ANNUAL REPORT 2005
FOR THE YEAR ENDED
MARCH 31, 2005

Japan Securities Depository Center, Inc.

Contents

1 Financial Highlights
2 President’s Message
6 Rapid Progress in Dematerialization
14 Business Overview
Revenues by Operations

19 Financial Statements

Year ended March 31, 2005
Millions of yen

29 Report of Independent Auditors
30 Board Members and Auditors

Pre-settlement
matching¥1,40532 History

Other
services¥3,87433 Corporate Information
Custody¥5,46833 Organization StructureBook-entry
transfer¥12,422

Note: Refund of fees amounted to¥4.4 billion for the year ended
March 31, 2005.

Established

Corporate
Structure

December 6, 1984

January 4, 2002

The Japan Securities
Depository Centerestablished as a not-forprofit foundation in linewith the November 1984
enforcement of the CSD
Law.

The Japan Securities
Depository Center, Inc.,
incorporated as a stockcompany.

October 9, 1991
Commenced businessas Japan’s only central
securities depository forstock certificates.

Our Mission
In view of our duty to serve the public, our mission
is as a group to provide a highly secure, efficient andeasy-to-use infrastructure for securities clearing andsettlement, which in turn contributes to functional
improvement of the securities market.
Toward this end, we seek to establish bookentry transfer systems for Corporate Bonds, as well as
investment trusts, and to respond more extensively
to the dematerialization of stock certificates as thisprocess continues to unfold in Japan. We will also
complement efforts to encourage greater use of thebook-entry transfer system for dematerializedcommercial paper (CP) with efforts to promotestraight-through processing (STP) with enhanced
system functions and pre-settlement matching, wider
use of depository services for stock certificates, andmore extensive application of the DVP settlement
system for non-exchange trade deliveries (NETD).
To achieve these goals, we will build andreplace systems, in line with our medium-term
management plan, and strive to cement a stronger
foundation for improved stability and reliability in ourbusiness activities. We will also endeavor to make ourservices more convenient for overseas investors, using
our settlement and clearing systems, and we willreinforce ties with international counterparts to foster
cooperation mutually beneficial to both sides.

June 17, 2002
Assumed all thebusinesses of the Japan
Securities Depository
Center, in accordancewith the CSD Law.

June 6, 2003
Established JASDEC DVP
Clearing Corporation(JDCC) to undertake
clearing services related
to the delivery-versuspayment (DVP) settlement
system for non-exchangetransaction deliveries(NETD).

11

Financial Highlights

CONSOLIDATED

Thousands of
US dollars

Thousands of yen

For the the year ended March 31, 2005

2004

2005

2005

¥17,124,010¥19,003,966$ 176,962

Income from operations

2,600,333

1,912,128

17,805

Net income

1,650,629

1,050,244

9,779

Total assets¥18,904,383¥73,585,824$ 685,220

Shareholders’ equity

10,636,565

11,460,609

106,719

Net cash provided by operating activities

4,708,979

4,792,564

44,627

Common stock

4,250,000

4,250,000

39,575¥192,579.99¥121,511.06$1,131.49

For the year:
Operating income

At year end:

Per share (yen and US dollars):
Net income—primary

Note: The amounts stated in US dollars in this report are translated, solely for convenience, at ¥107.39=US$1, the exchange
rate prevailing on March 31, 2005.

AT A GLANCE

262

billion shares

1,015

billion shares

3,757

companies

SHARES IN CUSTODY

The number of shares in custody reached 262.1 billion at the end of March 2005.

SHARES TRANSFERRED BY BOOK ENTRY

Of the 1,015.3 billion shares transferred by book entry, non-exchange trade transfers accounted
for 676.7 billion shares, or 66.7% of the total.

NUMBER OF ELIGIBLE ISSUING COMPANIES

We handle the share certificates of all publicly traded companies in Japan.

CUSTODY RATIO71%

The percentage of shares in custody amounts to 71.7% of the entire domestic stock market. Our
custody ratio for convertible bonds — that is, corporate bonds with subscription warrants for
new shares — reached 96.3% as of the end of March 2005.

AGGREGATE MARKET VALUE OF SHARES IN CUSTODY¥281

trillion¥25

trillion

The aggregate market value of shares in custody as of March 31, 2005, stood at ¥281,525 billion,up ¥37,429 billion, or 15.3%, from a year earlier.

TOTAL VALUE ON DVP SETTLEMENT SERVICES FOR NETD

DVP settlement services for NETD, which began in May 2004, represented a value of ¥25
trillion.

1

President’s Message

T OWARD THE F INAL S TAGE OF
D OMESTIC S ECURITIES AND
S ETTLEMENT S YSTEM R EFORM
Fiscal 2004 Review

In fiscal 2004, ended March 31, 2005, JASDEC continued to concentrate on the realization of amore user-friendly infrastructure for securities settlement and clearing in Japan. Concerted efforts
were directed toward reform of this system through improved safety, efficiency and convenience insecurities clearing and settlement.
Of note, in May 2004, JASDEC launched the DVP settlement system for NETD, and in lessthan a year settlement and clearing through this system already accounts for about 60% of all bookentry transfers for NETD. This result indicates that participants recognize the value of the system as a
key to better settlement and clearing activities.
In addition, we have marked a steady increase in the volume of transactions handled throughthe book-entry transfer system for dematerialized CP, which went online in March 2003. Of note,the March 2005 end to a special stamp duty exemption for paper-based CP

THE INTRODUCTION OF A

prompted a dramatic rise in the dematerialization of CP, equivalent to ¥13

DVP SETTLEMENT SYSTEM FOR

trillion.

NETD EXEMPLIFIES PROGRESS
IN CLEARING AND SETTLEMENTSYSTEM REFORM IN JAPAN.

To make this system more convenient to users, we are pushing ahead
with preparations for the introduction of a book-entry transfer system for
Corporate Bonds in January 2006.
Coinciding with the May 2004 implementation of the DVP settlement system for NETD, we linked the book-entry transfer system to the pre-settlement

matching system (PSMS) so that DVP transfer request data will, if trades are confirmed , automatically route to the book-entry transfer account and bring DVP settlement to a conclusion.
In February 2005, we added PSMS for domestic government bond repos and gensaki with
undertaking settlement guarantee by the Japan Government Bond Clearing Corporation.

HIGHLIGHTS OF THE YEARMay 2004

Implemented the DVP settlement system for NETD
November 2004

Signed a memorandum of understanding with Taiwan Securities Central Depository Co., Ltd.
February 2005

Established PSMS for domestic government bond repos and gensaki.
Signed a memorandum of understanding with Korea Securities Depository

2

President’s Message

To encourage investors and issuers to use our services, we ran advertisements in newspapers,
on television and through other media. Our efforts were rewarded as the number of shares in custody climbed to 262.1 billion, as of March 31, 2005, accounting for 71.7% of all outstanding sharesin Japan.

