it will use, i.e., by arranging for JSCC to debit its JSCC book-entry_custody position for shares held at JSCC, or by making physical delivery of certificates to JSCC's counter in a standardized envelope addressed to the net-buyer firm, or a combination of these methods. Similarly, the net-buyer firm pre-advises JSCC as to how it wants to receive the shares the next day (Settlement Day). It can either decide to receive them as a credit in its JSCC custody account or it can pick up the physical certificates at JSCC, or both. (4) T+3 (Settlement Day): Thus, around mid-day of T+3, JSCC facilitates the settlement from net selling members to net buying members, either physically or through the book-entry system of JSCC. Incidentally, in terms of the number of shares settled, following is a picture which our member firms generally choose to deliver and receive (figure in the month of last August): 1) physical delivery vs. physical receipt: 15.31 I) physical delivery vs. account credit: 18.31 I) account debit vs. physical receipt: 25.21 ~) account debit vs. account credit: 41.21 JSCC reports each member's updated balance in the securities account as result of the settlement on the morning of the next business day. As previously mentioned, only about 11 of net-sellers' deliveries fail on Settlement Day, but all fails are subject to interest payment until failing firm fulfills its obligation during the allowed period of four days (at the -3 -
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latest) after the Settlement Day. In turn, this interest is paid through TSE to the counterparty. The failing firm shall also deposit the trade value to TSE, until the obligation is fulfilled. Fortunately, in the past two decades we have never experienced a failure of the final delivery after the 4 extra days. If this ever happens, the TSE shall take necessary action or a.ctions to protect the counterparty of the settlement. A buy-in is one of the probable means that TSE can take. TSE reserves a Compensation Fund of 15bl. (HK$280ml.), or as a guarantee to cope with catastrophe. However, this should remain as last resort. 2. Payment The settlement of money on a net balance basis is effected on the Settlement Day by means of bank checks representing next-day funds availability. The net paying members pay their checks to the TSE's clearing banks accounts, and in turn, the TSE issues its check to the clearing bank account of each net receiving member firm. The movement of securities and checks occur simultaneously, but in separate streams. -4-
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3. Settlement Risk in International Trading Compared with the experience of some local clearing systems around the world, the .TSE's settlement performance seems excellent. Nowadays, however, the TSE finds itself becoming more vulnerable to the risk that TSE sellers may be unable to deliver securities by settlement day. This is primarily due to the sharp increase in cross-border trading and interplay between the domestic and cross-border markets. Once a non-resident client is involved in a sell order on the TSE, the client's securities often take a more complicated route through a series of intermediaries before they reach the TSE member firm who must deliver them to JSCC. In most cases, non-resident investors who buy and sell throuzh the Mmber brokers of the TSE hold their securities with outside custodian ban.ks. Therefore, the need to efficiently exchange information among the investor, the custodian bank, the broker and other patties overseas is critical. For example, if an investor fails to instruct its Tokyocustodian to surrender the securities, the delay affects the TSE broker who executed the sell order and is now liable to settle at JSCC on settlement day. Also, if the non-resident investor lacks awareness of TSE's settlement system or registration schedule, it may further complicate back-office matters in Tokyo. D. New Central Depository 1. Background of establishment of new central depository Since 1972, TSE (through JSCC) has been carrying out the current boot-entry system for all of the listed shares traded on the TSE, for the purpose of streamlining the securities b9siness. This book-entry system of JSCC is structured on the -5 -
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basis of agreements for collective custody and co-ownership among the parties concerned. However, due to some drawbacks in this system, it is not currently satisfying all needs. Under the current system, participation in JSCC is limited to TSE member brokers and Japan Securities Finance Co. So, no collateral transaction with banks is possible due to the absence of banks' participation. But the most serious problem of all is that prior to each record date, JSCC has to return all the share certificates it has been keeping in its central custody in order for those securities to be registered in the name of the current beneficial owners. After the record date is past, they are brought into the JSCC vault again. It is such a burdensome business to remove shares every time there is a record date arid then afterward_ for JSCC to accept them back. TSE and those who are engaged in practical operations in various sectors of the shareholding business have come to recognize that new arrangements and legal support are needed, so that it will be possible to keep the shares under custody even around the record date while treating beneficial owners as de facto registered shareholders. With initiation for further study and effort by TSE and securities industry, the Government embarked on serious consideration of legislation for a full book-entry system. Thus, a new bill was presented to the Diet and passed by it in May 1984. Thia Law Concerning Central Depository and Book-Entry Delivery for Share Certificates and Other Securities was enacted in November of the same year. 2. Structure of the New System The structure of the new system will be as follows: The share certificates will be centrally collected under the custody of an organization, Japan Securities Depository Center (JASDEC). The transfer of ownership, the circulation 8 -
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of shares and collateral transaction is to occur through a book-entry system without physical movement. Settlement of trades on TSE will also take place through the TSE account opened at JASDEC. The share certificates will be kept by JASDEC even at the time of the record date. They will never be returned without request from participant. The names of the beneficial owners as of the record date will be furnished to JASDEC by participants such as securities firms. banks, etc. JASDEC will compile this information and notify the issuing company of the identity of each beneficial owner. Based on this notification, the issuing company will be able to allow b.,.eficial owners to directly exercise such rights as receiving dividends and voting at the shareholders meeting. We call this the direct method, which is unique to Japan or maybe TAURUS of U.K. in comparison to the indirect method, of other countries. The direct method puts importance on direct communication between the issuing company and its beneficial owners. The Participants of JASDEC will range from securities firms, securities finance companies, banks, other financial institutions, stoct exchanges and to JSCC, etc. Of course, foreign-based securities firms and banks will be also included. Unfortunately. the start of JASDBC is far behind the schedule initially projected. We expect that it will take place by early October in 1991. While preparatory work is 1till under way. JSCC is making every effort to streamline the current 1y1tea. Extension of its custodial services to trust bant1 fro this coming November is one example. I. Development of International Linkage of TSE/JSCC 1. In the wave of 1lobalization. the TSE has become increasingly involved in various aspects of cross-border trades. A 100d example of thi1 can be found in the growing number of foreign equities which have come to be listed on the TSE. In 1984, there were merely 11 issues from 2 7 -
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countries. Today, by sharp contrast, the TSE foreign listings have reached more than 100 issues from 9 countries. In order to cope with the settlement of these trades on the TSE, JSCC has expanded its linkages overseas. While settlement takes place entirely on the books of JSCC, the underlying shares are held under the custody of overseas organizations, such as the International Stock Exchange in London for British shares, the.Canadian Depository for Securities .(CDS) for Canadian shares, Balsa de Madrid for Spanish shares, and the Deutcher Auslandskassenverein (AKV) for German shares. JSCC recently finalized a similar discussion with International Securities Clearing Corporation (ISCC), the wholly owned subsidiary of NSCC. A link with ISCC will enable JSCC to keep in an account at DTC the TSE-listed American shares which are now under the separate custody of ~everal custodian banks in New York. Once the JSCC/ISCC project is fully implemented, all of the American shares traded on the TSE --today they represent about 10, of our foreign listings --will be held collectively in the DTC's vault. This will greatly reduce redundancy in our custodian operations and will therefore streamline the settlement services of JSCC. The operation will start early next week. 2. Conversely, it is also the case that Japanese shares have become traded internationally. In this area, JSCC has been offering its own 1ervice1. SiL~e 1978, JSCC has been holding the Japanese 1hare1 listed on the Paris Bourse on behalf of S!COVAM, the French central depository, and since 1986, the Japanese shares listed on the Amsterdam Stock Exchange (ASE) on behalf of Nominee Amsterdam Stock Exchange (NASE), ASE's clearing organization for the ASAS system. Today we are holding 20 issues for SICOVAM and 4 for NASE. In addition, our discus~ions with ISCC are also focusing on plans for JSCC to hold Japanese securities on behalf of ISCC. 3. In a way, our international linkages so far are chiefly meant for the "domestic" market for foreign equities. This may be the simplest style of linkage, but we firmly believe -8 -
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in its potential for future development. The greatest merit of these linkages between such central clearing organizations and depositories is that they help us to facilitate efficient access to the other markets settlement services for the securities concerned. This enables all of us to move our positions back and forth on the central books of one organization in the home market. -9-
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2. Settlement Schedule of "regular way T Trade. Trade Comparison T+l: Error Correction T+2: Settlement Instruction and Pre-Advice T+3: Settlement
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3. Set.tleaent Necbanisa bit to s account or de i pb wsical deli verr Hill of I, Member Firm A a a/c [-1,000 1br1.1 .... ~er paraeu(I) 1llr1. .. 1, I I seller JSCC A a/c -1,000 book transfer 1brs. order i execution 1,000 1brs. .. TSE ,I (clearln& banks) \. pa,aent(I) 8 a/c + 1,000 shrs. order e1ecut1on 1,000 shrs .... payaent(I) credit to its account or phrsical deli ve ry Member Firm B b a/c ... / + 1,000 shrs. ,,-,~ pa,aent(V) buri of I I b I buyer r s.
