Tokyo Stock ExchangePresented by

Pearl ChaudharyParul Chaudhary

Rahul ReddyManish Vishnu M

About

Founded in May 1878

Total no. of listings : 2292 ; Domestic : 2281 and Foreign: 11

It is the third largest stock market in the world.

Market capitalization: US$ 3.3 trillion as of 2011

Current chairman: Taizo Nishimuro

On 01 January 2013, it was merged with Osaka Securities Exchange to form Japan Exchange Group.

Major Functions of the Exchange

Provision of Market Place

Monitors Trading

Listing of securities

Monitoring listed securities

Supervision of trading participants

StructureTSE

First Section

For Large companies

Total of 1675 First section companies

Second Section

For Mid-sized companies

Total of 437 second section

companies

MOTHERS( Market of the high-

growth and emerging stocks)

For High-growth startup

companies

Total of 182 MOTHERS

section companies

Main indices tracking TSE is the NIKKEI 225 selected by Nihon Keizai Shimbun (Japan`s largest business newspaper)

The TOPIX (Tokyo stock price index) index based on the First Section companies

J30 index for large industries companies maintained by Japan`s major broadsheet newspapers

Time LineMay 15, 1987

• Tokyo Stock Exchange Co, Ltd was established

June 30,1943• "Japan Securities Exchange", a quasi-governmental organization, created by a merger of all

existing stock exchanges in Japan

June 1, 1951• Margin transactions introduced.

April 2, 1956• Bond trading started

Oct 1, 1966• Government bonds listed for the first time after World War II.

April 1, 1968• Licensing system for securities companies introduced in place of registration system.

July 1, 1969• TOPIX (Tokyo Stock Price Index) inaugurated.

May 11, 1970• Trading in convertible bonds started.

Time Line

Jan 23, 1982• Computer-assisted Order Routing & Execution System (CORES) introduced.

Oct 19, 1985 • Trading in 10-year Japanese government bond futures started.

Feb 1, 1986• 10 securities companies including first 6 foreign companies joined the TSE membership.

May 23, 1988• 22 securities companies including 16 foreign companies joined the TSE membership.

Sep. 3, 1988• Trading in TOPIX futures started.

Oct 15, 1970• TSE joined the International Federation of Stock Exchanges(FIBV).

April 2, 1973• Yen-based foreign bonds listed for the first time.

Dec. 18, 1973• Foreign Stock Section opened.

Oct 20, 1989•Trading in TOPIX options started.

Dec 1, 1989•Trading in U.S. T-Bond futures started.

May 11, 1990•Trading in options on Japanese government bond futures started.

Jul 18, 1997•Trading in equity options

Jan 23, 1998•Trading in sector-stock price index futures

Nov. 11, 1999•The MOTHERS market for high-growth and emerging companies established

Aug 1, 2007•Tokyo Stock Exchange Group Inc established

Oct 17 2007•Establishment of Tokyo Stock Exchange Regulation

Jan 1, 2013•Merging with OSS to form Japan Exchange Group

Time Line

Organizational Structure

ProductsDomestic StocksFutures and OptionsOther Products

o Foreign Stockso Bondso ETFso Real Estate Investment Trusts

Domestic StocksLISTING

1. Significance of Listingo Listed companies can directly raise funds by

direct financing, including raise capital through public offering issued at market price and/or issuing warrant bonds.

o Social trustworthiness with clients, financial institutions, and others, is improved which leads to increased public awareness.

o By going public, the organizational structure of a company shifts from individual management to a more organizational style of operation, enhancing the internal management framework.

Domestic (cont...)2. Initial Listing

o TSE conducts a rigorous exam using certain numerical listing criteria, that companies have to meet.

o Need to check if the public interest and protection of investors can be properly ensured or not.

3. Assignment of Listed Stocks to Sectionso Stocks of emerging companies are listed on another market

called Mothers (market of high growth and emerging stocks).

o Newly listed stocks (except for stocks listed on Mothers) are assigned to Second Section.

o TSE examines whether the stocks listed on Second section and are applying for first section, meet assignment criteria including trading volume.

o Conversely, if first section stocks fall under any reassignment criteria, TSE transfers them to the Second Section.