Progress in Securities Clearing and
Settlement Reform

In 2000, the Financial Services Agency released a report highlighting “safety” and “efficiency” insecurities clearing and settlement system reform, and Japan embarked on the task of creating aninternationally competitive financial infrastructure to the world’s highest standards.
We emphasize two issues in our response to system reform.
First, to improve efficiency in the systems used in securities clearing and settlement, we havedirected efforts into four areas:
1 promoting STP for PSMS;
2 broadening the range of eligible securities accepted;
3 using our demutualization to revitalize corporate governance capabilities as a central securities depository; and4 elevating our profile through advertising to attract more investors and issuers to ourservices.
Second, to minimize principal risk, we prioritized the development of our DVP settlement
system, and in May 2004, we successfully linked our DVP settlement system for NETD to PSMS.
Through these efforts, we have contributed to the establishment of an internationally competitive financial market infrastructure in Japan and achievement of first-half objectives set out for
securities clearing and settlement system reform.

3

President’s Message

Medium-term Themes andFuture Tasks

Management has identified five business themes JASDEC will address over the medium term, fromfiscal 2005 through fiscal 2007. They are:1 to endorse dematerialization of securities;
2 to facilitate wider use of STP;
3 to persuade more investors and issuers to grant us custody of securities;
4 to promote the DVP settlement system for NETD; and5 to enhance the Group’s capabilities.
While all five themes are important, we will spotlight dematerialization as the cornerstone of
securities clearing and settlement reform in Japan.
We are making progress on the development of a book-entry transfer system for Corporate
Bonds, scheduled to go online in January 2006. To facilitate implementation, we are preparing
explanations for issuing companies about the system and formulating measures to ensure smoothconversion of paper securities from the outstanding registered format to book-entry bond status.
Concurrently, we have started working on a book-entry transfer system

OF MEDIUM-TERM OBJECTIVES,

for investment trusts, which will go online in January 2007. As with the bookentry transfer system for Corporate Bonds, we are looking at ways to ensure a

OUR PRIORITY IS STOCK
DEMATERIALIZATION — THEsmooth conversion of existing paper certificates to dematerialized form.
Dematerialization of stock certificates will mark the final stage of domestic

FINAL STAGE OF CLEARING AND

securities clearing and settlement system reform. To wrap up the transformation

SETTLEMENT SYSTEM REFORM

on a positive note, we are exploring suitable processing formats and conversion

IN JAPAN.

techniques, in line with the needs of participants, investors and users affected by
the June 2004 promulgation of the Stock Settlement Rationalization Law —legislation for partial amendments to the law concerning book-entry transfer of Corporate Bonds andother securities for the purpose of streamlining settlement for trades of stocks and other securities.
We are also putting together summaries of the new book-entry systems to help users understandthem better.
A higher custody ratio will support conversion of paper stocks into dematerialized form, so
JASDEC will strive to boost its custody ratio into the 80-percentile range through advertising
designed to capture the attention of more investors, including individual investors.

A memorandum of understanding
with Taiwan Securities Central
Depository Co., Ltd.

Straight-through processing (STP) An electronic system that eliminates humanintervention from all trade-to-settlement processes involved in securities transactions.
Pre-Settlement Matching System (PSMS) Please refer to page 18.
A system that automatically matches various information, including the name andvalue of trades and settlements.

Delivery versus payment (DVP) Please refer to page 17.

4

President’s Message

Addressing Corporate Social
Responsibility

The basic management direction at JASDEC hinges on the execution of businessactivities that meet the needs of the investors and issuers who use securities deposi-

A memorandum of understanding
with Korea Securities Depository

tory transfer systems through direct governance by shareholder participants.
Of the 17 members on the Board of Directors, 13 are external directors, including
10 who are representatives of eligible participants in the Company. Of the three auditors, one is a standing auditor. This structure supports management stability and transparency.
With the Bank for International Settlements’ Lamfalussy Standards in mind, JASDEC established a backup center in September 2000, to secure its systems. To reinforce in-house information
systems still further, we formulated a security policy of our own, based on such international standards as BS ISO/IEC17799 for information security management. In addition, in March 2005, we drew
up a policy on protecting personal information to ensure such information is handled appropriately.
The Group has always endeavored to reduce fees to participants, which led it to adjust thestandard for determining stock transfer fees from the number of shares involved to the number oftransfers executed. We will continue to cut costs by making operations more efficient, thereby lightening the cost burden carried by participants.
JASDEC strives to cultivate and further strengthen its ties to central
securities depositories abroad. During fiscal 2004, we signed memorandums

OUR MISSION AS A GROUP IS
TO PROVIDE A HIGHLY SECURE,

of understanding with Taiwan Securities Central Depository Co., Ltd., in

EFFICIENT AND EASY TO

November 2004, and with Korea Securities Depository in February 2005,

USE INFRASTRUCTURE FOR

which will underpin business cooperation mutually beneficial to respective

SECURITIES CLEARING AND

parties and generate opportunities for information exchange.
Guided by management policies devised to ensure highly transparent

SETTLEMENT.

business activities that put users before all else and to extend services that are reliable and exceedingly cost-efficient, JASDEC will strive to pinpoint user needs with greater accuracy, lay a moreuser–friendly infrastructure for clearing and settlement and polish its capabilities as a central securities depository. These efforts will lead to a higher custody ratio and act as the driving force to accelerate securities clearing and settlement reform.
On behalf of the Board and employees of JASDEC, I ask for the continued support of ourusers, participants and investors.
June 2005

Yoshinobu Takeuchi
President and Chief Executive Officer

5

RAPID PROGRESS IN
DEMATERIALIZATION
Domestic securities clearing and settlement reform has made progress
toward the final goal: dematerialization of stock certificates. As the organization responsible for the infrastructure of securities clearing and settlement in Japan, the JASDEC Group is tackling several issues that will leadto the improved safety, efficiency and convenience of inherent systems.

6

Rapid Progress in Dematerialization

TARGETS FOR 2009

MEDIUM-TERM THEMESThe JASDEC Group will concentrate on five themes over the next three fiscal years, but the No. 1priority will be dematerialization of stock certificates.

Progress in Dematerialization
Book-Entry Transfer System for Corporate Bonds In preparation for the start of a bookentry transfer system for Corporate Bonds* in January 2006, we are accepting consent notices fromissuers, running a comprehensive connection test of the system, and designing procedures to ensure
a smooth transition from outstanding issued bonds to book-entry transfer bonds.
* Eligible securities for Corporate Bonds are corporate bonds, municipal bonds, rights that should be repre-

sented on bond certificates issued by any government or by companies in foreign countries (excluding thosewith the characteristics of bonds with subscription rights), such as Samurai Bonds and Shogun Bonds.

