Summary of Hedge Fund Survey Results and Discussion Points

1.
 Hedge funds have rapidly grown in recent years, and regulatory authorities, etc., in each country are paying more attention to hedge funds and the impact of their growth on the market. As cross-border activities of hedge funds are claimed to have become more vigorous, especially due to the expansion of the market, further cooperation among regulatory authorities is considered necessary. In view of these circumstances, regulatory authorities, etc., in each country are making proposals and taking various measures with respect to hedge funds.

2.
 In the Program for Further Financial Reform announced on December 24, 2004, the Financial Services Agency (FSA) pledged to deal with hedge funds as part of its efforts to build an internationally-open financial system and globalize financial administration, which is one of the key challenges under the Program.

3.
 Accordingly, the FSA conducted a fact-finding survey on hedge funds targeted at Japanese financial institutions, compiled the findings, summarized the points under discussion in relation to hedge funds including references to international debates, and published the survey results on December 13 (English version: December 22), 2005.

4.
 In Japan, there is currently no clear definition of hedge funds. For the purpose of this survey, hedge funds were defined as funds with three components: (i) use of leverage, (ii) charge of performance fee, and (iii) use of hedge fund strategies. The FSA sent a questionnaire to 1,251 financial institutions under its jurisdiction, and requested them to respond on a voluntary basis.
 
  (Note) As this survey was aimed at identifying the actual state of hedge funds in Japan, including what kind of financial products are regarded as hedge funds by the surveyed companies, the interpretation of the definition of the three components mentioned above was left to the surveyed companies. It should be noted that because the interpretation might vary between the surveyed companies, there is no guarantee that the survey results are an accurate representation of the actual state of hedge funds in Japan.

5.
 The survey results revealed that hedge funds handled by the surveyed financial institutions over the five-year survey period from April 1, 2000 to March 31, 2005 totaled (i) approximately ¥5.9 trillion in sales and (ii) approximately ¥2.5 trillion in amount raised for establishing the funds. Holdings amounted to approximately ¥6.1 trillion as of March 31, 2005.
The survey results also revealed that hedge funds established by Japanese financial institutions have dramatically increased both in number and in amount since the fiscal year ended March 31, 2004. (The global market size for hedge funds is claimed to have roughly trebled from US$324 billion (approx. ¥35.6 trillion) in the beginning of 2000 to US$1 trillion (approx. ¥110 trillion) in the beginning of 2005.
Other major characteristics of hedge funds revealed by the survey include: half of all hedge funds are sold to financial institutions such as banks, shinkin banks and shinyo kumiai (credit cooperatives); sales to individual investors have substantially increased over the five-year survey period; and hedge funds established in Japan accounted for only 40% of all hedge funds sold, indicating that many hedge funds established in foreign countries were being sold in Japan.

6.
 In the process of compiling the survey results, efforts made in other countries to deal with hedge funds were mentioned as well. For example, in the United States, the 1940 Investment Advisers Act was amended in 2004, which involved redefining the number of customers at which the obligation of registration arises, and obliging certain hedge fund investment advisers to be registered with the Securities and Exchange Commission. In the U.K., although there are no regulations on hedge funds themselves, funds that have not obtained the approval of the Financial Services Authority (hedge funds, etc.) are not allowed to be sold to general investors as a rule. Moreover, various international organizations have been holding discussions and debates on hedge funds recently, including the International Organization of Securities Commissions (IOSCO) and the European Commission.

7.
 In consideration of these survey results and the international discussions, the points under discussion with respect to hedge funds include:
 
(i)  How should risk management capabilities of hedge fund investors be identified and enhanced?
(ii)  Are sales restrictions required for general investors who have limited risk management capabilities?
(iii)  How should the management structure of hedge fund management companies be identified within the existing inspection and supervision framework?
(iv)  What kind of framework would be appropriate to continually keep a close eye on the hedge fund transactions of Japanese financial institutions?

* For further information, please access the link titled ''Summary of Hedge Fund Survey Results and the Discussion Points'' (December 22, 2005) in the ''Press Releases'' section of FSA's official website.
 

[return to Contents]
 

Organization, Staffing and Budget for FY2006

1.
 Introduction
  The following is a brief explanation of the organization, staffing and budget relating to the Financial Services Agency (FSA) based on the Japanese Government's draft budget for the fiscal year ending March 31, 2007 approved by the Cabinet on December 24, 2005.
Approval has been granted for the development of the following structures-especially the enhancement of a market administration structure--and a budget totaling approximately 21.1 billion yen, in order for the FSA to continue properly fulfilling its duties in light of the transition of the Japanese financial system into a new phase.

2.
 Organization and Staffing
 
(1)  Enhancement of Market Administration Structure (40 staff members)
 
(i)  The Financial Markets Division and the Corporate Accounting and Disclosure Division of the Planning and Coordination Bureau will be structurally enhanced by such means as the appointment of a Deputy Commissioner for Market Operations and Deputy Commissioner for Disclosure Affairs. In addition, the Executive Bureau of the Securities and Exchange Surveillance Commission (SESC), which currently consists of two divisions and three offices, will be restructured into an organization of five divisions and one officer, in consideration of the increasingly diversified and sophisticated market surveillance functions.
(ii)  In view of the partial amendments to the Securities and Exchange Law, a civil penalties investigation structure will be developed to deal with misrepresentations in securities reports, etc. Moreover, an inspection structure targeted at auditing firms, etc., a supervision structure targeted at foreign exchange margin trading businesses, a user inquiry structure and other such structures will be enhanced.