Domestic (cont...)4. Supervision of Listed Companies

oCompanies are required to file various documents with TSE on matters concerning shareholder rights, like issuance of new shares.

5. Delistingo Listed securities if lose listing eligibility

criteria, they are delistedo Designated as Security to Be Delisted,

and allows them to be traded for a certain period of time before delisting (in principle, 1 month).

Reassignment to the 2nd Section (as of Dec 04,2012)

Domestic (conti..)Timely DisclosureoFor a market to fulfill the role of

efficient asset management, it is important to maintain investors’ confidence in the fairness and soundness of the market.

oThese are quick, accurate, and fair means of providing the latest corporate information.

Futures and OptionsDerivativeso Financial instruments whose values are derived from

other financial products, such as stock price indices or fixed income.

oCash settlement is the transfer of a cash position rather than the delivery of actual principal.

o The derivative products listed on Tdex (TSE’s Derivatives Market) offer investors a variety of effective hedging instruments and new opportunities for investment. It includes domestic as well as foreign investors.

o Tdex products: TOPIX Futures, mini-TOPIX Futures, TOPIX Crore30 Futures, TSE REITIndex Futures, TOPIX Electric appliances index, TOPIX Banks index, TOPIX Dividend Index Futures.

Futures and OptionsMarginThe deposit that is submitted as collateral to deal with adverse price fluctuations which may occur in future.

Margin required= SPAN Margin-Total net option value

Total net option value=Total long option value-Total short option value

Clearing HouseFutures and options traded on TSE are cleared by Japan Securities Clearing Corporation (JSCC). JSCC sets and announces various related parameters to SPAN

Futures and OptionsFuturesoTOPIX is a composite index of all common

stocks listed on First Section of TSE. o It is the measure of the changes in aggregate

market value of TSE common stocks. oMini-TOPIX is one tenth size of TOPIX futures

and offers users more convenience and meets, especially individual investors and smaller needs.

oTOPIX Core30 Futures is the TOPIX new index series to have sorted inside the country common stock listed on the first section of TSE.

Futures and Optionso TOPIX, is calculated based on the market value of a large no. of

stocks.o Investors can trade by forecasting overall trends of the

Japanese economy.o No dividends are paid, unlike cash transactions.o Investors enter the market with a short position.o Investors in cash transactions are unable to earn profits when

market is steady or contracting.o By trading futures contracts investors can earn profits- by

purchasing stocks at lower and selling at higher price, if they anticipate that market will rise; selling at higher and purchasing them at lower prices, if the market failure is anticipated.

o Since, futures contracts are settled by netting, investors incur no interest or premium charges.

o When it is necessary to avoid risks of a fall in the value of cash equities, holders of the stocks can hedge risks by selling TOPIX Futures and buying them back at lower prices, even when market prices fall.

Futures and Options Options

TOPIX Options

o Providing a hedging tool: Price variability due to certain global events is called Systematic Risk. TOPIX options provide a means of managing this risk with a view to reducing it.

o Easier Portfolio: Portfolio managers can adjust their portfolios without having a large impact on the underlying stock market.

o New investment tools: TOPIX futures provide new investment tools like arbitrage and position trading.

Individual Optionso TSE introduces Individual Options in order to satisfy the diversifying

needs of the market users and provide hedging tool for individual securities.

Futures and Options Market maker scheme: It is the system that

creates a trading environment where market makers continually quote bids and offers for designated contracts so that investors can trade the contracts at any time.

Futures and OptionsForeign StocksoTrading Hours: morning= 9:00-11:00 a.m. and

afternoon= 12:30-3:00 p.m.oTrading Unit: Trading units of 1,10,50,100,500, and

1,000 shares are determined based on the stock price as per TSE rules.

oBase price: It is the final price. Same as domestic stocks.

oTypes of Trading: Regular Transactions, When-issued transactions, and Margin trading of foreign stocks.

oCommissions: same as domestic stocks, it also depends on the rates set by securities company. 5% consumption tax also applies to commissions.

Exchange Traded Fund (ETF)3 features:

1. Simple:

◦ They are managed by an investment company to track an indicator, such as stock price index, like TOPIX.