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4. Structure of International Linkage Forei1n Shares Listed on TSE ( luuiI Coapaa, I Clearl11 Or1a1l&atio1 or DoPo1horr Forel11 eo.u,, ,,... or Catodr Baik DePollt C111tocllan ------------------~-~ 11111 II I II,, _________ __ Japaa J S C C Ir DePoll t T S E !.!Jirs Depo1i t 8e1efit'lal Owaers Japanese Shares Listed on Foreign Exchange Foreign Country Japan Beneficial Owners Deposit "II Participants of the Clearing Organiiation or Depository Deposit J/ Clearing Organiiation or Depository Depo~i L .J/ ( J S C CI Custodian f Issuing Coapany )
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INTERNATIONAL CUSTODY LINKAGE OF JSCC
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PROCEDURES TO WITHDRAW SHARE CERTIFICATES FOR FOREIGN SHARES LISTED ON TSE FOREIGN COUNTRY 4') Notice of completion of delivery 1 ') Notice to accept delivery PARTICIPANT (Member Firm) JNlAN 3) Delivery 1} Withdrawal instruction 5) Notice of comoletion of delive 2) withdrawal instruction (Telex) -CUSTODIAN JSCC 4) Notice of completion of delivery (Telex)
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PROCEDURES TO DEPOSIT SHARE CERTIFICATES FOR FOREIGN SHARES LISTED ON TSE FOREIGN COUNTRY 1 ') lnstsruction of delivery JAPAN PARTICIPANT (Member Firm) 2) Delivery 1) Notice to deposit 4) Notice of completion of deposit CUSTODIAN JSCC J) Notice of completion of deposi.t (Telex)
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II II
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FOREIGN COUNTRY CLEARING SYSTEM FOf~ FORIEGN SHARES LISTLD ON TSf. TAX Issuing Company Oividlnd1 -----------------4 Custodian lhldlndlafterkl NolicH Shareholder Dividends Paying Agedt JSCC ,-... I Service Ageht JAPAN Oivkllndl I n Participants (Member Firm~) Beneficial L----------------,~IOwners U1I of Beneficial Owners Nolice6 In JaponeN
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SW1111ary of interviews performed at Tokyo Stock Exchange on March a, 1989. Attending from the Tokyo Stock Exchange were Mr. Hamana, Mr. Shimizu, Mr. Miyahara and Mr Katoh of JSCC. These notes serve as additional information for the docWDent entitled "Settlement System of Tokyo Stock Exchange --its mechanism and development currently under way--", prepared by Toshitsugu Shimizu, Senior Assistant Manager, Clearing Administration Department, Tokyo Stock Exchange, October 5, 1988. IntnmDt Tr PD tb TAQA ltoek IXGbua Equities, corporate and government bonds, us bonds (as well as other foreign bonds) denominated in Yen, and foreign currency denominated bonds are all traded on the Tokyo Stock Exchange, as well as TOPIX futures and government futures. The foreign bond issues denominated in foreign currency are settled on the TSE in Yen. There are 112 foreign equity issues, from 10 countries (as of the end of March, 1989), listed on the Tokyo Stock Exchange. These issues are held in custody in the country from which they are issued. For government bonds, the settl-nt of block transactions are decided between buyer and seller. For a transaction entered into before the 20th of the aonth, settl-nt date isl calendar month later. If, however, '"the trade is entered into after the 20th day of the onth, an extra 10 days is allowed for settlement, due to high volWDe. Settl-nt of small transactions are done on T+J. For Futures: TOPIX trades are settled on the third business day after the second Friday of the aonths of March, June, September and December. Government Futures are settled on the 20th <>f the months of the same months. c1aving 1 All 114 aellt>ers of tbe Tokyo Stock Exchange are clearing members of JSCC as well, and ut ,ave a clearing office in Tokyo. The 8 trust banlca are associate members. Associate mem ber are not muabers of TSE, but use the custodian function of JSCC for their unag-ent of funds. JSCC never takes counter-party position on TSE trades. However, the TSI has a guarantee fund (as a self-regulatory facility). For payment, the TSE uintains its relationships with its members, not the banks at which the members hold their accounts. For payments, aellt)ers of the TSE must hold their accounts at one of 13 clearing banka designated by the TSE. Money is settled by means of bank checks ~hich are cashed next day. The exchange receives all monies in before it rel any funds out.
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The TSE aonitor the financial poaition of each member on a weekly baaia. Separation of member fund fro customer runds is required. MOP aonitora exchange aember positions on the exchange. TSE accepts aa aargin, blue chip aecuriti, government bond, municipal bond and beneficiary certificates or investment trust. Th TSE does not accept letters of credit. The Japan Securities Financial Corporation offers securities lending ser vices. on T+l TCS (Toabo Coaputer Syat-, a aubaidiary of TSE) creates ttlnt data. A bard-copy is nt to JSCC which dis tributes th information to the aeat>er finu tor settlement. Uu For the efficiency and risk reduction in settlement, TSE would like to see th phyaical mov-nt of aecuriti reduced, and would like to encourage i-obilization. Standardization in co-unication through a communication format Yti desirable. A standardized format system, such aa ISIN i welc011e. Heavy foreign investment in Tokyo fro New York or London leave the TSE ember' poaition expoaed to more risk. The com petitive presaur fro thi urketplace force brokers to accept orders without guarantee of ttl-nt. aua;tion Securities should be immobilized in the home market, similar to the JSCC/SICOVAM arrangement, where JSCC is the custodian tor the 25 listed stocks of Japan companies on the Paris Bourse. ADRs should be eliainated, due to the coat and time loss relating to the isauance and cancellation of the depository receipt, aa well aa the inconvertibility of the depoaitory receipts in other urketa. Inatead, the development of international linkage between central clearing organization and depos itories will pave the way for original share trading under a book-entry enviromaent. More bilateral agr-nta between depositories/clearing organization should be encouraged, and aultilateral agreements might be desirable. ru,t,ar fpr Claripg IP4 tt;l-pt ip ,tgap JASDEC is scheduled to go live in the third quarter of 1991. It i envisioned that JSCC and JASDEC will have a aimilar type of relationabip as do NSCC and DTC. Money mov-nt will remain through the TSI.
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MENOIWmUK AUSTllACLEAll LIMITED BY DITH USSIIElt KARAGIRG DIUCTOR AUSTliCLEAll JULY 5, 1988 This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology, Sept. 1990. This do~ument does not necessarilt reflect the analytical findings of OTA, its Advisory Panel, or its Technology Assessment Board.
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:ROM CATE SUBJ'ECT WHY AUSTRACLEAR? MANAGING DIRECTOR 5 JULY 1988 AUSTRACLEAR LIMITED REF: 880507K1 Almost niqhtly, the T/V Financial News segment shows scenes of frenetic tradinq in one of the leadinq Money Market dealinq rooms. Dealers with telephones qlued to their ears are captured consummating deals in foreign currencies, securities and interest rates with counterparties located in every corner of the world. The dealing room is where the action is, the deal is finalised at this stage and it is left to the "back office" to arrange for the settlement of the deal and transfer of the securities between the parties. Reuters, Telerate and others have devised elaborate electronic screen dealing systems which greatly enhanced the dealers capacity to negotiate with people and countries previously outside their reach. Naturally, the volume of deals has skyrocketed and this has placed enormous pressure on the "back office" settlement people. Some six years ago, the plight of the "back off ice" in Australia was becoming desperate and the Financial Market collectively decided to "throw money into the hat" to enable a Clearing System to be developed to cater for the requirements of the "back office" people from this was born "Austraclear". WHO ARE THE MEMBERS? Meabership of Austraclear is comprised of the Banks, Merchant Banks, Life Offices, Trustee Companies and other leading industrial and financial corporations. AUSTRACLEAR'S AIM 1) PROVISION or AN ELECTRONIC SCOREBOARD 2) IMMOBILISATION OF MONEY MARKET SECURITIES. The aim of Austraclear is to provide the "back office" -now euphemistically known as the "Treasury Operations Department" with an electronic scoreboard on which all Financial Money Market transactions are recorded. -1 -
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.. .:,"' 4 4 LIABILITY INSURANCE COVER 5 July 1988 To provide a facility for the immobilisation and safekeepinq of securities -thus eliminating the physical transfer of securities from one owner to another. ~HAT HAS BEEN ACHIEVED SO FAR? 1. Electronic Scoreboard Deals, in the followinq, can now be recorded on the Electronic Scoreboard: a) Trades in: b) Transfer of: Bank Accepted Bills of Exchanqe Bank Endorsed Bills of Exchanqe Bank Certificates of Deposit Promissory Notes Non Bank Bills of Exchange Federal Government Treasury Notes Semi-Government Securities Forward Deliverable Bill Aqreements Forward Interest Rate Agreements. Securities -by sale and purchase. Securities -by way of Pledqe Funds. 2. Custodianship of Securities Members' securities are held in secure vaults, the system allows for: a) The Lodqement of Securities b) The Uplift of Securities c) The advice to Banks and payment by them of maturinq securities. HOW DOES THE ELECTRONIC SCOREBOARD AND CUSTODIANSHIP or SECURITIES WORK? Electronic Scoreboard The followinq simile may clarify Austraclear's function as an "Electronic Scoreboard". Imaqine, if you would, an electronic baseball scoreboard. Home runs, strikes and inninqs are aqreed by the umpires and teams and this information is used by the media and spectators to determine the state of play. The scoreboard does not record such thinqs as dropped catches, or misfields, it is only concerned with statistics aqreed by the umpires and players concerned. -2 -
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.,111111111811 'LIABILITY INSURANCE COVER 5 July 1988 Likewise, Austraclear 1 not concerned Mith the hiccups in trading which occur betNeen ita members. It records only those transactions which are electronically agreed by both parties to a deal. The information on the scoreboard is available to the members !players) and the final scores ea~h day are made available to the Banks Nho conduct bank accounts for the members. Austraclear is not a Bank and does not conduct bank accounts on behalf of members, it is merely a scoreboard on Nhich the members record their transactions. The Bank authorise the payment/receipt of funds between themselves, the safeguard for members is that they independently authorise their Banks to meet the "score" sent throuqh at the "close of play" from the Austraclear scoreboard. Unlike a "Futures Exchange" Clearing House, Austraclear does not quarantee performance of the deals between its members, nor does it make "depoait and "ar9in" call to keep "forward" deals )n line with market. Austraclear has been established for the use of the "wholesale" market only. Members accept their ONn counterparty risks when dealing with each other. The size of deals is larqe, approximately SM5, and this is the system's qreatest safeguard as any discrepancy at the end of the day is patently obvious to the individual meabers and their bankers (there Mould not be many of our members with sufficient overniqht overdraft facilities to meet a shortfall, planned or otherwise, of SM5). Quite obviously, Austraclear's major concern is to ensure that unauthorised "scorers" are prevented from manipulating or 1n any other way interferinq with the scoreboard. This is the area which has received the greatest concentration of effort in the past 12 months. It has resulted in the elimination of telex and facsimile instructions from members and the introduction of the "personal identification smart card" for all members not communicatinq with the system via "dedicated Teleco11 lines". In my opinion, the Austraclear communication network is now totally secure. Custodianship of Securities It is the ultimate aim of most financial markets worldwide to eliminate "paper securities". Paper securities, to settle trade transactions, have their origins in ancient civilisations and their form has not chanqed substantially over the a9ea. Austraclear has introduced to Australia a "half way house", -paper securities have now been withdrawn from the marketplace and immobilised in Austraclear's vaults deals involvinq the sale/purchase and settler 4nt of deals involvinq these securities are now carried out electronically via computer networks. The staqe has now been reached where "paper securitiea" are virtually untouched by anyone but the iasuers of the securities and Austraclear. Also, the denomination of individual securities ha increased siqnificantly. -3 -