Book-Entry Transfer System for Investment Trusts Working toward the implementationof a book-entry transfer system for investment trusts in January 2007, we are making headway insystem development and exploring suitable approaches to ensure a smooth transition from existing
paper certificates to a dematerialized system. Our perspective on exchange-traded funds (ETFs) is
the same as that on the dematerialization of stock certificates.

Dematerialization of Stock Certificates To achieve dematerialization of stock certificates,
we are exploring practical procedures and conversion techniques, in line with users’ needs.

Book-Entry Transfer System for Dematerialized Commercial Paper To promote
dematerialized commercial paper (CP), we will undertake enterprising promotional activities to raise
recognition and use of the book-entry transfer system for dematerialized CP. We will also make
improvements to the system by joint development with the book-entry transfer system for Corporate
Bonds.

Promoting STP

We will expand the capacity of the PSMS to encompass contracts and settlement matching for
Corporate Bonds and dematerialized CP.

Raising Number of Stock Certificates in Custody

We will undertake aggressive marketing campaigns, using the mass media and word of participants,
to persuade more investors and issuers to grant us custody of stock certificates.

Wider Use of DVP System for NETD

As we continue to survey and discuss the DVP system, we will strive to pinpoint suitable themes
and then realize stated goals to establish and enhance the system and enrich service content.

7

Rapid Progress in Dematerialization

Strengthen Group Capabilities
Medium- to Long-term Plan for Systems Seeking to build safe and efficient systems, wewill formulate and implement medium- to long-term plans for systems geared to the dematerialization of stock certificates and the replacement of our account transfer system.

Reinforce Security Measures We will establish a structure to ensure uninterrupted operationsin the event of an emergency and will redouble efforts to protect confidential information.

Stronger Ties with Overseas Counterparts JASDEC will foster closer ties to counterpart
organizations abroad and create more opportunities for information exchange through to join the Asia
Pacific CSD Group and CSD (International organization for CSDs).

FOR IMPLEMENTATION JANUARY 2006

BOOK-ENTRY TRANSFER SYSTEM FOR
CORPORATE BONDS
Main Features of the System

In Japan, the majority of Corporate Bonds transactions is settled by record being made in registration books maintained at registering agencies, which number 160. The fact that an estimated 10
million physical bonds are still in the custody of securities companies and financial institutions
reflects the delay in the implementation of a settlement system for Corporate Bonds in Japan.
In January 2003, the introduction of the Law Concerning Development of Related Laws to
Improve Securities Markets Through Reforms of Securities Settlement System facilitated the creationof a new settlement system for Corporate Bonds, etc. The completely paperless environment will
require several changes: Corporate Bonds will be centralized at a single book-entry transfer institution; the custody procedures — from issuance to redemption, including transfers — will be revised,based on the management by balance recorded in a transfer account book. We also intend the implementation of DVP (gross-gross format known as BIS model 1) and STP by linking with PSMS.

Book-Entry Transfer System Based on Balance Management Under the prevailing registration system, registering agencies enter the denomination type and serial number as well as ownershipin respective ledgers. Under the new book-entry system, transfer of ownership is executed by entering the net increase or decrease in the transfer account book, thereby expediting distribution.

JASDEC

Trade
Party

1
Trade Report Data

Pre-Settlement
Matching System

4
Noice ofAffirmation

Affirmation/
Disaffirmation

5
5

SSI

Notice ofSettlement Matching
Status7
8Transfer Application(linked with 6)

Settlement
Party

6

Settlement
Matching

2
Trade Report Data

Trade
Matching

Trade
Party

3
Affirmation of Trade5
Automatic
Generation of Settlement
Instruction Data
5
7
Notice ofSettlement Matching
StatusSettlement
Matching

Settlement
Party

Transfer System
for Corporate bonds
9
10
Notice of Recording

Record inTransfer Ledger

16
Securities Transfer
NoticeSecurity
Transfer

10
Notice of Recording

Securities
Settlement

15

Fund
Settlement
Company

16
Securities Transfer
Notice14
Settlement
Completion

11
Fund
Settlement Data

12
Notice of Receipt

12
Payment Request
13
Payment Instruction
14
Notice of Payment
Completion

14
Notice of Receipt
Completion

Fund
Transfer
Bank of Japan

LinkedFund
Settlement
Company

Fund
Settlement

Multi-Layer Holding Structure of Participation We are planning to diversify the forms ofparticipation in the book-entry system to include participation through international connections. The
multi-layer holding structure will be composed of book-entry transfer institutions, account management institutions and investors. Account management institutions are positioned in the multi-layer
holding structure in order to facilitate flexibility of business development and to promote affiliation
among international institutions.

Eligible Securities A variety of bonds are eligible (not including JGBs), regardless of whether
the securities are public or private offerings. In addition, the system is flexibly designed
and will accommodate floating-rate notes and foreign-currency-denominated bonds.*
Corporate bonds
Municipal bonds● Specified Corporate Bonds prescribed in the Law Concerning Liquidization of Assets● Rights that should be represented by bond certificates issued by companies under special law● Rights that should be represented by bond certificates issued by any government or by companies
in foreign countries (excluding those with the characteristics of bonds with subscription
rights), such as Samurai Bonds and Shogun Bonds●●*Notes:1. Corporate bonds with subscription rights will become dematerialized when stocks aredematerialized.
2. Corporate bonds issued in overseas markets, such as Euro-yen
Bonds are excluded from
eligibility.

9Rapid Progress in Dematerialization

Smooth Transition of Outstanding Issued Bonds After the date determined by Cabinet
Order (some time before January 5, 2008), the Law on Recording of Bonds, etc. will be abolished.
Bonds will be issued either as book-entry transfer bonds, based on the new law, or physical bonds,
based on the principles of the Commercial Code. Outstanding recorded bonds and physical bonds
can be converted to book-entry transfer bonds by the consent of both issuer and investors.
From January 6, 2008, preferential tax treatment on interest income for such entities as taxexempt corporations will be applied only to book-entry transfer bonds. Recorded bonds and physical bonds will no longer be eligible for preferential tax treatment. JASDEC will continue its efforts topromote book-entry transfer bonds.

FOR IMPLEMENTATION JANUARY 2007

BOOK-ENTRY TRANSFER SYSTEM FOR
INVESTMENT TRUSTS
Investment Trust Market in Japan

Investment trusts were traditionally securities-style savings products for individual investors. But
recently, investment trusts have attracted the attention of corporations seeking new approaches tofund management as well as products suitable for the Japanese version of the 401K retirement plansestablished in the United States. According to the Investment Trusts Association of Japan, net
investment trust assets reached ¥59.3 trillion, as of March 31, 2005, substantiating the rising importance and growing prevalence of these financial products in Japan.