◦ Information regarding price movements and changes in profit/loss are easily grasped, since, information is reported daily by the news media and other organizations.

2. Facilitate diversified investment:

◦ ETFs lowers the investment risk, because, the underlying assets are widely diversified.

◦ There are rich ETFs in addition to Japanese stocks, including those tracking the foreign stocks, REITs, and commodities indices.

3. Low initial investments

◦ When investing in individual stocks, tens of thousands or even millions of yen are generally required, however with ETFs, initial investment is possible with several thousands or tens of thousands of yen.

◦ Management costs of 0.1-1% are generally lower than those of investment trusts.

◦ Trading costs are similar to the listed stocks.

Real Estate Investment Trust (REIT)

These are the products which gather capital from a large number of investors, purchase real-estate and return rent and proceeds from sales produced by such purchases as dividends to investors. They have the following characteristics:

Listed on Exchanges: REIT can be traded on TSE market through securities companies all over Japan, same as stocks.

Risk Distribution, Real estate management by professionals: Manage assets by investing in different properties, diversifying risk.

Stable dividends, comparatively high yields: dividends are produced from rent etc. of multiple properties, expecting high yields.

Investment possible with Relatively Low Amounts of Capital starting from approx. JPY 100,000 making REIT more accessible than real estate.

Comparison of Stocks, REITs and other Securitized Real Estate Products

Clearing and settlement

Clearing Organization Assumption of obligations: When transactions are

effected, sellers have obligation of delivering securities and the right of receiving cash, and vice versa for buyers. Organization assumes these obligations and acquires these rights as a central counterparty between buyer and seller.

Netting: Securities are netted by issue while cash on the basis of total amount of payment and receipt.

Settlement instructions: The clearing organization determines the settlement amount, notifies each clearing participant of that amount, and then notifies the settlement organizations.

Settlement guarantee: Firstly, the loss is compensated using the defaulting participant’s assets, Secondly, if such amount is insufficient, other participants must compensate for it.

Japan Securities Depository Center, Inc.

JASDEC is the book-entry transfer institution in accordance with the Act on Transfer of Bonds, Shares, etc.

It facilitated the dematerialization of a wide range of securities. JASDEC offers following services:Book-entry transfer for stocks, etc.Book-entry transfer for commercial papersBook-entry transfer for corporate bonds.Book-entry transfer for investment trusts.DVP settlement services for off-exchange transaction

deliveries.Pre-settlement matching systemCustody services for foreign stocks

Key trends

TOPIX index futures

1 2 3 4 50

2000

4000

6000

8000

10000

12000

14000

16000

18000

2008 2009 2010 2011 2012

7,396

6,080

9,371

5,069

16,548

TOPIX mini futuresIN 100 MILLION YEN

0

50000

100000

150000

200000

250000

300000

350000

400000

TOPIX CORE 30 Index Futures

YearTOPIX Core30TOPIX Core30 Index futures Trading Volume

In 100 million Yen

2008 2012

JGB futures

TOPIX options

0

100000

200000

300000

400000

500000

600000

700000

800000TOPIX Options

YearTOPIXTOPIX Options Trading Value

In 1

00 m

illion

yen

1985 1989 2012

Individual securities options

Options on JGB futures

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

Options on JGB futures

Options on JGB Futures Trading Value

Year

In 1

00 m

illion y

en

1985 1990 2012

TSE 1st Section Trading volume

Domestic Stocks

MOTHERS index

Real Estate Investment Trusts (REIT) Index

The Way forward

Three objectives of TSE: 1. Strengthen its position as the central market

place for Japanese stocks.2. Expand its derivatives markets based on yen

products.3. Function as a “hub market” in the Asian

region.

The Way forwardTokyo stock exchange is looking forward for

tie-ups' with U.S. exchanges in New York and Chicago

The TSE would like to see itself as the dominant and most influential exchange in the region and, in particular, as they want to attract IPOs from China.

They have strong vision to become a first class competitive exchange and also to learn from other exchanges.

TSE is working to have excellent track record on executing grand plans.

Recommendations

• Market products and quality control• Trading and settlement infrastructure• Supervision of the market and market

participants• Organization and management of the

TSE and accessibility to the market• Promotional and public relations

activities

Thank You