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LIABILITY INSURANCE COVER 5 July 1988 When Austraclear coaaenced operations, secur1t1es had an avera;e face value of 1100,000, these days the avera;e deal between members 1s SM5 and 1nd1v1dual secur1t1es now have face values between S500.000 and SM5. All securities held by Austraclear are prominently stamped "This Security has been lodqed for safekeep1nq 1n the Austraclear System". The market has been advised that if a security bear1n9 this stamp comes into its hands and there is any doubt whatsoever as to its authent1citythen a phone call to Austraclear will immediately determine whether the security has been ;enu1nely released by the depository. Austraclear has always believed that it would be virtually impossible to obtain value for a security ille9ally removed from the vaults, as the professional market would not touch paper ~nless its parenta9e has been authenticated. Now that the securities are substantially hi;her in value and are distinctly stamped, I believe that the chances of successful conversion are even more remote. WHAT OF THE FUTURE? 1. Reserve Bank Th new Di9ital System, due to be introduced in early 1989. will. subject to acceptance test1n9, be "licensed" to the Reserve Bank of Australia. The Bank will have its own computers and be responsible for access to them. 2. Foreign !xchanqe Transactions (FX) This is an extreaely coaplex isaue which 1 under the spotlight worldwide. Th reconciliation and settleaent of FX transactions is creating huge probleas for our members and we are settinq up an Exploratory Coaaittee to ascertain whether the Austraclear Scoreboard can be used to alleviate the position. There does not appear to be an early solution in siqht. 3. New Zealand The Board of Directors views New Zealand as a natural extension to the Austraclear System. This opinion is not necessarily held by our Kiwi cousins but dialo;ue will be entered into in the coming year with a view to arriv1n9 at a communality of approach. 4. Equity Clearinq Australia is reputed to have one of the world's worst systems for the transfer of stocks and shares. Many of our members would like to see th lustraclear Scoreboard used to facilitate transfers. It is a hiqhly political subject in this country but we will be investi9atinq whether there is a place for Austraclear in this particular market. You would be aware that Euroclear has taken an active role in the clearance of equities in the past two years. -4 -
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AUSTL\CLBll LIMITED PAPQ PREPllED BY g.q. USSRD MANAGING DIRECTOR:-A) MAJOR ACTIVITY 8) TD SYSTEM C) BLBCftONIC SECURITY PREMISES. wog ACTIVITY Austraclear .. intaina a facility known as the systea for the safe c:uatody of c:uritie and the recordinq of and the facilitation of tbe Settleaent of Transactions between Members -(of tb systea). To carry out this activity Austraclear aaintains depositories in each of the aainland State Capitals. Ancillary to and linked with this activity Austraclear aaintains a national coaaunications network linked to a central coaputer site in Sydney, for tbe recording, settling and transfer of ownership of negotiable and, certain governaent and seai governaent registered securities. With tbe exception of the Perth depository, which is currently -intained by Perpetual.Truatees W.A. Ltd on an agency basis, the depositories are staffed and controlled by Austraclear Personnel. Siailarlr, except for certain specialist Software Consultants, the coaputer Operator and Software Developaent Staff are Autraclear Personnel. Th following paraphr the operation of the Austraclear Srt-. It is written in Layaana teras and is not to be taken as in ur war replacing or varying the official systea perating and Procedures Nanua1. IID'II DRQSIJ' or SBcugITIBS (A) m or IICQIITIIS LOQGIQ IN TRI DBPOSITOllIIS 2, QGOTIMLI JlfflQNINTS (a) lank Accepted 1111 of Exchange either blank endored or payable to bearer. (b) lank BDdorsed 1111 of Exchange. Cc) Non-lank Accepted Billa of lxchange either blank endored or payable to bearer. (d) Bank issued Negotiable Certificates of Deposit. Ce) Proaiory Not either payable to bearer or blank endored. -1 -
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2. Cf) Other types of n99otiabl instruaents. vbicb are classified by Auatraclear as instnaaents vhicb have general acceptance in the professional aarket. Basically tbese are inatnmenta vbich bear the characteristics of a proaiasory Note but do not fully coaply with tbe requir-nta of a Proaissory Note but which, bower. are acceptable as one n- paper by the aarket. Acceptance of th securities requires loard approal. lllGI~TPIP GQVRNNPT i SDII GQVANNINT SIMITIES Ca) Co11110nwealth of Australia Treasury Notes. Cb) Securities issued by Coaaonvealtb State Governaent instruaentaliti On receipt, all r99iatered securities are registered into the n ... of Austraclear Liaitecl aa Noai~ for tbe beneficial owner. (I) PTIX or SICUgITIIS INTO DI SYSTBN 1. ACTION IJ ANIA (A) Nellbera input details of the securities through a terainal in their office and uaing tbe detail held on screen generate a odgeMnt report (in dup) wbicb is deliered to Auatraclear with tbe aecuritiea. Tb report, wbich are signed by the aeaber autboriaed aipatoriea, a-red UDder a signing authority iaaued to Auatraclear in teraa of our &991&1atiou atate certify that tbe documents deac:ribed bereon (Auatraclear lhlllber of securities beiag lod9ed) are being lod9ed in accordance with Regulation 6.J. R9911lation 6.l stat Neaber lod9ing a Paper Security in tbe Systea aball thereby warrant that: 1. Such Security and the aignatures of all parties appearinQ thereon are 9enuine: 2. Tb Nellber baa or baa a ri9ht to pa good and unencuabered title to aucb Security: l. Such Security i duly drawn, accepted or in~orsed aa appears on it face: t. Such Security baa not been intentionally cancelled bra bolder thereof: 5. Such Security baa not, without tbe aaaent of all parti liable thereon been aaterially altered witbin tbe ning of Section 69 of the Act and: 2 -
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I. Sucb llellbor ia liable for anf apparent or concealed defects coacerninv aucb Security no aatter wbea sucb defects are diacoered. (I) At tbe tiae of entry tbe lft generates an Autraclear NWlber for eacb line of aecurities being lodved, tbe -ber record thia nuaber on the top ri9btband corner of eacb aecuritf and thia beco tbe official ideatifyia9 nuaber within the ayat-froa tbre oa. Tile ....,_r also staapa each aecuritf with tbe followin9 elldorae .. at prior to delirinv tbea to tbeir local Austraclear depoaitory. TBIS sscuarn BAS 11111 LODGID roa SUIICDPDIG DI TD AUSftACLSll STSTEN .:>TB: Auatraclear ill oalr accept aecuritiea payable in the central luaiaeaa Diatrict of tbe citiea in wbicb the coapaay baa officea. l 2 I ACTIQII IJ AQIDACJ:111 PROS ITQIJ OD preenutioa of aecuritie and Lodg ... nt Report (in duplicate) tbe Auatraclear ataff will: 1. Dasure tllat tbe R99Qlatioa 6.l certificate baa been aiped. 2. -ure tlaat tile details of tbe aecuritiea reflect bat baa been -tr.C tile lodg-at re1Nrt iacludi119 tbe nuaber of aecariti a.tiDG lod9ed aDd tile face alue. l. In a iDteria receipt (OD tile ....,_r's duplicate copy of tile Lodeat Reportl. Tia aecuritie are tllea passed to tbe lONial Clerk for recordi119. C. Tile lowiDI clerk recorda brief detail of tile Lod9e .. at Report la a Lod9-at R-.,iater. Tile aecuriti are tbea aabjected to detailed clleckiDG ia tenaa of Section D (II of tile operati119 aaaual. 5. OIi c:aapletioa of tile pbpical cbecu -Auatraclear Coaputer Data IDtr, Clerk re-tera key detail of tbe aecaritie. If tb detail electronically aatcb tbe .. aber'a entry tbe curitiea are automatically entered iDtO tbe 8J'St-. 6. OD completion of tbe coaputer coafiraatioa eacb line of curiti i placed in a clear plastic enlope together witb tbe 1od9e .. at report and banded to tbe Custodian for counting and acceptance. 7. All aecuritie lod9ed for tbe daJ' are reconciled to tbe Coaputer Record bf tbe Cutodian -4 beld in tbe ult oeraigbt. OD tbe followi119 aorning approxiaatlJ' 10 percent of tile lin are lcted randoaly by tbe Internal Auditor -4 ubjected to a detailed cbeck. -l -
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I. rollOlriDG tlae audit. the face and rr of the firt ecaritr in each line i recorded on ideo tape and tbe eeuritie are tben filed in the ult in aaturitf date order. Tia aeeuritiea tben re .. in unditurbed until -turitr or uplift froa the Srt-. TIie ecuritie held in tbe ult are ubject to pot checu by tbe lxtenaal Auditora. Touch lo and Co. who couat UICI check approxi .. telr 10, of total tock beld in uar l aoatb period. At the end of each quarter Touch lo Co carry out total check and count of all curiti VPLiffDIG or SICQIIJIIS nocsuuas ,oa UPLiffDIG sscuamss n011 STSTIN Should a current owner wiah to withdraw curiti fro the Yt-the followi119 procedure take place. J 11 Ql-19911 6CUOI IX NISlll.8 Cl) Detail of tbe ecuritie to be uplifted are keyed iato tbe computer. Tllia baa tbe effect of: Ca) PrNai119 tbe security so that no trnction. otber tbaa a ubaequeat deletion bf tbe IHllber, cua take place. Cb) GeaeratiDG a computer adice to Auatraclear t.llat tbe ---r require to uplift the aecurity. C2) Tb .. r tbeD priata off aa uplift requet fora in dlicate. wllicb i iped in accorduce with tbe r ai911i .. autlloritr, and taken to Auatraclear bF Illa Alltlloriaecl courier to collect the docWNnt. a> ICTIQI U WITUCJ:111 Cl) O.C. eacb bCMar tbe Yault Cuatodiaa priat off a l'ellOrt 91 detail of uplift requeated bf aaabera. C2) !lie CU.todiua recorda detail of tbe uplift reciuet la tbe Uplift aegtater aad witbdr the aecuritiea froa ~b ult. Cl) !lie ecuritiea are banded to a Data IDtrr Clerk who kep la .. tail of tlle aecuritie to be uplifted. If tbe detail iaput -tcb tbe Maber entry, tbe uplift i recorclecl a finalied witbin the coaputer. c) TIie Data SDtry Clerk tben pa tbe aecuritie to a cbecki119 officer wbo rifle: Cal Tbat tbe ecuritie are entered in tbe 4Uplift aeeiater. Cb) Tbat tb aecuriti are, in fact, tboe recaueatecl by tbe Mllber. --~ -----_ __!!_~~-~/J~l ___________
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(5) TIie aecuriti are then held in a secure fire proof cabinet pendin9 collection bf the abers courier. (6) Vben the -uers courier presents the uplift request the Counter Clerk: (a) Verifies the signatures on the uplift request a9ainat our records. (b) Withdraws tbe securities fro the fire proof cabinet and bands tb to the courier aqainst written receipt. (Note: vbere standinq autboritr is not held for tbe courier to take deliery of the securities a speciaen of his sipature is provided on the uplift request by tbe -llber). (7) Tb receipted uplift requests are held in the day cabinet until tbe end of the dar when they are reconciled with tbe uplift R99ister and the p1ift Transaction Report generated by the coaputer. (I) OD t.lae foll0tri119 day the Internal Auditor checks all uplifts. (9) If aecuritiea are not collected on tbe day requested tlle7 are recorded in a aeldor Re9iter and held in t.lae ult oernigbt for production to the lnteraal Auditor. 111mm or sgugmu u -o-.oiacr part of ita aerYice to tile _..,_rs. Austraclear IIIMlertaku to ,reat -turing unplecl9ed aecuriti to the paying Mak AD Aaaoc:iate .. llber not -intainin9 a noainated baak accoaat -t ~~lift tb aecuriti and arran9e bis own co&lectiN. (1) Olle ... -prior to aaturitJ date tb Internal Auditor rifi that aecuriti -turin9 en days hence are accouated for. (2) Tbr-daya prior to a aaturitJ date the rt atops aant:era lod4ri119 aecuriti rith that aaturity date. (l) ID t.lae afternoon of the day prior to aaturity. the -turiti for the following day are ataaped with a diatincti Auatraclear red croaaing atup. witbclrawa fro the vault and placed in the fire proof aecure cal:tinet under dual control. -~-
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(4) On maturity day the computer system matures all securities, not subject to pledqe and produces the following reports; (a) Detailed listing of all Bank Accepted Bills and Bank Issued Certificates of Deposit for each bank. (b) Detailed listing of all Promissory Notes, Non Bank Accepted Bills and other market instrW1ents payable at banks. (c) Listing with disposal details of all securities not payable at a bank. (d) Listing of all securities owned by the Aociate Meabers who do not maintain bank accounts. (e) Litinq of all securities remaining pledqed at close of busines the previous evening. (f) Reconciliation totals. (5) At tbe ti the coaputer aatures the securities it generate an advice to each of the paying banks indicating the securities that will be preented by Austraclear. (6) At a.JO aa each day the Autraclear depository staff .. tch the aaturing securities to the bank reports. Tb aec:uritie are then delivered to the paying bank and reled againt receipt. Th report accoapuying the curiti contain the following notation: Tb Bills/Not are prnted for payaent or answer pl phone th Office Supervisor at AUSTRACL&All LTD on 235 0277 by no later than 3 p.a. if payaent ha not been confiraed through th syatea by that ti (7) ProgrilY during the day the paying bank confirm payment of the paper payable at their organisation. Thi confinaation cauaes the syste to generate an i-ediate payment, advice and results in the paying banks crediting the aeaber oWDing tbe securities. (I) lecuriti not payable at a bank are presented to the paying agent's officeunder coar of a letter fro Auatraclear, signed by two authorised signing officer, requesting iasue of a cheque (crossed not nqotiable) in favour of the beneficial owner.