System Summary JASDEC aims to implement a book-entry transfer system for investment
trusts, like those for CP and Corporate Bonds, in January 2007. With this system, subscription,transfer and redemption of beneficiary rights following the establishment, transfer and cancellationof investment trusts will be recorded in the transfer account book.
Book entry will ensure safety and efficiency in the settlement of investment trusts and support
further growth of the investment trust market in Japan. In addition, dematerialization will eliminate
paper-based beneficiary certificates, which are required under the current system, and thereby
streamline administrative processes.

Rapid Progress in Dematerialization

Advantages of the System The implementation of the book-entry transfer system for investment trusts should generate the following advantages.
●

Lower administrative costs pertaining to the issue and certification of material beneficiary certificates.

●

No more stamp duties charged when beneficiary certificates are issued.

●

Reduced costs related to conveying and safekeeping certificates.

●

A drop in various administrative and custodial costs that comes with the material existence of beneficiary certificates, including administrative costs for entering and maintaining beneficiary certificate ledgers as well as costs incurred to reconcile balances, enter denominations and voidcertifications at redemption.

●

No risk of certificates being lost, stolen or counterfeited.

●Standardized, safer, more efficient settlement systems — such as STP, DVP settlement and smooth
cash transactions — for subscription, partial redemption at maturity and transfer.

Eligible Certificates This book-entry transfer system for investment trusts will extend tobeneficiary rights recognized under the Investment Trust and Investment Corporation Act but
will not initially cover those foreign investment trusts established overseas or mother funds.*

Moving toward Implementation To facilitate the January 2007 implementation of
the book-entry transfer system for investment trusts, JASDEC issued the Outline of BookEntry Transfer System for Investment Trusts in September 2004, which describes the basic
framework of the system, and the System Operation Outline for Investment Trusts inJanuary 2005, which summarizes the processes involved. We will continue to explore thedetails of practical application and system development.

*Note:
Exchange-traded funds (ETFs)
are different from other investment trusts. JASDEC’s basic
stance on ETFs, in the event
settlement is carried out by
the same procedures applied tostocks, is to use the same system
platform used for stocks, and to
pursue further improvements
consistent with those applied tothe book-entry transfer system
for stocks.

FOR IMPLEMENTATION JUNE 2009

DEMATERIALIZATION OF STOCKCERTIFICATES
Dematerialization of Stock Certificates in JapanT he June 2004 promulgation of the Stock Settlement Rationalization Law — a law for partial
amendment of the Law concerning Book-entry Transfer of Corporate Bonds and other securities forthe purpose of streamlining the settlement for trades of stocks and other securities — enabled publicly held companies to eliminate stock certificates by stating in their articles of incorporation thatthey do not issue stock certificates. All listed companies will become non–stock-issuing companies,
effective on a day within five years from the date (June 9, 2004) on which the Stock Settlement
Rationalization Law was announced and as determined by government ordinance.

11

Rapid Progress in Dematerialization

Basic Format of New System
The basic structure is as follows:
Under the new book-entry transfer system, the attribution of ownership on stocks (shares in custody) will be made by entry into the transfer account book. The transfer of shares in custody will
be executed by account transfer.
● Twice a year, in principle, the central securities depository — namely, JASDEC — will inform issuersof shares in custody about shareholders (general shareholders’ notification), based on entries in thetransfer account book. This service is similar to the one for beneficial shareholder notification
under the current system in Japan, but it differs in that issuers can, if the cause is justified, request
the central securities depository to issue a general shareholders’ notification whenever necessary.
● Issuers draw up beneficial shareholder lists based on general shareholders’ notification data. Under
the prevailing securities custody and book-entry transfer system, stock certificates in the custody ofthe central securities depository are listed in the shareholders’ register in the name of the central
securities depository while actual shareholders are named in the beneficial shareholders’ register.
But under the new system, ownership information will be consolidated, with the names of actual
shareholders recorded in the shareholders’ registry .
●When issuers undertake stock-issuing activities, such as stock splits, bonus issues and mergers, therecord of shareholders’ accounts is automatically revised through procedures executed by theissuer and the central securities depository as well as the account management institution.
● When minority shareholders and single-unit shareholders wish to exercise rights on shares in custody, they must submit to their respective account management institution an application notifying
the issuer of the data in the account transfer book. The central securities depository will theninform the issuer (specific shareholder notification) and within a specified period thereafter willprompt the issuer to exercise its rights.
● With justifiable cause, an issuer can request the central securities depository or an account management institution to provide information pertaining to items recorded in the account transfer book.
●

Future Tasks The Financial Services Agency began meetings in August 2004 to discuss governmental and ministerial ordinances related to dematerialization of stock certificates. To facilitate theestablishment of practices and systems for this purpose, JASDEC will address the following tasks.
● Standardize information among the central securities depository, account management institutions,issuers and transfer agents.
● Establish a data center where the collection of actual shareholders’ names can be consolidated in
one place.

Rapid Progress in Dematerialization

Prompt shareholder responses by issuers, transfer agents and account management institutions andthe central securities depository.
● Eliminate beneficial shareholder form and seal impression form.
● Create a more realistic and understandable fee structure for services provided.
●

IMPLEMENTED MARCH 2003

BOOK-ENTRY TRANSFER SYSTEM FOR
DEMATERIALIZED CP
Main Features of the System
Dematerialized Format CP in the conventional paper form, or paper-based CP, is prepared incertificates, and these certificates must be delivered or presented to the assigned holder at settlement.
In comparison, JASDEC’s system totally dematerializes CP and records systematically the issuance,transfer and deletion in the transfer account book. Initially, the system handled only dematerialized
CP issued by domestic companies, but from April 2004, the system has accepted dematerialized
Samurai CP as well.

DVP Settlement JASDEC’s book-entry transfer system for CP uses DVP (gross-gross format known
as BIS model 1) settlement, linked to the Bank of Japan system. This system shortens the settlement
period, removes the risks inherent in transporting certificates and eliminates the cost of custody —which were all drawbacks of the paper-based form — and makes settlement safer and more efficient.
Because requests for CP transfers are executed electronically, the settlement period could beshortened to T+0, essentially the same day a trade is initiated.
Furthermore, paper-based CP is subject to restrictions regarding circulation, since the stamp
duty charged on each certificate encourages Issuers to cut the burden of cost by issuing largedenomination certificates. Dematerialized CP is not hampered by such restrictions, allowing
issuance and circulation in smaller denominations, and thus providing greater investment flexibility.
Coinciding with the development of the book-entry transfer system for Corporate Bonds,
JASDEC will work on enabling direct connection to users’ mainframe computers, linking functionality with the PSMS and introducing a security queue function to ensure sufficient capacity to handle
the growing CP market.
Note: Transaction results for fiscal 2004 are detailed on page18

13Business Overview
For the the year ended March 31, 2005

BASIC DATA
Participants and Accounts

Participant firms open accounts at JASDEC and deposit the certificates they wish to consign. Suchfirms include securities companies, banks, trust banks, insurance companies, securities finance companies and stock exchanges.
As of the end of March 2005, the number of participants stood at 272, and the number ofaccounts stood at 469.
PARTICIPANTS BY
CATEGORY

Stock exchanges
and others 20(As of March 31, 2005)

NUMBER OF
ACCOUNTS BY
CATEGORY

Stock exchanges
and others 37(As of March 31, 2005)

Life and non-life
insurance companies 7Life and non-life
insurance companies 9

Banks
41
Securities
companies 204

Securities
Banks 186 companies
237

Total 469

Total 272

Note: Clients of participant firms do not deposit certificates directly with JASDEC. Rather, they utilize JASDEC’s services through theaccounts they establish at participant firms.

