2. Market = (offering of reliable, effective transaction framework)

Institutionalized markets, including securities exchanges and over-the-counter markets, have great significance as systems for fair, effective securities transactions for the investment and procurement of funds. Technological innovation will reduce their significance as a place for the physical execution of transactions. Nonetheless, the significance of the existence of the reliable transaction framework provided by institutionalized markets (i.e., by regulated markets which provide frameworks by which transactions are conducted) is likely to become even greater.

These markets can offer a wide variety of benefits, including easy access to listed prices, high liquidity, stable prices, reduced costs, reduced settlement risk, enhanced transparency, and the establishment of transaction fairness. Such market functions can be realized by ensuring free competition and by improving the market infrastructure including the transaction settlement system. The significance of institutionalized markets should lie in the offering of attractive transaction services to users based upon the observation of regulations governing the conduct of transactions and of the principle of self-responsibility. Individual market participants have different priorities with regard to expected functions of these markets. Therefore, for answering diversified needs, it is necessary to promote competition among domestic markets, while maintaining fairness. As a result, the competitiveness of the Japanese securities market as a whole will be strengthened as well.

<Specific Issues for Discussion>

o Diversification of transactions and competition among different types of transactions

In order to cope with diversified needs created as a result of competition between markets and in recognition of the the need to improve the performance and competitiveness of the Japanese market as a whole, we must consider the question of exactly what form should be taken by securities exchanges and over-the-counter markets?

・ Review of mandates obligating investors to concentrate transactions in markets

The obligation to concentrate transactions in markets has been designed to make securities exchanges more basic and contribute to fair, appropriate price formation. In the meantime, large/basket transactions, etc. have expanded in recent years, which are difficult to execute effectively on a securities exchange. To cope with such investor needs, it may be necessary to give flexibility to the principle of concentrating transactions in markets.

In addition, some people point out that if the concentration of price information is secured through the utilization of information technology, fair, appropriate price formation can be realized without the obligation to concentrate transactions. How should we regard this opinion?

・ Review of the status of the over-the-counter market

For the Japanese economy to maintain its vitality in the preponderantly elderly society of the 21st century, it is important to provide funds to growing industries that will support the next generation. Because of this, the over-the-counter market is expected to play an even greater role in the future. The over-the-counter market has been regarded as a market to supplement stock exchanges. Some people, however, insist that efforts should be made to realize a fair, effective overall market through sound competition among the respective markets. In accordance with such an idea, we believe that due consideration should be given to a revision of the status of the over-the-counter market.

・ Review of the handling of unlisted and unregistered stocks For the Japanese securities market to cope with various fund procurement and investment needs in the future, we believe that due consideration should be given to the reformation of regulations and procedures governing the trading of unlisted and unregistered stocks so as to ensure proper disclosure of information.

o Access to transaction and quotation information

People are growing ever more wary of the manipulation of markets and information and other forms of unfair trading, and this in turn has created opportunties for greater gaps to come to exist between investors in terms of access to information. In light of this, how should requests for improving convenience for investors, including access by investors to transaction and quotation information, be regarded?

o Upgrading of infrastructure including negotiation and settlement systems

・ Upgrading of securities transaction and settlement systems As for the securities market, it is necessary to upgrade its infrastructure in compliance with international standards so as to cope with advances in telecommunications and information technology. From this viewpoint, we believed that we ought to give due consideration to the establishment of effective systems with low risks for making, executing, and settling orders in consideration of transaction costs.

・ Upgrading of stock loan market

Market participants, mainly institutional investors and securities companies, have new stock loan and borrowing needs from those of a few years ago. Securities companies are actually borrowing stocks from institutional investors, etc. and stock loan transactions are executed between securities companies. Based upon such actualities, we believe that we ought to consider without delay the upgrading of the stock loan market, including margin and loan transaction systems, so as to strengthen the functions of the securities market.

・ Improvement of negotiation in over-the-counter market

It has been pointed out that in many cases in the over-the-counter market, negotiation volume becomes smaller after the listing of stocks, resulting in an increase in transaction risk. Therefore, to let the over-the-counter market fully fulfill its market functions, it may be necessary to make various efforts to improve negotiation in the market, including the expansion of the capability of securities companies to participate in the creation of markets.

・ Improvement of bond negotiation market

To enhance the attraction of the bond market for a wide variety of investors and to allow the market to fully fulfill its functions, it is important to improve its negotiation infrastructure.

As for bond settlement, a principle has been adopted to eliminate settlement risk and to reduce costs by creating an online network and establish a settlement system meeting international standards. It may be necessary to continue to promote such efforts.

Some people argue that new systems of taxation on interest on public and corporate bonds would promote smooth price formation, contributing to the diversification of participants in the bond market. How should we regard this opinion?

o Revision of regulations and practices concerning listing

It may be necessary to revise the procedure for deciding issuing conditions and methods for floating and selling newly listed stocks, etc., together with negotiation rules. As a result, the expected fund-offering capability may be fully displayed while the fair, appropriate price formation function can be maintained. At the same time, we may need to discuss how the procedure for approving listing should be to improve its effectiveness.

o Improvement of disclosure

Group activities of companies have internationalized and become complex. It may be necessary to expand consolidated information and examine the accounting standards, including market price standards, concerning financial products so that investors can more clearly understand relations between risks and returns.

At the same time, it is necessary to maintain the appropriateness of disclosure. We may be required to strive to improve the quality of audit activities of certified public accountants, audit systems, etc. to cope with recent changes in the economic and financial structure.

o Enhancement of supervision, disposition, and dispute settlement schemes

In order to ensure fairer, more competitive market transactions based upon the principle of self-responsibility, we may need to improve the regulatory system by strengthening supervisory committees such as the securities and exchange commission. It may also be necessary to strengthen the system to support the imposition of penalties for violation of regulations.

In addition, to create a market where individual investors can participate without anxiety, we may need to devise a scheme for easier solution of civil actions in case of losses.

o Investor education

It may be necessary to afford a better understanding of securities transactions and savings to investors, particularly individual investors, to ensure that the principle of self-responsibility is observed in the market. In other words, we believe that we must work to educate investors about the nature of the market.

o Measures to cope with the introduction of electronic technology

The worldwide introduction of electronic technology in the conduct of securities transactions is producing various benefits for market participants, including reduced transaction costs, improved transaction convenience, and an increased range of choice. At the same time, this has made it necessary to consider the enhancement of regulations to cope with this information technology and to find ways of protecting investors. We believe that there is a need to consider such matters in anticipation of future advances in electronic technology, while establishing an infrastructure to actively support expanded use of such technology.

・ Measures to cope with securities transactions on the Internet

Internet home pages are used by some of the issuing companies to directly float stocks, or by overseas securities companies trying to establish business relationships with domestic investors. As for the utilization of the Internet for securities transactions, we may need to promote

discussions between nations and strive to establish transaction rules and enhance the supervisory system with user needs in mind, including the diversification of fund investment and procurement methods, etc., so as not to cause unexpected losses to investors.

・ Electronically based disclosure of information

It may be necessary to introduce electronic systems for the acceptance, examination, and perusal of documents which must be disclosed to the public by law, because such systems produce various effects including more prompt transmission of disclosed information and the improved convenience for investors and issuing companies. Also, we may need to improve systems, etc. for paperless and online handling of documents (prospectuses, etc.) to be distributed to investors.

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