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(9) (10) (11) (12) The cheque is delivered by our courier to the beneficial owner and released aqainst receipt. Where the owner is a resident interstate the cheque is paid into the local branch of the beneficial owners bank with a request that the funds be Telegraphed to the branch at which the owners account is maintained. Maturing securities subject to pledge are held to the order of the pledgee. If the pledge, is lifted during the day the securities are held for the beneficial owner. It is the responsibility of the pledgee or benefical owner, before mentioned, to collect the securities from Austraclear and present the for payment. Siailarly, Associate Members without bank accounts are required to collect securities from Austraclear and attend to their maturity. The Maturity clerk reconciles the maturities each day. On the following day the Internal Auditor verifies that all aaturities are accounted for. -1. 2. A formalised procedure is in place for handling dishonoured securities Where a paying bank inadvertently omits to pay aaturities before closure of the system, it is the banks obligation to pay the proceeds (outside of the system) direct to the owners bankers. TRADING SICURITIBS (A) Sellers operation A seller aay electronically transfer securities to a buyer either against payaent or free of payaent(external settlement). Payaent is usually on an Bnd Of Day basis but "immediate" payment can be obtained through the banking system if requested. To settle a trade through the systea the seller imputs details of the transaction and the securities involved. On iAput the ecurities are blocked off until the trade i~ cons111111ated by the buyer. The seller can delete, if necessary, prior to confiraation by the buyer. u.,1 -_7_______________
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(8) BUYERS ACTION The buyer checks details of the transaction and the securities involved, and if in agreement confirms the deal through his screen. This: (a) Results in the transfer of the securities from the sellers to the buyers portfolio. (b) Debits the buyers inter day account and credits the sellers inter day account. These debits and credits are transfered to the respective banks at End Of Day. NOTE I When a seller requests the buyer to provide i-ediate bank funds ,the buyer if in agreement generates a message to his bank requesting the funds to be transfered to the sellers bank account. The transaction remains in escrow and is not consummated until the buyers bank has provided the funds. II Where the buyer disagrees with the deal or security details entered by the seller, he impute what he beleives are the correct details. These new details are displayed on the seller screen and the transaction will not proceed until the seller amends bis original input. PLBDGING SBCURITIBS Nellbers can borrow funds through the system by pledging their securities to the lenders. Pledging of securities is carried out in a similar manner to the double aided transactions utilised in the settling of trades, tbe pledged securities are shown in the pledgors portfolio with a pledge recorded against them and in the pledgees records as securities pledged to hia. once a security i pledged no other dealings may be carried out with it until tbe pledge has been lifted by both the pledgor and pledgee. A aellber wishing to lift a pledge inputs details of the securities pledged. Provided the pledgee agrees he commits his confirmation and the securities revert to the pledgor. o\_ -----~-------~~---------'.____"'---' _______________
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f_w.n>S TRANSFERS Austraclear has recently introduced a facility which enables members to record funds transfers on the "Electronic Scoreboard". No transfer occurs until the banks receive information from the score Board" at the end of day. Provided the lender aqrees vi th thCl figure appearing on the "Score Board" his banker transfers the funds to the borrowers bank account. All funds transfers are on an "End Of Day" basis -Immediate Funds Transfers are not permitted. FORWARD TRADES (DELIVERY.TRANSACTION) -RECORDING & SETTLINq The system provides members with a facility to record the future sale of a secuirty to a nominated member. Each party enters the forward trade as it occurs and the system automatically matches up both the forward seller and buyer. On the day prior to settlement "sellinq" members nominate from their portfolio the securities which are to be sold to the buyer the next day. -On settlement day the securities are automatically transfered fro the sellers portfolios to the buyers portfolios. Payment takes place at the "End Of Day~ Austraclear advise their respective bankers of the accounts to be debited and credited. Note Associate Mellbers are not permitted to participate in the forward trade syste fORWAltD RATB AGRBBMBnS SETTLEMENTS (PRA) By using Forward Rate Agreement members can lock in an interest rate on a transaction for a defined future period. Austraclear provides aellbers with a real time system which enables the to record their PRA transactions and facilitates the settleaent of those transactions on the nominated settlement date. Once aqain the saae principle applies -one party enters the transaction into the system and if confirmed by the counterparty the deal is recorded on the electronic score board. On settleaent day the interest rate prevailing that day is entered into the system. The parties to the deal are matched out aqainst this rate and the difference i.e. profit or loss is debi-ted or credited to the parties to the deal.
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BANlt CLEARANCE SYSTEM Austraclear does NOT conduct bank accounts nor does it interface with the banking system. It maintains internal score sheets which record the cash contents of members transactions throughout the day. At the end of the day the balance appearing on the score sheets are transmitted to the members banks. After checking their clients position each Bank agrees to either accept or reject the members balances. Banks pass their own internal entries from the information received from Austraclear. Rules ln relation to ~pe use of Bank Accounts for Members Cash Settlement (1) Bach Full Member must nominate one bank account to which his cash transactions are cleared. (2) Associate Members may nominate a bank account to which his cash transactions are cleared. (3) Associate Members who do not nominate a bank account may not participate in the cash clearance and must uplift and collect the proceeds of their maturing securities. (4) Mellbers Y noainate additional bank accounts to which their transactions may be cleared however. (5) Where a Meaber nominates more than one bank account to wbich bis funds may be cleared he must nominate at least one of tbese accounts a~ a default account for those functions wbicb involve cash transactions. (6) Where securities are purchased for I-ediate settlement tbe bapk of tbe.buyer receives a request via his screen to confira tbat he will provide funds to aeet the transaction. Unless that bank provides confiraation via its screen the transactions will not proceed. Note this bank confiraation is irrevocable. (7) After a buyers~~~~ has confirmed an imaediate transaction the system generates a report to the sellers bank confiraing that the buyer's bank has input an irrevocable confirmation of his agreement to pay the purchase price. The _s_ellers_ bank may now make funds available to the seller. (8) Where a aeaber buys "Bnd of Day" and wishes to uplift the securities or sell on an "external settlement" basis, he aust first have his bank allocate confiraed funds equivalent to the purchase price before the transaction. aay proceed. This ensures that no security can leave the System unless it has been paid for with "Cleared Funds" by the uplifting member.
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IRTD.VIEV VITH K.V. CHAN THE STOCK UCBANGE or BONG KONG, LTD. BY BABERS TllUST COMPANY NEV YORIC OR 'l'IIE rtmJU CLEAllING AND SETTLEMENT SYSTEM or THE STOCK EXCHANGE or HONG XONG KAI.CH 15, 1989 This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securftfes Markets and Information TechnoTogy, Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or its Technology Asse~sment Board.