Issuing Companies 3,757
As of March 31, 2005, all publicly traded companies in Japan have consented to JASDEC handlingtheir stocks.

Eligible Securities
ELIGIBLE SECURITIES (As of March 31, 2005)
StocksPreferred investment securities
Beneficiary certificates of ETFs
Certificates of REITs
CBs

262,128 million shares

3,758 issues

251,765 units
1,708,097 thousand units
3,449,594 units
2,604,232 million yen

16 issues
18 issues
158 issues

1 issue

Note: JASDEC accepts securities described in the CSD Law. Consent of the issuing company is also a prerequisite. Currently, eligible
securities are domestic securities, including stocks, convertible bonds (corporate bonds with subscription warrants to new shares),beneficiary certificates of exchange-traded funds (ETFs), certificates of real estate investment trusts (REITs), and preferred investment
bonds of financial institutions established by cooperative associations, which are listed on stock exchanges or registered with the Japan
Securities Dealers Association (JSDA).

Corporate Governance
Basic Policy As the central securities depository in Japan, JASDEC strives to fulfill its duty toserve the public through the provision of a highly secure, efficient and convenient clearing and settlement structure. This perspective underlines the Company’s basic policy on business.

14

Business Overview

The basic concept for corporate governance at JASDEC hinges on two points: first, we must
undertake activities that address the needs of clients, not only participating firms but a wide range ofother parties, including investors, using the Group’s systems; and second, we must maintain highly
transparent management practices that reinforce our public-service quality and cement a reputationof trust in the market as the organization responsible for the securities clearing and settlement infrastructure in Japan.

REVENUES BY OPERATION
Fiscal 2004 Review

Fiscal 2004, ended March 31, 2005, was characterized by a general feeling of economic recovery inJapan. During the first half, higher exports and capital spending as well as an increase in industrial
output underpinned better business conditions. In the second half, the upward trends evened out,
albeit temporarily, with exports and production holding at par year-on-year. However, a positive
undercurrent in consumer spending and a healthier employment situation supported the overall
recovery tone for the year.
Amid this rosier economic climate, the securities market also gained strength. Stock trading
was active, substantiated by daily trading volume averages at the Tokyo Stock Exchange greatly
exceeding the 1 billion mark in consecutive months, and stock prices were bullish.
The JASDEC Group benefited from this environment as heightened stock-trading activity triggered more account transfers through the Group’s securities depository and book-entry transfer systems and expanded the number of shares in custody. Against this operating backdrop, the Group
achieved the following results.

Book-Entry Transfer Services
for Stock Certificates
Account Transfer Operations The number of shares in the transfer account — that is, combined exchange trade and non-exchange trade deliveries (NETD) — averaged 71.0 billion a month,
primarily a reflection of brisk stock trading. This situation led to another year of energetic accounttransfer activity. Consequently, income related to account transfer services, particularly services forstock certificates, corporate bonds with subscription warrants to new shares and ETF beneficiary certificates, reached ¥12,420.0 million.

Custody Operations Thanks to steady receipt of shares into the special account, the number ofshares in custody was up, as of March 31, 2005, with stock certificates at 262.1 billion shares, corporate bonds with subscription warrants to new shares at ¥2,604.2 billion, and ETF beneficiary certificates at 1,708 million units. As a result, income related to custody operations, particularly services
related to stock certificates, corporate bonds with subscription warrants to new shares and ETF beneficiary certificates, amounted to ¥5,468.8 million.

15

Business Overview

Handling of Shares(a) Deposits and withdrawals
The withdrawals to deposits ratio has beenfalling year after year for some years now, settling at 15.1%, as of March 31, 2005.

(Years ended March 31)

Billions of shares

%

60

40

45

30

30

20

15

10

0

Number of Shares Deposited
Number of Shares Withdrawn
Withdrawals to Deposit Ratio

FY2000FY2001

FY2002

FY2003

FY2004

45.3
12.5
27.6%

53.2
10.5
19.8%

33.7
9.6
28.5%

34.9
7.4
21.4%

45.8
6.9
15.1%

0

Note: The ratios above are calculated based on the number of shares deposited, excluding shares deposited by stock splits, and s
hares withdrawn, excluding shares by stock transfer and merger.
Billions of shares(b) Custody
As of March 31, 2005, the number of sharesin JASDEC’s custody stood at 262,128 million
shares and represented 71.7% of all outstanding shares issued by companies listed on stock
exchanges in Japan.

%

280

80

210

60

140

40

70

20

0

Custody Balance
Ratio of Custody Balance to Shares Issued in Japan
Ratio of Immobilized Shares in Custody

FY2000FY2001

FY2002

FY2003

FY2004

157.0
42.3%
46.8%

191.5
53.5%
49.9%

203.1
58.6%
51.9%

228.2
64.1%
56.3%

262.1
71.7%
60.2%

0

Note: Immobilized shares are shares in custody that have been replaced by jumbo certificates, based on set criteria, to reduce
administrative costs associated with custody and minimize risks, such as the physical loss of stock certificates.
Billions of shares(c) Book-entry transfer
Of the number of shares transferred between
accounts by book-entry transfer in fiscal
2004, the number of shares pertaining to
exchange trade transfers represented 338,607
million and the number of shares pertaining
to NETD accounted for 676,745 million.

%

800

80

600

60

400

40

200

20

0

NETD Transfers
Exchanges Trade Transfers
Ratio of NETD Transfers to Total Transfers

FY2000FY2001

FY2002

FY2003

FY2004

279.0
205.1
57.7%

308.9
219.1
58.4%

355.0
225.7
61.1%

442.7
311.9
58.7%

676.7
338.6
66.7%

Million cases(d) Beneficial shareholder notification
In fiscal 2004, beneficial shareholder notification services covered 532,658 million sharesand 73 million cases.

