Provisional translation

Press Conference by FSA Commissioner Takafumi Sato


June 9, 2008

[Opening Remarks by Commissioner Sato]

Good afternoon.

First, I would like to talk about the issue of the FSA (Financial Services Agency) employees' relationship with taxi drivers. It has been revealed that some FSA employees have been accepting beer and snacks from taxi drivers when returning home by taxi late at night, and the revelation has led to public suspicion and distrust. This is quite regrettable. The FSA is re-investigating this matter in order to grasp the facts more precisely. For the moment, we issued today a four-point instruction, which all FSA employees are to take note of and comply with, in order to prevent this kind of malpractice.

The first point is the improvement in the efficiency of work processes and the avoidance of late-night working hours, thereby limiting the use of taxis to a minimum.

The second point is the assurance of refusal of taxi drivers' offers of cash or goods, including beverages and snacks, when it is necessary to go home by taxi late at night.

The third point is the curtailing of the use of late-night taxi services through collusive arrangements with specific taxi drivers.

The fourth point is to the assurance of written-down metered fares on taxi tickets in place of filling in of figures by the drivers.

These are the four points of our instruction. This is all I have to report to you.

[Questions and Answers]


You said that the FSA is re-investigating this matter. How long will it take to complete the investigation?


It is hard to say when it will be completed. In any case, we would like to finish it as soon as possible.


I have a question about information disclosure regarding securitized products. Last week, the FSA disclosed the amounts of non-subprime-related securitized products (in addition to subprime-related ones) held by banks and co-operative type financial institutions and losses on the holdings of such products. Although I understand that the disclosure was in response to the recommendations included in a report issued by the FSF (Financial Stability Forum), could you explain why the FSA compiled and disclosed these figures, in addition to disclosure made by individual financial institutions on a voluntary basis? Also, does the FSA believe that its disclosure should set a standard for future disclosures by individual banks?


Last Friday, June 6, the FSA disclosed the amount of subprime-related products held by deposit-taking Japanese financial institutions as of the end of March as well as the amount of evaluation profits and losses and realized profits and losses. This is our third such disclosure, following the ones regarding the figures as of the end of September and as of the end of December. This time, in addition to subprime-related products, our disclosure cover securitized products not directly related to subprime mortgages, such as CDOs (collateralized debt obligations), RMBS (residential mortgage-backed securities), CMBS (commercial mortgage-backed securities) and leveraged loans. We have also disclosed the loss rates regarding these products.

The FSF report, which was issued on April 11, recommended that financial institutions properly disclose their exposure to the risks most closely related to current market conditions based on the leading disclosure practices. If we look at the disclosures regarding the fiscal year that ended in March made by individual financial institutions, we can say that their disclosures are generally in line with the leading disclosure practices shown in the FSF report, while taking account of their respective risk profiles, although the level of disclosure varies somewhat from institution to institution.

Now I will explain why the FSA compiled and disclosed the aggregate figures. For some time now, the FSA has been a world pioneer in subprime-related product-related disclosure. We have compiled and disclosed the amount of such products held by domestic deposit-taking financial institutions as a whole based on a common standard, thereby making clear the extent of their exposure. Through such disclosure, we have helped measure the extent of the impact (of the subprime mortgage problem) on Japan's financial system. This is aimed at facilitating an accurate understanding of the impact of the subprime mortgage problem on Japan's financial system and helping dispel uncertainty amid the continuing turmoil in the global financial markets. Also, this is in line with our goal of enhancing the dissemination of information as part of our efforts toward better regulation. By adding data regarding securitization products not related to subprime-mortgages as new disclosure items, we are proud to say that we have taken our approach to disclosure a step further.

As for the question of whether our disclosure should be used as a standard for disclosure by individual financial institutions, I think that it should be left to their own judgment whether or not to make disclosure regarding items other than those specified by laws and regulations. As risk profile varies from institution to institution, the degree of emphasis that must be placed on specific disclosure items may also differ somewhat. The FSA believes that it is very important that financial institutions make appropriate disclosure based on their own judgment and in reference to the leading disclosure practices shown in the FSF report and the FSA's disclosure, and as such we will keep a close watch on their approach to disclosure.


Last week, Nomura Securities issued a report on the findings of its internal investigation into the insider trading case involving a Nomura employee. Basically, the report focused on measures to prevent the recurrence of similar cases, including the introduction of severe disciplinary measures for senior employees, thorough management of information and employee training and education. How do you view the effectiveness of the preventive measures?


First, I would like to sort out the facts regarding this case. Last Friday, June 6, a special investigative committee established by Nomura Securities compiled a report on the findings of its investigation, and the company announced its planned corrective measures, including those intended to prevent the recurrence of similar cases. Among the preventive measures were assurance of the use of code names in projects, periodic checks of access logs (checks on who have accessed particular data) and assurance that relevant information would be thoroughly managed. Other measures included the enhancement of personnel management and employee training with top priority placed on professional ethics and the introduction of severe disciplinary measures against improper stock transactions of a malicious nature.

I would like to refrain from offering my assessment of the investigative report and the preventive measures, as these are matters that concern an individual financial institution. Generally speaking, given the highly public nature of their role, securities companies are required to ensure strict compliance with laws and regulations and to maintain rigorous internal control systems. In addition, their officers and employees must engage in business with an enhanced sense of legal compliance and a high level of professional ethics and self-discipline based on the recognition of the public nature of securities companies.