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Interview on March 15, 1989 Attending: K. W. Chan, The Stock Exchange of Hong Kong Ltd. Giulia Fitzpatrick, Bankers Trust Company New York Topic : The future clearing and settlement system of the Stock Exchange of Hong Kong Introduction The Stock Exchange of Hong Kong's clearing and settlement system is in a ~riod of transition. The clearinp and settlement (c&s) of stock transactions is primarily still paper based; that is, delivery o bank check against paper script or stock certificate. In the best of times, a paper-based system adds significant time and costs to the settlement of stock transactions. Wlien a crisis occurs, however, paper ~tems break down and it can take weeks to settle outstanding transactions. After the 1987 October crash Hong Kong experienced such a break-down of its settlement system. The exchanse ended up closing for four days due in part to the back log of settlements. This resulted in increased transaction costs and risks to market _participants as brokers and investors tried to account for their outstanding market positions. In reseonse to the c&s problems ~sed during the crash, the Stock Exchange took the initiative to change the c&s system. The exchange invited the major banks in llong Kong to join in the effort of creating a committee to recommend specific changes to make the c&s process more automated, efficient, and risk free. I The projected date for full implementation of the new c&s system is 2nd quarter 1991. Overall, the proposed changes to securities clearance and settlement are still under consideration. Some features of tlie new system have been specified while others, such as the creation of a share transfer system, continue to be studie
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Ccadn1 Hoose In the proposed Clearing House structure, all stock exchange members will also become clearing members. Currently the exchange has approximately 500 broking firms. Custodians may also become members of the clearing house. All clearing members must initially have a pbySical presence in Hong Kong. The cl~ house will be a non-for-profit entity operating independently from the stock exchange. It will be owned 50% by the stock excbange and 50% by 5 banks in Hong Kong; Bank of China, Hongkong & Shangllai Banking Corporation, Standard Charter Baruc, Bank of East Asia, and Hang Seng Bank: While it is to early to discuu the source of clearing house revenues, one likely option will be pricing on a per transaction basis. The clearing house will have a guarantee fund for guaranteeing the settlement of all trades. The indus~ participants or clearing members will contribute establish the fund. The size of the fund IS still under consideration. The fund will be reviewed regularly for adequacy. In addition to the safety mechanism provided by the fund, the clearing house will take the counterparty position to each member's trades. This serves to ensure the full faith in the clearing house by the members. Currently there are no margin rules at the stock exchange. In the future the exchange will monitor each member's daily trades for signs of overexposure, while the clearing house will monitor c&s positions through established risk management procedures. CJeadn1 or Matchina The new settlement period for all instruments will be either at Trade day + 2 or T + 3 days, up from the current T + 1. (The exact settlement time is still under consideration.) From the time a trade occurs, the selling broker will have 15 minutes to enter the trade data into the exchange's computer system. At 4:05~m each day the exchange will send the day's trade data via computer to the clearing house s system. Under the current system, the responsibility of 'matching' or verifying the trade rests with the buying broker. This procedure will be kept with the new c&s system. The buying broker can inquire about the day's trades from 6pm to 8pm that da.Y through an on-line terminal. The broker can then repair the trade information on-line directly on the clearing house's system if there are any discrepancies between his information and the clearing house's. If no changes are made by the tiroker at the end of trade date, the trade is deemed in order and will be processed for settlement overnight in a computer batch-run. By noon on T + 1 the previous day's trades will be locked in. After that trades can only be reversed or changed with the approval of the stock exchange. In the event that the selling broker does not agree with the cbanges to the trade information made by the buying broker, the two parties must seek arbitration through the exchange. -2-
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Scuieroent While the exact share title transfer mechanism has not been defined yet, the fundamental elements of the settlement will be based on existing international settlement models. For example, the clearing house will guarantee performance by muming the counterparty position to every trade. Should a member fail to meet his obligations then the clearing house can unwind his positions and, under extreme circumstances, draw upon the resources of the guarantee fund to meet the member's outstanding obligations. The clearing house intends to maintain a delivery versus payment system and make it all electronic or in 'book-entry' form. The clearing house plans to effect simultaneous cash and securities settlement for its members. That is, the clearing house will have members settle their obligations through cash and securities accounts helased t:ra
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c) Of interest to !!l8JlY people is the potential effect of 1997 on the operations and planning at the Stock Exchange of Hong Kong. 1997, however, is not be!DI taken into consider ation in planning for the new clearing ~d settlement systems. While there will undoubtedly be chqes when Hong Kong returns under the rule of mainland China, these should not effect the efficient settlement of securities transactions. --4-
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IIITDVI& VITB IT MIDIS TRUST COMPANY IIAICB 22, 1989 This contractor document was prepared for the OTA Background Paper Tradinq Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology, Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or 1ts Technology Assessment Board. -...
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Sumaary of interviav with Le Hoaking of the Sydney Future Exchange on March 22, 198!.'. Attending fro Bankers Trust: Jane F. Pried and Giulia F. Fitzpatrick. bcllallfJ ua4 Clearin9 Bou The Sydney Futures Exchange (SFE) is one of two futures aarkets in Australia, the other being the Australian Financial Futures Market (APl"II), a division of the Melbourne Stock Exchange. Vol mae on the sn is up since the october 1987 crash, basically due to Australian intert rate (contract volmae i up froa 21,000 per day to 51,000 per day with only 2,000 relating to the ahare index contracts). The sn plans to -intain its own clearing house, replacing the rvic wbich ICCR provide for Australia. ICCB i owned by 6 British banks, vbich adainiater the ICCB guarant-fund. This fund i currently at 150 aillion pounds aterling, and covers tradu cleared by ICCB on behalf of aany exchangu including SFE. In the ca wbere the fund aust be uaed, it i accuaed in chronological sequence. Thi is worriaoae to th sn, for if a mar ket crisi occurs during the Landon tille zone wben Australia is closed, the guarantee fund may be used up before Australia opens the next 110ming. Th starting guarantee fund for the SFE' own clearing house is planned at 100U$. one of the option open to the sn i that Ulia guarantcould be provided by three tiara of funding: 10111A$ provided by the sn, 35aA$ by insurance, and l.llA$ fro each of 60 clearing llellbers. The uae of inaurance i teaporary: the clearing house will charge f for the transactions it clean and will uae thi as it build up to displace the 35aA$ of the guarantee fund provided by insurance. Th sn expect that the guarantee fund will grow to 117aA$ in ten yeara. In addition, the sn acts aa a P\ltures Aaaociation in Auatralia, which ha a fidelity fund, currently at A$4N. An Auatralian investor trading anywhere in the world aay call the Futures Asso ciation with a claia, such a fraudulent broker activity.1 The fund growa through a $0.10 fee levied on both the buyer and the ller. btma4e4 Bour Traclin9 The sn: is developing SYCON (Sydney Coaputer ovemight Market) which i an extended hour screen trading aystfor the 29 -ber in Sydney. SYCON will be uaed for local trading and Globex will be uaed for non-local trading. The reaaons for the sn to extend trading hours i a) to continue to bri119 in foreign inveataent dollar to Australia, and b) Australian aecurities and bond are traded in Landon, with a large BFP market. 1 Bach claia i liaited to A$50o,ooo.
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AccordinC) to Boaking, Globex not only opena doaeatic -rkt to aore inveaton, it belpa aaootb tbe vay for reciitri119 inatruaenta vith regulaton in foriCJll countri Por example, when tb sn lita an instrument on Globex, Natif, by bei119 a aber ~f Globex, belp get the instruaant regiatered in France. Of courae, in tbe United Stat-, the sn baa been approved by th enc to Nll producta diractly to 1nv-ton. If any probl ... occur, the us 1nv-tor trading an Auatralian contract in th us baa redre vith the c:rrc vbo would then contact the NCSC directly. LoDf.,.. caoal Tb sn expecta to aove tovarda th following goal: on line cl-ring and -qining of contract.a. Cro -rgining againat other product.a and bchAftCJ in Austra lia. A aore com10n ...,_nbip and clearing faciliti aero the Aus tralian financial aarketplace. In addition, the sn bopea tbat the payment Yt-which supports th clearing and NttleMnt function vill aove toward electronic payaenta, ridding the proc of checks and eliainating overnight riak to the cl-ring bouae vbil waiting for checks to clear. rurt.benaore, the sn ..-tbat th bankinCJ ayatu will need to aake aoae change if it i to be able to handle -rgin call for extended bour trading (i.e. occurring when the banka are traditionally closed).
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l REGULATION or AUSTRALIAN FUTURES MARKETS* Auatralian futures aarkt are regulated in two ways: by federal legislation and through a self-regulatory system adainisterad by the excbang th-lv (th only active tuturea exc:banqe is the sn). In practice, th legislation, known the ruturea Industry Coc:l, delegates much of the regulatory ~naibility to the ex~ '!'be regulatory environaent in Australia received the illprlaatur of the Cam.oclity Futures Trading Comission (Cl'TC) in Roveaber 1911 vben sn: aUlbers were given approval to -rut the exchange' proc:lucta in the us. '!'be rutuna Industry Coc:l was introc:luced on July l 1986 and took effect in Victoria and Rew South Wal (NSW) from January 1 1917. By the end of 1917 it was fully effective in all Australian Stat and territories. Th Coc:le requires all Australian futures broken to be licensed and stipulates llallbersbip of an approved futures exchange or futures aaaoc:iation u a prerequisite for licensing. To be lic:enaed, broken aust have muabersbip of either the sn or the Auatralian Financial Futures Market (AFFM), a division of the llelbourne Stock Exchange. Th membership 11USt be of a class vbicb is authorised to deal with the public under the relevant exchange's rules: for the SFE, this ..ans either Floor MUlbenhip, Full Associate Neaberabip vitb an authorization to deal with the public, or Introducing Broker Aasociate Membership, the latter being a new cl created in Novuaber 1916 for those who advise clients and take orders fro thwithout handling the flow of funds on their behalf. Briefly, the Futures Industry Coc:le imposes the following obligationa, uong others, on futures brokers: -Clients' funds aust b kept in a segregated account (and other property in safe custody) apart from the broker' ovn funds. Strict rules are laid down r-,arding payments into and withdrawals from segregated accounta. -Docullents relating to clients' trading must be regularly prepared and provided to clients, containing full detail of each future (or futures option) tranaaction as t down in the Code. -ru11 records auat be kept of brokers' dealings on their ovn account (ie. for th-lv or their Articles reprinted fro Sydney Future Exchange publication.
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2 companies), and brokers are not permitted to take the opposite aide of a futures contract from that of a client without the client's consent. -Brokers must observe the rules which encourage the aaking of futures contracts on a recognised exchange, including provisions which prevent (with certain exemptions) persona or corporations from entering into _futuraatypa agr-nts with memb~rs of the public wbara they are not traded on an exchange. -Brokers must also observe the wide ranging regulations relating to market manipulation and artificial price making, false trading and market rigging, false statements made to affect the market price of a contract or to induce others to deal in futures contracts, and fraud relating to futures trading. In addition to these rules, the Code also imposes an obligation on a futures exchange to establish and maintain a fidelity fund tor the purpose of protecting the public against financial default or fraudulent misappropriation of property or money by a futures broker. Members of an approved exchange must make contributions to the fund, and in the case of the SFE this achieved by way of a lOc levy on each transaction (payable by both the buyer and seller), whether the transaction occurs on the SFE or on an overseas futures exchange. Under the Coda, futures exchanges must incorporate certain regulations into their business rules, including regulations go,erning the admission _of members, standards of training and aJCperience tor membership, .:he manner in which Jlbera must conduct their business, rules for disciplining aUlbara who oraach the exchange regulation for the inspection and audit of members' accounting records, rules probibitiag a member from dealing contrary to a client's inatru~~1ona, and various other rules designed to ensure tba~ cha exchange and it members will carry on business ~~ch due regard for the interest and protection of the public. The exchange is also under an obligation to enforce it rule and to provide the National Companie and Securities Commission of changes to it rules and of disciplinary action taken against any member. Ammendments to the rules of the SFE to ensure compliance with the Code ware paaed by a general meeting of Floor Members on May 29 1986.