16

Billions of shares

80

600

60

450

40

300

20

150

0

Number of Cases
Number of Shares

0

FY2000FY2001

FY2002

FY2003

FY2004

41.7
307.2

47.8
367.1

54.7
430.2

61.2
448.1

73.9
532.6

0

Business Overview

Other Securities Operations An overview of other securities operations conducted during fiscal 2004 is presented below.
(a) Convertible bonds (corporate bonds
with subscription warrants to new shares)(Millions of yen)
Deposits
Withdrawals
CustodyBook-entry transfers
Exchange trade transfers
NETD
Number of issues

286,897
1,985,120
2,604,232
949,391
12,691,752
158(c) Preferred investment securities of financial
institutions(Number of units)
Deposits
Withdrawals
CustodyBook-entry transfers
Exchange trade transfers
NETD
Number of issues

9,604
1,226
251,765
59,50089,4451(b) Exchange-traded funds (ETFs)(Thousands of units)
Deposits
Withdrawals
CustodyBook-entry transfers
Exchange trade transfers
NETD
Number of issues

920,846
1,205,868
1,708,097
2,114,709
9,145,555
16(d) Real estate investment trusts (REITs)(Number of units)
Deposits
Withdrawals
CustodyBook-entry transfers
Exchange-trade transfers
NETD
Number of issues

1,149,398
59,184
3,449,594
2,544,588
5,634,093
18

Note: Data regarding the number of issues is as of March 31, 2005

DVP Settlement Services for NETDs

Demand for DVP for NETD has far surpassed initial expectations, with the number of DVP bookentries averaging about 60,000 per business day since the DVP for NETD system was launched in
May 2004. As a result, income related to DVP settlement services for NETD amounted to ¥1,039.2
million in fiscal 2004.

Basic Format for DVP for NETD DVP for NETD is a gross-net type DVP settlement systemthat links book-entry transfer of stocks and other securities with payment of funds, based on settlement instruction data produced by the pre-settlement matching system (PSMS). With this type ofsystem, book-entry transfer of securities is processed on a gross-net basis, whereby at the end of the
day each participant pays or receives the balance that remains when payable amounts for the receipt
of securities and receivable amounts for the delivery of securities are netted out. These procedures,
already adopted by the United States’ Depository Trust & Clearing Corporation, effectively reduce
securities settlement risk and facilitate efficient processing of numerous settlements.
Connecting PSMS and the DVP for NETD represents the last step on the road to achieving
straight-through processing for securities settlement in Japan. PSMS-generated instruction data on
settlements are relayed to the DVP settlement system automatically, obviating the need to input
instructions through a separate process and bringing settlements to their respective quick conclusions. JASDEC DVP Clearing Corp., a JASDEC subsidiary, ensures thorough legal compliance withrules for risk management and netting.
Pre-Settlement Matching System (PSMS) Please refer to page 18.
This system automatically confirms investment instructions, such as trade names and amounts.

Delivery versus Payment (DVP) This system simultaneously attaches specific conditions to the delivery ofand payment for securities. International standards, recommended by the Group of 30 and other organizations,require the application of a DVP settlement system to all securities settlements to eliminate settlement risk

17

Business Overview

Book-Entry Transfer Services
for Dematerialized Commercial Paper

As of March 31, 2005, book-entry transfer for dematerialized commercial paper (CP) had been
extended to 238 issuers, an increase of 200 companies from a year earlier. The account balancestood at ¥4,863.3 billion, up ¥3,459.1 billion, and the number of transfers reached 11,772, up
9,710. As a result, income related to book-entry transfer services for dematerialized CP reached¥55.6 million.
Dematerialized CP Account Balance (Month-end)
Trillions of yen
20

15

10

5

0

Outstanding amount

Apr. May
2004
1.3
1.3

Jun.

Jul.

Aug. Sept.

Oct.

Nov.

Dec.

1.7

1.8

1.9

1.9

2.3

3.2

2.1

Jan. Feb.
2005
3.5
3.7

Mar.

Apr.

May

Jun.

4.8

9.8

13.7

18.2

Pre-Settlement Matching Services

I n fiscal 2004, as in fiscal 2003, stock trading was brisk, spurring use of JASDEC’s PSMS.
Consequently, income related to pre-settlement matching services amounted to ¥1,405.0 million.
The PSMS was connected to the account transfer system to coincide with the May 2004 startof DVP for NETD so that DVP transfer request data will, if requirements have been met, automatically route to the transfer account and bring DVP settlement to a conclusion.
In February 2005, a matching function for domestic government bond repos and futures wasadded to the system in anticipation of the Japan Government Bond Clearing Corporation assuming
the function of a key counterparty.

Other Services

The time limit for receiving requests for securities companies’ special accounts expired on December
31, 2004, prompting a considerable increase in the number of inquiries regarding the Securities
Information Tracing System, known as SITRAS, during the second half of calendar 2004.
More stock certificates in custody and the availability of transfers of title the day after application caused a rise in the number of agencies handling transfers of title. As a result, income related toother services came to ¥3,818.3 million.
In fiscal 2004, the JASDEC Group provided participants with fee refunds amounting to¥4,451.9 million. Consequently, operating income grew 11.0% over fiscal 2003, to ¥19,003.9 million.

18

Consolidated Balance SheetJapan Securities Depository Center, Inc.
As of March 31, 2004 and 2005

2005

$ (thousands)(Note 4)2005

¥ 1,203,318
4,056,477
50,47054,570,594
266,278
60,147,137$ 11,205
37,773
469
508,1542,480
560,081756,824
4,190,155
4,946,979(2,830,335)
2,116,644

7,047
39,01846,065(26,355)
19,7109,694,192
920,785
10,462
10,625,439

90,271
8,574
97
98,942509,657
31,999154,948
696,604¥73,585,824

4,746
298
1,443
6,487
$685,220¥ 4,500,000
2,281,906
26,223
115,199
160,541
54,570,594
363,243
62,017,706$ 41,903
21,249
244
1,073
1,495
508,153
3,383
577,500

52,24955,260107,509
62,125,215

486
515
1,001
578,501

4,250,000
4,250,000
2,960,609
11,460,609¥73,585,824

39,57539,57527,569106,719$685,220¥ (thousands)
2004

ASSETS

Current Assets:
Cash and cash equivalents¥ 1,733,337
Accounts receivable—trade
3,803,049
Deferred income taxes (Note 8)
129,490
Designated assets for clearing funds (Note 3)—
Other current assets
190,571
Total Current Assets
5,856,447
Property and Equipment:
Buildings
149,075
Tools and furniture
4,017,025
4,166,100
Less: Accumulated depreciation(2,164,535)
Total Property and Equipment
2,001,565
Intangible Assets, Net:
Software3,625,338
Construction in progress (Software)
6,912,863
Other intangible assets
9,755
Total Intangible Assets
10,547,956
Investment and Other Assets:Long-term refundable lease deposits
424,619
Long-term prepaid expenses
42,927
Deferred income taxes (Note 8)
30,869Total Investment and Other Assets
498,415
Total Assets¥18,904,383