(2)
 Development of Effective and Efficient Inspection and Supervision Structures (24 staff members)
 
(i)  In view of the partial amendments to the Insurance Business Law, etc., inspection and supervision structures targeted at small-claims and short-term insurance businesses will be developed, and in light of the partial revision of the Banking Law, etc., a supervision structure targeted at bank agents will be developed.
(ii)  In order to address the growing importance of cross-industry supervision tasks, the Financial Conglomerate Office will be established. In addition, inspection and supervision structures will be developed in conjunction with the introduction of a rating system in financial inspections aimed at conducting inspections more efficiently and effectively, including the appointment of a rating examiner.

[Breakdown]
  Number of Staff at End of FY2005 Staff Cutback Increase in Staff in FY2006 Number of Staff at End of FY2006
Planning and Coordination Bureau 289 - 4 16 304 (Note)
Inspection Bureau 454 - 6 6 454
Supervisory Bureau 203 - 3 21 221
Securities and Exchange Surveillance Commission (SESC) 307 - 5 19 318 (Note)
Certified Public Accountants and Auditing Oversight Board (CPAAOB) 41 - 2 43
Total 1,294 -18 64 1,340
  (Note) The number of staff at the Planning and Coordination Bureau and SESC at the end of FY2006 includes changes due to staff transfers.
(Reference) Staff cutback in FY2005 was ''17'' and the increase in the number of staff was ''109'', a net increase of ''92''.

3.
 Budget
 
(1)  A budget totaling approximately 21.1 billion yen has been approved, including expenses required to develop the system of Electronic Disclosure for Investors' NETwork (EDINET).
(2)  For continued assurance of financial system stability, 50.15 trillion yen has been approved as government guarantees earmarked for the Deposit Insurance Corporation of Japan (DICJ).
 
[Reference] Government Guarantees for Deposit Insurance Corporation of Japan (DICJ)
 

(Unit: trillion yen)
 

Account

 FY2005 Draft Budget for
 FY2006
General account 19 19
Financial revival account 14 7
Account for prompt restoration of soundness of financial functions 6 5
Emergency response account 17 17
Account for enhancement of financial functions 2 2
Industrial revival account 0.15 0.15

Total government guarantees

 58.15 50.15
   
 

Summary of FSA Budget for FY2006
(Rough Estimate Approved)
  Summary of FSA Budget for FY2006(Rough Estimate Approved)
  (Note) Figures may not be consistent with each other as each figure has been rounded off to the nearest million yen.
 


(Reference)
 

(Unit: million yen, %)
  (Reference)
  (Note) Figures may not be consistent with each other as each figure has been rounded off to the nearest million yen.

[return to Contents]
 
[Explanation of Laws and Regulations]
 
In this section, we provide an explanation of the major amendments to the relevant Cabinet Order in conjunction with the enforcement of the provisions relating to the new examination system (January 1, 2006) under the Act to Amend Part of the Certified Public Accountant Law (Law No.67, 2003).
   

Revision of Relevant Cabinet Order associated with Enforcement of Act to Amend Part of Certified Public Accountant Law
(1) Complete Revision of Practical Training Rules for Junior Accountants, etc.
 
a . In order for practical training bodies, etc. to be authorized, criteria must be fulfilled such as having the facilities where conventional operations can be executed in a fair and accurate manner, and having sufficient social credibility. In addition, it is necessary to ensure the appropriateness of practical training more than ever before, as practical training is now positioned as a requirement for Certified Public Accountant (CPA) registration. Accordingly, the practical training rules prepared by the authorization applicant must now meet additional requirements; for example, the practical training methods, etc., must meet the requirements set forth in the Cabinet Order.
Moreover, pursuant to the revision of the Certified Public Accountant Law, only bodies and organizations are entitled to become practical training entities. Accordingly, the provisions on CPA instructors (existing practical training entities who are individuals) were abolished.
b . In the practical training contents, ''Laws and Regulations relating to CPA Services'' were modified to ''Laws and Regulations and Professional Ethics relating to CPA Services'' in consideration of the importance of professional ethics required on the part of CPAs at present.
c . As for the method of practical training, the practical training period of one year or more is no longer a requirement. Instead, it is now a requirement to earn a certain number of credits. Furthermore, practical training methods have been defined and the necessary number of credits has been set with respect to each method in order to confirm the level of proficiency upon the approval of credits.

(2)
 Partial Revision of Rules on Work Assistance, etc. by Junior Accountants, etc.
  The revision of the Certified Public Accountant Law involved deleting the provision which sets forth that the period of work assistance, etc. and the period of practical training shall be at least three years in total. Accordingly, similar provisions have been deleted.

(3)
 Partial Revision of Registration Rules for CPAs, etc.
  In conjunction with the abolition of the junior accountant system, the provision on the registration of junior accounts has been deleted.

(4)
 Partial Revision of CPA Examination Rules
  Paragraph 2, Article 1 of the Enforcement Order of the Certified Public Accountant Law exempts from financial accounting theory anyone who has engaged in accounting-related or audit-related clerical duties or services prescribed by the Cabinet Order for seven years or more at a large corporation under the provisions of the Law on Special Provisions for Commercial Code concerning Audits, etc., of Joint Stock Companies such as listed companies, national government, local authorities or other corporations set forth in the Cabinet Order. Accordingly, such corporations and clerical duties or services have been defined.
[return to Contents]
[Next Page]