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3 SFE ACCESS TO US MARKETS The Sydney Futures Exchange was the first futures exchange in the world to gain full access to the United States for the sale and marketing of its futures and options contracts. US futures regulator the Commodity Futures Trading co-ission (CFTC), introduced rules in July 1987 which required brokers marketing non-us futures and options to us residents to be registered with the CFTC. In october 1987, the SFE petitioned the CFTC for exemption from this requirement on behalf of its Australian members. Just over a year later in November 1988, the CFTC gave the go-ahead for SFE members outside the US to offer SFE products to the US public without hte need for registration. The order issued by the CFTC grants members of the SFE exemption from certain provisions of P~rt 30 of the CFTC rules, relating to dealings on non-us exchanges. SFE Members who meet certain conditions are able to advertise and offer for sale any SFE product except, at the time of writing, those relating to the All Ordinaries index, approval for which was awaited from US authorities. Among the conditions set down by the CFTC are that each SFE member will: -consent to jurisdiction under the us Commodity Exchange Act and appoint an agent in the us for serving of process -Agree to open its books to the CFTC and the Justice Department -Provide details of any subsidiary domiciled in the us -Agree to arbitration in the US for disputes with customers The SFE must also provide an undertaking that any Member doing business in the us is of good standing with the exchange and has Australian customers, that it will monitor the member's compliance with its regulations and report any change in status, that customers will receive the same protection as they would in the us and that it will co operate with the CFTC with respect to any inquires it makes.
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The order i~ likely to lead to an increase in the amount of US trading on the SFE, since it removes a major barrier to direct marketing. This approval follows extensive consultation between the CFTC and the SFE and is recognition that the selfregulatory environment established by the SFE under the Futures Industry Code is effective and equivalent to that applying to US exchanges. It follows earlier approvals obtained by the exchange in the United.Kingdom. 4
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INTEllVIEW WITH MESSllS. J.amODA, HIRANO, AND OB.ITANI BAB OF JAPAN JAPAN BY BARXEllS Tl.UST COMPANY KAI.CH 13, 1989 This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Tec'nology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technology, Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or its Technology Assessment Board.
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SUJllllary of interview performed at Banlt of Japan on March 13, 1989 (attending from the Bank of Japan were Mr. Kuroda, Mr. Hirano, and Mr. Oritani; attending from Bankers Trust Company ware Jane Fried and Giulia Fitzpatrick) and additional information provided by the Bank of Japan. Th rp1 pf IQJ u4 th Mini1ta pf rtnua The Bank of Japan is a central banlt, and is similar to the Federal Reserve Bank in that it issues currency, manages the book entry of government securities, monitors operations of the payment system and supervises its client banlts. It is also the lender of last resort. In contrast to the FED, BOJ has no specific regulatory power, however it does exert influence over financial institutions on the basis of the relationship between a central bank and its client. For example, banks enter into contracts with BOJ in its role as the vendor providing a service to the private sector by holding reserve accounts at BOJ. The equities and bond markets are regulated by the Securities Bureau of the Ministry of Finance, under the Securities Transaction Act. The Securities Bureau also regulates securities-related futures and options (such as JGB futures and -1-
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stock index futures). The Banking Bureau and the International Finance Bureau regulate non-securities-related futures ~nd option (such aa currency and interest rate futures). D IIUNP~ gatpa, There are three large value electronic payment systems in Japan: BOJ-Net fund transfer ayst-, the Gaitame-Yen system and the Zengin aysta. There are also nwaaroua check clearing systin Japan. Therefore, the manag-nt of a given bank's expo sure is complicated by the number of payments systems it uses anc~ the differing level of finality among th-. laatrollia Wayaat l7tThfl IAJ-Ht1 BOJ-Nat is a wholesale (i.e. Interbank) system which was implemented in October 1988 by the Bank of Japan. As its first phase, it has started to offer funds transfer services siailar to those of Fed-wire. Third-party funds transfer (i.e. transfer originating from and received by customers of institution participating in the Net) are conducted with a ainilllDI transaction volwae of 300 aillion yen. (BOJ-Net 1 also known aa Michigan Net, BOJ Wire, the Bank of Japan Financial Network system -2-
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fund tranafer ayathandles approximately 10,000 transactions a day.) Institutions which have current accounts with the Bank of Japan are eligible to participate in the system (including US institutions). BOJ-Net is open from 9:00AM to 4:30 PM. Payment instructions for same-day transfers must be received by 3:00PM. Those for next day transfer may be received from 9:00 to 4:30. Inquiry capability is available fro 9:00 to 4:30. Daylight overdrafts are not allowed in BOJ-Net. Funds transfers may be effected either instantaneously, or at a designated later point in time. This latter facility helps user financial institutions to synchronize their payments and receipts and settle them through their accounts with BOJ even when they have relatively limited amounts of reserve balances. All transactions settled through the system are final, even if the sending institution tails iDIDlediately after a transfer. Tbe ao1tame-xeu ayatu Gaituae-Yen ia a Japanese CHIPS and is managed by the Tokyo Bankers Association. BOJ began to operate this syatem for the Tokyo Bankers Association as a part of BOJ-Net in March 1989. At this time, a bilateral net credit limit facility was implemented, so that each participant could -3-
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control its credit exposure via-a-vis other participants. Also, liquidity sharing rules among participants were adopted to cope with the potential failure of settlement by a participant. The system provides same day availability of funds, with finality siailar to that of CHIPS. It is used primarily for yen transactions related to foreign exchange and other international financial transactions. The participants of the syste are 146 banks, including 59 foreign banks. Participants may send payment orders from 9 AM to 1:45 PM. Settlement is at 3PM. Tbe zengin sytem Zengin is a cooperative fund transfer system, owned and controlled by the Tokyo Bankers Association. Zengin provides a funds transfer facility for participating banks and their custoaers. It is used pri-rily by the retail segment, however it includes the wholesale segment. The membership of Zengin are those inatitutions which comprise the Tokyo Bankers Association, along with Citibank, Chase and Bank of America. Zengin currently handles 1.a million transfers a day for this SacJllant. -4-
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Settl-ent on Zengin is guaranteed by the Bank of Japan, by making suspense payments when a participant fails to settle. BOJ collects collateral from the participants to cover the possible exposure resulting from these suspense payments. The amount of collateral collected is calculated based on the average value of the bank's daily funds transfer origination on the Zengin system during the previous year. If the suspense payment exceeds the collateral value deposited by the failed participant, all of the participants of the Zengin system are held responsible. In addition, guidance on sander net debit caps was introduced in 6/87. Interbank settlement for Zengin transactions is not until 1PM the next day through participants accounts at BOJ. Thus, the Zengin syst8JI is a next-day settlement sys tem. There is no unwinding provision among the participants in case of a default. Check c1earin9 ayat ... The check-clearing aystein Japan are operated by local clearing houaes.2 When banks r9caive checks from their customers, they sulmit those checks to the local clearing house on the following buin day. Net balances are settled through current 2 An institution -Y be a member of more than one local check clearing association. -5-
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accounts with BOJ on that day. In this sense, the check clearing syst-are also next-day settlement systems. Participants deposit bonds with total face value of 3 million yen (for the Tokyo Clearing House) as collateral with the clearing house. Collateral is used only it it covers the unpaid balances. Otherwise, when a participant is unable to pay its net balance, all checks and bills ot that tailed bank are unwound from the total clearing, then the clearing process for all other checks and bills is resumed. In this situation, the collateral is not touched. The electronic payments systems are not used to settle stock exchange transactions. Instead, the Bakan system is the Tokyo Stock Exchange' private check-based settlement system, jointly operated by the 13 clearing banks in Tokyo. These checks are eventually cleared through the Check-Clearing System operated by the Tokyo Clearing House. There is no systematic delivery vs. payment (DVP) mechanis in the clearing process ot the Tokyo Stock Exchange. -6-
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IIP MYDPIP~ Obligation, Govermaent bonds are ostly traded over-The-counter, although some are traded on the stock exchanges. The government securities market is large, and therefore any risks in the clearing and settlement of these instruments are important because of the importance of the market. currently, there is no standard mechanism for the payments related to the government bonds transactions, since payments may be done through different systems (i.e. payments are aade by checks (drawn on either BOJ accounts or commercial bank accounts) or funds transfer (Zengin System or BOJ-Net)). There is no consolidated mechanism to ensure DVP in the settlement process of government bonds. Furthermore, the settlement of these securities on the 5th, 10th, etc., as opposed to a daily rolling settlUlent, allows unsettled balances to pile up. The Bank of Japan acts as a sole proxy for the Government in all clerical operations such as the issue, redemption, interest payments, and paper based registration of government securities. An on-line transfer (i.e. securities settlement) system for Japanese government bonds (JGB) is under development as another part of BOJ-Het. -1-
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Vele tmrerne,nt Ohligatipg ip JUMe There are elf-regulatory rules for the trading of foreign denoainated governaent obligations in Japan. All U.S. Government Obligations traded in Japan are eventually settled through the U.S. Federal Reserve Bank book entry syst-. Payment may be accomplished by either using a correspondent bank in New York, or through the dollar clearing aystin Japan. The latter is operated by Chase (in Tokyo). A sample transaction follows. Here a Japanese Life Insurance Company ("JLIC) wants to purchase U.S. Treasuries. His broker is a Japanese Securities Company ("JSC"), which decides to purchase the Treasuries from the Tokyo branch of a U.S. invest ment bank. 1. JSC enters into a contract of purchasing Treasury securities with the Tokyo branch of a us Investment Bank for the purpose of securing the securities to be sold to JLIC. 2. JSC orders by telex its custodian bank in NY to transfer funds to the inveat.Jllant bank (i.e. to purchase Treasury securities) while the investment bank asks its custodian bank in NY to transfer Treasury securities to counterpart. 3. During the same day, JSC pays required cash to Tokyo branch of its custodian bank to be sent to its NY office. -a-
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4. By tbe end of tbe day, tbe custodian bank tranafr the caab to its NY office through the SlfIPT ayata. 5. At tbe beginning of tbe day in NY, tbe NY office of the custodian bank receives tbe caab and credits the sua to JSC' depoait account. 6. By 4:30 PN in NY, the NY office orders tbe Federal R-rv 8anJt of Nev York (PRBIIY) to tranafer the funds through RDWXRI. Tb investment bank' custodian bank, in the -anti-, order tbe PRBlfY to transfer Treaaury aecuritiea.3 7. Within tbe PRBNY, -ttleaent of Treasury securities takes place aiaultaneoualy against payment of cash. 8. Tb PR8lfY advi both custodian ~nu of the coapletion of tbe transfer procedure. 9. JSC' custodian bank sends telex advising JSC of th coapletion of tbe tranafer
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10. on the next day in To~o, JSC confir1111 receipt of Treaaury aac:uriti vbil the inveatJlent bank canfinaa receipt of caab. 11. 011:ing the -day, JLIC pay required aaount of caah to JSC. JSC iaau the depoaitary receipt ta JLIC. At the -tiae, JSC tranafen thia account of Treaaury curitias traa ita own account to ita account for JLZC in hi book. ot!lel' Mt09\a Tbere 1 neither a central depoaitory nor a fonaal arrange-nt for cl .. ring other aoney -rket inatruaenta in Japan. The payaenta in the -rketa tor th-inatruaenta are uaually -d tbrouqb BOJ-Net, by 80J cbecka Qr through the check-clearing systa. Th Financial ruturu ExchanCJ vill ttl tranaactions through the accounta of clearing banka at th Bank of Japan. A Japane-reident cannot bold Yen account outaid of Japan vitbout penaiion. Japan banka, however, can receive non-Yen denominated depoaita in Japan. -10-
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IITDVIEW WITH ANGUS llIC1WlDS TIii AUSTRALIAN STOCK EXCHANGE AUSTIALIA KAI.CH 20, 1989 This contractor document was prepared for the OTA Background Paper Trading Around the Clock: Global Securities Markets and Information Technology, July 1990, and OTA Report Electronic Bulls and Bears: U.S. Securities Markets and Information Technolopy, Sept. 1990. This document does not necessarily reflect the analytical findings of OTA, its Advisory Panel, or 1ts Technology Assessment Board.