I would like to remind you that on April 28, the FSA issued a notice to all securities companies, asking them to take prompt action for the purpose of checking their internal control systems. I hope that securities companies, in cooperation with self-regulatory organizations, will make industry-wide efforts toward devising and implementing effective measures with a view to preventing the recurrence of similar cases. As for the effectiveness of internal controls, as I mentioned the other day, securities companies' business operations have become diversified and globalized, making it increasingly necessary to employ personnel with diverse and international backgrounds. In a manner suitable for this diverse and globalized environment, companies must manage information and establish codes of ethics for their employees and ensure the execution of business based on professional ethics. The preventive measures adopted this time apparently reflect this viewpoint to a certain degree.


In relation to disclosure regarding securitized products in response to the recommendations included in the FSF report, will the FSA compile the aggregate figures for financial institutions other than deposit-taking ones, such as securities companies and insurers?


The appropriate thing to do will be to consider that issue in light of the actual situation in Japan. As I have been saying, financial institutions other than deposit-taking ones, such as some major insurers and securities companies, are subject to exposure to subprime-related products or other securitized products and have incurred substantial losses. One major securities company belongs to the group of a large deposit-taking financial institution. In the insurance and securities industries, such exposure and losses are limited to a small number of major companies. In light of this situation, compiling the aggregate figures for these industries should not necessarily be a matter of high priority. Of course, we will be ready to reconsider our stance if the situation changes.


I have another question about securitized products. It seems to me that the amount of latent losses on securitized products not related to subprime mortgages that are held by regional and cooperative financial institutions is relatively large. What is your view on this?


As our disclosure covered a wide range of securitized products not related to subprime mortgages, the total exposure amounted to 22,793 billion yen, a fairly large figure. However, the loss rates for products not related to subprime mortgages are very low compared with the rate of 48 percent for subprime-related ones. By product category, the loss rate stands at 14 percent for CLOs and CDOs, 4 percent for RMBS excluding subprime mortgages, 3 percent for CMBS and 1 percent for leveraged loans. One factor behind the low loss rates is the fact that a large part of the underlying assets of securitized products held by Japanese financial institutions are domestic assets. Although U.S. asset backing may be present for some of these products, I understand that the loss rates for these product categories are low compared with the loss rate for subprime mortgages.

Different types of financial institutions have different levels of exposure. In any case, major banks account for an overwhelming proportion of the total exposure, as I understand it. Co-operative type financial institutions, for example, may also have a fairly large exposure, but their figures include the exposure of the Shinkin Central Bank, if I remember correctly. The important thing is that individual financial institutions manage their risks properly in a manner suited to their respective risk profiles and in light of their risk buffers (capital built up to cover risks).


Regarding the taxi issue, you spoke of ''improving the efficiency of work processes.'' Given that, as I understand it, the FSA is already doing its work with very limited human resources, is it possible to further improve efficiency?


I think that it is not entirely impossible to make improvements if every employee in every department and division makes an effort. First of all, we should all make such efforts. If any effective improvement measure is found somewhere through trial and error, it can be adopted throughout the agency.


I have a question about the code of conduct for credit rating agencies that has been established by the IOSCO (International Organization of Securities Commission), which I think will serve as a basic guideline for actions, or rules. As Japan's financial market regulator, how does the FSA intend to deal with credit rating agencies that are operating in the country?


On May 28, the IOSCO wrapped up its amendments to the code of conduct that you mentioned. For the time being, the FSA hopes that credit rating agencies will review and revise their own codes of conduct quickly in light of the amended code of conduct set by the IOSCO. We are not only hoping for such reviews and revisions but also for a close monitoring of their improvement efforts.

As you know, major credit rating agencies have global operations. So, if any single country acts alone in dealing with them, it will not be effective or it may undermine international consistency. Our current stance is to do a further study on whether the regulatory authorities should strengthen involvement in matters concerning credit ratings, with due consideration of the need to maintain international consistency. Of course, as I said earlier, we will closely watch improvement efforts by credit rating agencies.


Have you found anything unexpected in the report issued by Nomura Securities' investigative committee? Also, may we understand that you regard the measures adopted by the company to prevent the recurrence of insider trading cases as meeting the requirement that you mentioned earlier, namely that securities companies manage information in a manner effective in the current situation?


In order to judge how effective those measures are proving to be, we will have to keep a close eye on their implementation by the company. Therefore, I think we should refrain from making a definitive assessment for the time being.

However, as I said earlier, securities companies' business operations have become diversified and globalized, and it is now common for them to employ personnel, both senior officials and rank-and-file employees, with a diverse range of expertise and diverse backgrounds. Therefore, it is necessary to implement preventive measures effective in such a diverse environment. My rough impression of the measures adopted by Nomura Securities is that they apparently reflect the viewpoint that I mentioned. For one thing, it is very important to deal with this issue based on the assumption that humans are inherently good and to foster a sense of professional ethics among employees and enhance the code of conduct. In addition, my impression is that rather than relying solely on this kind of assumption, these measures are also based, up to a point, on the view that humans are inherently evil. In this sense, I feel that these measures may be reflecting to a certain degree the new environment in which securities companies are operating. I understand that the previously mentioned periodic access log checks partly reflect this reality.


Site Map

top of page