LIABILITIES AND Current Liabilities:
SHAREHOLDERS’
Short-term debt (Note 6)
EQUITY
Accounts payable—trade¥ 5,000,000
1,846,861
644,945
100,675
77,617—
521,687
8,191,785

Income tax payable
Accrued employees’ bonuses
Consumption tax payable
Deposits received for clearing funds
Other current liabilities
Total Current Liabilities
Long-term Liabilities:
Accrued employees’ retirement benefits (Note 7)
32,863
Accrued executives’ retirement benefits
43,170Total Long-term Liabilities
76,033
Total Liabilities
8,267,818
Shareholders’ Equity:
Common stock
Authorized: 10,000 shares
Issued: 8,500 shares
4,250,000
Capital surplus
4,250,000
Retained earnings
2,136,565
Total Shareholders’ Equity
10,636,565
Total Liabilities and Shareholders’ Equity¥18,904,383
The accompanying notes are an integral part of these statements.

19

Consolidated Statement of Income
Japan Securities Depository Center, Inc.
For the years ended March 31, 2004 and 2005

2004

2005

$ (thousands)(Note 4)
2005

Operating Income¥17,124,010¥ 19,003,966$176,962

Operating Expenses
Executives’ compensation
Salaries and bonuses
Severance costs for employees
Executives’ retirement benefits
Maintenance for systems
Outside services
Registration fees
Depreciation
Rent
Advertisement
OthersTotal Operating Expenses
Income from Operations

117,438
1,139,758
13,35024,8104,314,280
2,543,018
1,866,472
2,838,420
237,525
264,327
1,164,279
14,523,677
2,600,333

135,545
1,240,492
26,643
21,4104,871,921
2,688,531
2,302,067
3,923,948
290,398
463,429
1,127,454
17,091,838
1,912,128

1,262
11,552248
199
45,36725,03521,43736,5392,704
4,315
10,499159,157
17,805

19

34

0

—
—
(30,439)—478
77,617(65,616)(33,294)

5
723
(611)
(310)

—
(4,557)——
1,524(33,453)
2,566,880(8,984)(55,038)(192,285)(27,923)588(304,423)
1,607,705

(84)
(513)
(1,791)(260)
6(2,835)
14,970963,539(47,288)¥ 1,650,629

602,519(45,058)¥ 1,050,244

5,610
(419)
9,779

¥ (thousands)

Other Income (Expenses):
Interest income
Operational revenue on the designatedassets for clearing funds
Adjustments for prior year consumption taxes
Interest expenses
Commitment fees
Fees for fund operation of designatedassets for clearing funds
Loss on disposal of property and equipment
Loss on disposal of intangible assets
Cancellation fee for system operations
Others, net
Total
Income before Income Taxes
Income Taxes (Note 8)
Current
Deferred
Net Income

U.S. Dollars(Note 4)Yen

Per Share (Note 11)
Net income — primary
Dividends¥192,579.99
25,000¥ 121,511.06
25,000

8,500

8,500

Weighted average number ofcommon stock shares outstanding (in shares)
The accompanying notes are an integral part of these statements.

20$$1,131.49
232.80Consolidated Statement of Shareholders’ Equity
Japan Securities Depository Center, Inc.
For the years ended March 31, 2004 and 2005
¥ (thousands)
Number ofcommon stock Commonsharesstock

Balance as of March 31, 2003
Net income for the year
Cash dividends
Bonuses to executives
Balance as of March 31, 2004
Net income for the year
Cash dividends
Bonuses to executives
Balance as of March 31, 2005

8,500
—
—
—
8,500
—
—
—
8,500

¥4,250,000———¥4,250,000———¥4,250,000

Additional
paid-in
capital¥4,250,000———¥4,250,000———¥4,250,000

Retainedearnings

Total
shareholders’equity¥ 711,036 ¥ 9,211,036
1,650,629
1,650,629(212,500)(212,500)(12,600)(12,600)¥2,136,565 ¥10,636,565
1,050,244
1,050,244(212,500)(212,500)(13,700)(13,700)¥2,960,609 ¥11,460,609$ (thousands) (Note 4)

Balance as of March 31, 2004
Net income for the year
Cash dividends
Bonuses to executives
Balance as of March 31, 2005

Number ofcommon stock
sharesCommonstock

Additional
paid-in
capitalRetainedearnings

Total
shareholders’equity

8,500
—
—
—
8,500

$39,575———$39,575$39,575———$39,575$19,895
9,779(1,978)(127)$27,569$ 99,045
9,779(1,978)(127)$106,719

The accompanying notes are an integral part of these statements.

21

Consolidated Statement of Cash Flows
Japan Securities Depository Center, Inc.
For the years ended March 31, 2004 and 2005

2005

$ (thousands)(Note 4)
2005

Cash Flows from Operating Activities:
Income before income taxes¥2,566,880
Depreciation
2,838,420
Increase in accrued employees’ bonuses
12,613
Increase in accrued employees’ retirement benefits 10,291
Increase in accrued executives’ retirement benefits 24,810
Interest income(19)Interest expense
30,439Loss on sales of property and equipment
69
Loss on disposal of property and equipment
4,487
Loss on disposal of intangible assets—
Increase in accounts receivable—trade(703,543)
Increase in accounts payable—trade556,142
Decrease in other assets
334,505
Increase in other liabilities
41,020
Others, net(12,597)
Sub-total
5,703,517
Interest and dividends received
19
Interest paid
(33,260)
Income tax paid
(961,297)
Net cash provided by operating activities
4,708,979¥ 1,607,705
3,923,948
14,524
19,386
12,090(34)
65,616—55,038
192,285(253,428)
435,044
3,308
122,028(13,697)
6,183,813
34(64,009)(1,327,274)
4,792,564$ 14,970
36,539
135
180
112
0
611
—
513
1,791
(2,359)
4,051
31
1,136
(128)
57,582
0(596)(12,359)
44,627

Cash Flows from Investing Activities:
Payments for purchase of property, plantand equipment(435,224)
Payments for purchase of intangible assets(4,656,346)
Proceeds from sales of property and equipment
546
Payment of guarantee money deposits received—
Net cash flows used in investing activities (5,091,024)(1,130,647)(3,394,399)—(85,037)(4,610,083)(10,528)(31,608)—(792)(42,928)

5,000,000(3,100,000)( 212,500)

1,000,000(1,500,000)( 212,500)

9,311(13,967)(1,978)1,687,500
1,305,455
427,882¥ 1,733,337(712,500)(530,019)
1,733,337¥ 1,203,318(6,634)(4,935)
16,140$ 11,205¥ (thousands)
2004

Cash Flows from Financing Activities:
Proceeds from short-term debt
Repayment of short-term debt
Cash dividends paid
Net cash flows provided by (used in)financing activities
Net Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at beginning of Year
Cash and Cash Equivalents at End of Year
The accompanying notes are an integral part of these statements.