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SUMMARY OF INTl!RVIEW CONDUCTED WITH ANGUS RICHARDS OF THE AUSTRALIAN STOCK EXCHANGE ON 20 MARCH 1989 Attending from Sankara TNlt were Jane Fr1ed and Glula Fltzpatrtck. The Australlan Stoek Exchange (ASX) commenced operations In Aprtl 1887, as an entity formed through the amalgamatlon of 1lx pravlously Independent state Stock Exchanges (le Sydney, Melbouma, Penh, Adtllalde, Brllbant and Hobart). Bach state Exchange 11 now a subsldla,y of ASX. and the prace11 of reorganletng ASX operation, on functlonll rather tl'lan geographic lnee Is CORllrung. ASX provides market far: equity HCWftlN Exchange traded opt1an1 on eqlde1 future, contracta on parcels of equity securltlN (the Australian Flnanclal Futu19s Market) Out of a total at aama 1800 equity securttles quoted on ASX. about 1560 are n" traded through the natlonal Stock Exchange Automated Trading System (SEATS). SEA'rS Is an automated execution system. The remaining 250 1ecurlt1e continue to trade on six trading floors located In the reapectlve states, wtth In tXC911 of 90% of floor traded business being done In Sydney and Melbourne. The value of turnover In securities traded through SEATS currently r9pNNntl lOffl8 35% oftatat ASX tumowr. SEATS volume Is about 50/e of total volume. SEATS trading currently takN place bet\T.ieen 10:00 am and 5:00 pm dally. Trading on the Sydney and Melbourne floors take place between 10:00 am and 3:15 pm; with a break betwHn 12:15 pm and 2:00 pm, and there are shorter trading hours on the other floors. Au11ralan Flnanclal FutuNs contractl a,. 4110 traded through SEA TS. The Australian Options Market operated by ASX tradH Exchange traded opttons on a floor located In Sydney. The trading dsclplne In SEATS 11 time pstortty within bid or offw prfce, without rastrtctlon on lot size. In the event of overlap betWeen best bid and offer p,tcee at the opening, a sharing dlsc:tpllne applies, and the opening prtce Is determined u the prtce at which the maximum number of securtaes can be t,.dld. Trades are locked In betwNn brokll"I either through tradltlanal floor trading mechanisms or th,augh SEA TS. &ECURfflES In Au1tralla Hcurtty settlement remains paper baaed, and as such 11 a source of embarra1sment and frustration for the entire Australian marklll There have been many lnltladvee to l~rave the Australan Nttlemtnt ayatem but to date all major Innovations have talled. In 1988, 1 Stack Exchange propoaal to Introduce a central depository was finally abandoned by the Exchange In the face of 1trong obfectlon, from Issuers, chiefly on the balls of their perception, of lmpalntd dlsclo1ure of beneflclal ownership, and Increased difficulty In shareholder communications. Australian companle1 pr911ed the Excnange to addreas the Nttlement problem thraugh a name on registerbook entry transfer system such as wa, tt,en conceived by the lntematlonal Stock Exchange (London) In the proposed TAURUS 1y1tem. The work proceeded with the definition of a Settlement Transfer and Regl1trat1on Sy1tem (STARS) which embodied the name on reg11ter concepl However In the face of lnltlal Implementation COit eltlmate1 (Al'0 mllllon) and a coat 1queeze ,after the October 1987 cra1h, lmplementatlon of STAAS WH 1helvd by the ASX early In 1988.
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2. Work Is currently proceeding on a llmltad measure known as FAST (Flexible Accelerated Securtty Transfer) which wtll enable shareholdings to be uncerttflcated at the discretion of the anareholdel'8. FAST Is being Implemented for a Sff!all sample ot companies as a 12 month pllot scheme. Because FAST still requires a piper transfer to be moved physically to registries (transfer agents), and proce11ed by them, It Is seen to be only a small step towards the utumate goal of book entry transfer. However FAST Is compatlble with, and could evolve to, either a dtpolltory or a name on reglatar system. In ASX thinking, either STARS or a depository would encompass a national c1ear1r19 house, Including a national broker to broker sattlement system and. a national lnstltutlonal Ntllement ayatem. Whereas the securtttes tranefer pracesa Is currentty outside the realm of ASX, Its BBS (Broker/Braker Settlement) ayetem maintains racord1 of traclae between brokers natlonally and controls the money 1attlement between brokers (sea attached diagram), The BBS syetem receives Inputs from the automated trading system as well as Exchange trading floors. and generata trade confirmation rapo111 to each braker. Aecords of open trades are maintained, and ex date (typlcatly 5 days before nacord date) ad1U5tments are performed on open transactions. For daily eettlement purpose,, brokers submit notifications to BBS of deNvertes that are being made that day to counterparty brokers, and an the basis of that nottflcatton BBS computes the net money settlement obllgatlon of each broker on the day. Settlement la effect9d by cheque payable from a broker to the ASX Clearing House or vice versa. Settlement cheques are normally exchanged around 2:30 pm, and are cleared ovemlght through the banking system. A broker who Is unable to meet the net settlement obllgatlon la subject ta Immediate suspension, and the ASX then appoints a manager to unwind the affairs of the broker. The settlement process Is backed by a Guarantee Fund which currently stande at same AS70 mtlUon. This fund guarantees completlon of contracts pursuant ta an ASX tranuctlon; le the contract between counterparty brokers, and the contracts between cllent1 and brokers acting as their agents. The National Socurltles Exchanges Guarantee Corporation, which administers the Gua~ntee Fund, Is currently not calling for adcltional contrtbutlona from ASX member ftrma, but the fund Is growing through Interest received on Its lnvettmenta. There la currently no fixed pel1od settlement dlsclplne In AuetrallL A buying broker who la party to a trade which rematna undellverad after 1 a buslneu days may seek recourse against the sefflng broker under the Buying In Ruin of ASX. Under this mechanism, after due notice II given, other btakera haw an opportunity to aupply securttlas on a prompt (24 hours) delivery bule to the buyer, at a price determined by a scale of premiums over the currant market price. The premium lncrea~e daily after a traneactton has been placed on the Buying In Uet. The penalty COit usoclated with the prompt sale Is bome by the ortglnal dilatory Nllng broker. Although thl buying In mechanism la avallable, It Is not wtdely used. Currently, In depressed market condition,, 1ome 80% of ASX transactions are settling within T +5 bullnNI day1. HOW8Vllf' many tracfea take longer than 1 o days to nnalty settle, White the,. la prtseure from both outllde Australia and from flnanclal lntermedlarts within Auatralla to make the Ncurttlea settlement eyetem more efficient, and to Introduce a fixed pertod settlement dl1olpllne (le all tradee Httllng an T+S or sooner), the situation Is somewhat amelorated for foreign lnveetora b-, the trading of Australian company AORs
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3. outside AustrallL Foreign trading In ADRs enablH Investors to avoid Austranan settlement problems. and also can assist Australlan companies In raising fo"'lgn capttal, but It does nothing to Improve the standing of the Australlan market and Its attractiveness to foreign lnvestol'I. OPTIONS Call and put option contracts based on underlylng equity aacurttlea are traded on the Australlan Options Market Of)lratad by ASX In Sydney, Currantly Exchange traded options are available on tome 25 Australlan equtty securttlea, and It 11 anticipated that opttons on a 20 leadera Index wtll soon be traded on the ASX option, market. Option, contract, are settled by the Options CIHrtng House which Is owned and operated by ASX. Opttona adhere to T + 1 settlement. FUTURES The ASX Australlan Flnanclal Futures Market (AFFM) currently trades futures contracts on 10,000 share parcels of 4 leadlng Auatranan securttlea (BHP, Santos, Western Mnlng, and Elders IXL). Settlement of the futures contracts la via ICCH. A,/~ AG Rleharda
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11 -1-I! I I\ 1IC .... fJ II i t j I
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WllITTER RESPONSE OF BAJDIE YOSHIOKA THE OSAKA SECUI.ITIES EXCHANGE JAPAN TO QUESTIONS POSED BY BAN1CEllS Tit.UST COMPANY 1989
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The Osaka Securities Exchange has providd written answers to specific questions which were provided to them by Bankers Trust Company. The Questions and answers appear below. Q 1. a) What types of instrmaent are traded on your achange7 ~, What currency(ies) are the trades denominated in? The types of instruments currently traded on the Exchange are as follows: 1 cash Trading (1) Stocks (including subscription rights) (2) Bonds (3) Convertible Bonds (4) Government Securities (5) Bonds with Warrants (6) Subscription Warrants (7) Foreign Bonds (Yen-Denominated & Foreign currency-Denominated) 2 Futures Trading (1) Stock Futures Trading (OSF50) (2) Stock Index Futures Trading (Nikkei 225) The above instruments are traded denominated in yen currency, except for foreign currency-denominated bonds whose trade is denominated in "point". The settlement prices of all instruments are based on yen currency. 1
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Q a. a) Do your acbange clear or aatcb daily trades? If yea bow? b) If your acbanqe do not perfoza trade aatching, i there another organisation that does? c) Bow long i the ttl-nt period for the inatrmaent traded in your aarket? Transactions on the Exchange are classified as follows according to the settlement days of contracts: (1) Regular Way Transactions Settled on the 4tb business day from the day of transactions. (The 5th business day for transactions on ax-right and ex-dividend days.) (2) Cash Transactions Settled between sellers and buyers on the day of transactions, or the next day if agreed to by both parties. (3) Specified Day Transactions Settled between sellers and buyers on a specified day within 15 days after the day of transactions. (4) When-Issued Transactions Settled on the 4th business day from the last day of transactions. For large-lot transactions of government bonds, settlements are made on a specified day within one month after the day of transactions. However, as self-regulatory rules in the securities industry with the aim of shortening settlement periods, in principle the settlement of the above government bonds are made on a specified day within 10 days after the day of transactions. Futures Trading Stock Futures Trading (OSF50) Settled on the 15th day of each contract month with the 6th business day prior to the settlement day of the contract month. stock Index Future trading (Nikkei 225) Settled on the 10th day of each contract month with the 3rd busineas day prior to the last settlement day of the contract month as the last trading day. 2
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The cash difference as a result of marking to market for both futures trading are paid and received on the 4th business day from the day of contracts. Q 3. Bow aany clearing aual,ers do you have? Bow many nonclearing amllbers do you have? Under the clearing system of Japanese stock exchanges, all of the exchange members are also clearing members. All transactions on the stock exchanges are cleared and settled through the respective exchanges. Therefore, different from European and American system, in Japan there is no system of clearing members. The stock exchange in Japan must be an incorporated organization under a membership system in accordance with the Japanese Securities and Exchange Law, and its members must be securities companies licensed by the Minister of Finance. A member of the Tokyo and Osaka Exchanges is required to have a minimum capital of 300 million yen. At present, the number of regular members is limited to 94 corporations as stipulated by the Exchange Constitution. This include 24 Out-Of-Town members, which have no business office located in the district of Osaka. In addition, the Exchange has 4 non-member.securities companies as the special participants, qualified for futures trading. 3
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Q ,. Bow do the proceaa of trade aettl-ent work in your aarket7 Clearing and settlement on the Exchange are classified into the following two methods: 1 Cleared and settled between the party of the contract as the other side to the transactions for each contract. 2 Individual trading contracts are divided into two groups, selling contracts and purchasing contracts. And then nee balance of selling contracts and purchasing contracts are calculated to execute the delivery and receipt, thereby all the selling contracts and purchasing contracts are settled. Delivery and Receipt of Securities For transactions of the same issue and the same kind of securities, net balance of selling volume and purchasing volume for each member are calculated, and the net balance of securities are delivered to or received from the member designated by the Exchange. (Regular Way.Transactions) Payment and Receipt of Trading Value All the trading value of securities with the same settlement day are paid or received collectively through the Exchange. The Exchange calculates the difference between the sales value and purchasing value for each member, and the member pays the net balance of value to the Exchange or receives it from the Exchange. 4
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Qi. Bow electronic ia the clearing and aettl-nt process in your aarket? In Electronic Processing Section of Clearing Department, various clearing data necessary in settlement business are prepared through the electronic process by IBM 4381 system, including clearing sheets and other clearing-related statistical tables. QI. Do Japan have a centralised depository for aafekeeping of aeauritiea? In Japan, the Law Concerning Depository and Book-entry for Share certificates was promulgated on May 15, 1984, and became effective on November 14 of the same year. Following this development, the Japan Securities Depository Center was established as a main body to create this system, and designated as an official securities custody and clearing agency in May 1985. Thia depository canter, when established, began to work on various concrete matters tor operating the system, including system-related basic matters, design of the computer facility, and technical and practical discussions for drafting specific guidelines. At the moment, the system is scheduled to begin its operations in October 1991. currently, in the Tokyo stock Exchange, the Japan Securities Clearing Corporation (JSCC), a TSE subsidiary, is serving as a book-entry clearing organization tor share certificates, which is a simplified version, not based on the law. 5
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Q 7. I the aettlent of title tranafer priaarily paper-baaed or ia JJOOk-entry fon7 At preaent, aettlaents of securities on the Exchange are ude by aeana of physical delivery of actual securities certificates. Q a. If you are a alearin9 houae, what trade CJU&ranteea-if any-do yoa prOYide to tradin9 partiea7 Cbecka to be paid for the aettl-ent by embers to the Exchange are ex-pted fro certification of payment by banka, it the check wboae money aaount falls within the liait fixed by tbe Exchange for each aUlber. For tbia certification of payment, the Exchange reviews every year tbe liit of the certification for each member according to the following it-aa the calculation standards: Muabership Subscription Fee A aeaber' liquid aaaeta -liquid liability x 1/2 OSI Regular Meaberhip Association Reserve Fund Default Compensation Reserve Fund Default Compensation Reserve Fund for Futures Trading Settlement Fund, etc. 6
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Qt. ow 4oea tile balaaa9e iateraat witll tile pay.eat Yt(i.e. cutral Bank, coaaeraial Bank, eta.) la tile ttlut of tra4ea7 In payment and receipt of settlement money, the bank deaignated by the Exchange intermediates between the Exchange and the elll>r, in which the latter receives a net balance of aoney fro or delivers it to the Exchange through the bank. The Exchange deaignates 8 city banks which engage in this ttl-ent buainesa, under routine system, at a regular interval of 10 daya for each bank. Q 10. nat type of collateral doe tlae alearia9 bou aoaept for aaqin/aettl-at obli9atioaa7 Do you aaaept letter of are4it7 Future trading (OSP50 Nikkai 225) To enaure the settl-ent in full, the exchange requires the aeaber firma to put up the required 11argins. The margin may be depoaited in aecuritie in lieu of cash. Th kinds of aecuritiea that aay be uaed aa caah-substitutad securities are a follOV11: (1) Securiti listed on the Exchange or other domestic exchange, which include stocks, corporate bonds, govarnaent bond and convertible bonds, ate. (2) Stocka which are registered with the Japan Securities Dealer Aaaociation. (3) Beneficiary certificate of the securities investment truata. Bank-iaaued letter of credit are not acceptable. Tbere ia no -rgin sytfor caah trading. However, all recJUlar llellbers, which have joined the Exchange Clearing Departaent, are required to deposit a Settl-ent Fund, which ia of collateral nature. Also the Exchange has a Default Coapensation Reserve Fund Syata to cover the lo reaulted fro the default by other mabers. 7
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Q 11. Do you aonitor tradinq ezpoaur of your Ulbr? Bow7 Supervision of trading activities by the members are conducted under cooperative efforts with Trading Floor Dept., Member Firm Dept., and Clearing Dept. Trading on the floor is under constant watch by floor officials of the Exchange with a view to assuring a fair pricing mechanisms and sound practice of trading among members, including trading activities far exceeding the ability of the members handling the transactions. All parties involved in the transactions who are considered by floor officials to be dubious are required to explain the case before the officials. Unfair transactions are subject to much closer investigation, which makes it necessary for the staff of Member Firm Dept. to pay a supplementary visit to the firm() in question. Such information is immediately reported to Clearing Dept. tor .further check in the process ot the settlement. Q 12. ftat, in your opinion, are tbe aajor rik in tbe olearin9 and aettl-nt Yt-in Japan? As mentioned earlier, the Stock exchanges in Japan are operating under the membership organization by securities companies. These member securities companies are licensed by the Minister of Finance, and are doing business under the Ministry's administrative guidance and individual exchanges' supervision. Prom this viewpoint, we do not believe that any serious risks might be raised associated with the clearing and settlement business in Japan. 8
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Q 13. Do th oaua aecuritiea Bzchange have any trading linJca9ea with other ezchanges, either in Japan or abroad? Vlease ezplatn the nature of any such links? At present, the Exchange does not have any trading linkage with other exchanges. However, discussions are underway on deciding whether to participate in the CME proposed GLOBEX system. The Exchange is now engaging in a detailed study about GIDBEX, including the benefits it offers to the Exchange and the member firms. Q 14. Do the Bzchange have any plans for extended hour trading? lfllat are the clearing and settlement issues in extended hour trading? Today the world financial business has entered the era of market globalization. From the viewpoint of internationalization of securities business as well, we have to discuss the introduction of new trading system, for example, the extension of trading hours to meet the increasing needs on the side of investors in and abroad. Liberalization and internationalization is the world trend, and we believe that it is necessary for us to challenge new and creative ideas. Q 11. Do you have any plan to use automated trade execution ayat? Futures trading (OSFSO, Nikkei 225) currently carried out on the Exchange have computerized since October 3, 1988. Options trading based on the Nikkei 225 index is scheduled to be inaugurated this coming June, which is to be computerized this tal1 after manual trading since its inception. For stock trading, the Exchange plans to introduce computer trading system in 1990. 9
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Q 11. Wbere are your clearinq aeuera located? Under the Exchange regulations, the member firms have to designate a conveniently located office, from among their main and other branch offices, as a liaison office between the Exchange and their firms. Therefore, most of the Exchange member firms are located around the Exchange building or in city of Osaka. Q 17. Wbat will be the effect of the new l'Uture aarket in Japan on the securities aarketa? Will they serve to ainimise or exacerbate riak in the market? In Japan, the cash-settled stock index futures trading only started in September last year. The accumulated data in this area is not available with a short period of experiences. Therefore, we believe it difficult to define at this time the affect of the new futures market on the securities market, including the risk in the market. Q 18. Will JSCC clear your equity trade? Transactions of subscription rights affected on the Tokyo, Osaka and Nagoya Stock Exchanges are settled through the book-entry system for subscription rights, operated by the Japan Securities Clearing Corporation. 10
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