22Notes to the Consolidated Financial Statements
Japan Securities Depository Center, Inc.

1.
Basis ofPresenting theConsolidated
Financial
Statements

The accompanying consolidated financial statements have been prepared from the accounts maintained by Japan Securities Depository Center, Inc (“the Company”) and its subsidiary in accordance with the provisions set forth in the Securities and Exchange Law and in conformity withaccounting principles and practices generally accepted in Japan, which are different in certain
respects as to application and disclosure requirements of International Finance ReportingStandards. Certain items presented in the consolidated financial statements filed with the Directorof the Kanto Local Finance Bureau in Japan have been reclassified for the convenience of readers
outside Japan.

2.
Summary of
Significant
Accounting
Principles(1) Consolidation
The consolidated financial statements include the accounts of Japan Securities Depository
Center, Inc. (“the Company”) and its wholly-owned subsidiary, JASDEC DVP Clearing
Corporation (hereafter, “JDCC”) which is the only subsidiary of the Company. JDCC uses a
fiscal year ended on March 31, which is the same as that of the Company.
(2) Cash and cash equivalents
Cash and cash equivalents include all highly liquid investments, with original maturities ofthree months or less, which are readily convertible to known amounts of cash and are so near
maturity that they present only an insignificant risk of changes in value because of changes ininterest rates.
(3) Property and equipment
Depreciation for buildings, excluding improvements, is computed on the straight-line method
using the estimated useful lives prescribed by Japanese Corporate Tax Laws. Depreciation forother capital assets is computed on the declining-balance method at the rates based on theestimated useful lives prescribed by such laws.
(4) Software costs
Costs of software for internal use are capitalized and amortized on the straight–line method
over the estimated useful life of 5 years.
(5) Accrued bonuses
Accrued employees’ bonuses represent liabilities estimated as of the balance sheet date.
Bonuses to directors, which are subject to approval at the shareholders’ meeting, areaccounted for as an appropriation of retained earnings.
(6) Severance indemnity benefits
The Company has a severance indemnity plan covering all employees who meet the eligibility
requirements of the Company’s retirement regulations. The Company records accrued
employees’ retirement benefit costs based on the amount that would be payable if all eligible
employees voluntarily terminated their employment with the Company at the balance sheet
date.
Retirement benefits payable to directors and statutory auditors are accrued as accrued
executives’ retirement benefits at the amount computed based on the Company’s internal
rules and regulations on these benefits.
(7) Finance leases
In the normal course of business, the Company enters into lease agreements. Finance leaseagreements, except for those agreements where the ownership of the leased assets is transferred to the Company, are accounted for as operating leases.
(8) Accounting standard for impairment of non-current assets
On August 9, 2002, the Business Accounting Council in Japan issued “Accounting Standard
for Impairment of Non-current Assets”. The standard requires that non-current assets bereviewed for impairment whenever events or changes in circumstances indicate that the carrying

23

Notes to the Consolidated Financial Statements

amount of an assets may not be recoverable. An impairment loss shall be recognized in theincome statement by reducing the carrying amount of impaired assets or a group of assets to
the recoverable amount to be measured as the higher of net selling price and value in use.
The standard shall be effective for fiscal years beginning April 1, 2005. However, earlier adoption is permitted for fiscal years beginning April 1, 2004 and for fiscal years ending between
March 31, 2004 and March 30, 2005. The Company has not yet applied this new standard nor
has it determined the effect of applying it on the Company’s consolidated financial statements.
(9) Consumption taxes
The consumption taxes withheld by the Company and its subsidiary on sales and the consumption taxes paid by the Company and its subsidiary on its purchases of goods and services are not included in the amounts of the relevant accounts in the accompanying
statements of income. The consumption taxes withheld and paid are recorded as an asset or aliability, as the case may be, and the net balance is shown in the balance sheets.
(10) Appropriation of retained earnings
Under the Japanese Commercial Code and the Articles of Incorporation of the Company, theappropriation of retained earnings (including year-end cash dividend payments proposed by
the Board of Directors) must be approved at the shareholders’ meeting, which must be held
within three months of the end of each financial year. The appropriation of retained earnings
reflected in the accompanying consolidated financial statements represents the results ofappropriations which were applicable to the immediately preceding financial year, approvedat the shareholders’ meeting and disposed of during that year. Year-end cash dividends arepaid to shareholders on the shareholders’ register at the end of each financial year.
The payment of bonuses to directors and statutory auditors is made out of retained earnings instead being charged to income for the year, and constitutes a part of the appropriations
cited above.

3.
Assets andIn order to secure the Delivery Versus Payment (“DVP”) for Non-exchange Transaction Deliveries
liabilities held (“NETD”) settlement system, JDCC, a consolidated subsidiary of the Company, receives cash or
for soundsecurities as collateral from the DVP participants whom JDCC officially acknowledge as a party
settlement
system operation who undertakes securities obligations in accordance with the provisions set in JDCC’s general proand management visions in accordance with Article 156, Paragraph 7-1, of the Securities Exchange Law (Law No.

25, 1948).
JDCC manages cash and securities entrusted by the DVP participants as clearing funds
defined in Article 156-11 of the Securities Exchange Law separately from other assets in accordance with Article 7 of the cabinet ordinance related to securities clearing agencies (Cabinet
Ordinance No. 76, 2002).
(1) Participant fund specified assets and participant funds under management
Under the DVP for the NETD settlement system, when JDCC accepts obligations from DVP
participants, the DVP participants involved in the transactions make JDCC responsible forpayment obligations and the content thereof.
JDCC requires each DVP participant to establish a participant fund in excess of the necessaryamount set forth in JDCC’s general provisions to ensure that the respective obligations of DVP
participants are covered. The aggregate amount of participant funds entrusted to JDCC as ofMarch 31, 2005 was ¥15 billion. In the event a DVP participant defaults on the required payment obligations of the DVP for the NETD settlement system, JDCC shall take deposits fromthe participant fund of this DVP participant to fulfill its obligations to other DVP participants.
The participant funds entrusted to JDCC will be managed as money trusts, in line with thestated general provisions of JDCC.
The evaluation technique applied to money trusts will be the present value method for investments with no market value, a process corresponding to that used for other marketable securities.
24

Notes to the Consolidated Financial Statements

Assets and liabilities pertaining to participant funds are expressed as line items for thispurpose, with assets indicated as designated assets for clearing assets, and liabilities indicatedas deposits received for clearing funds.
(2) Collateral securities
Under the DVP for the NETD settlement system, DVP participants are able to entrust marketable securities listed in JDCC’s general provisions (hereafter, “collateral securities”) toensure that obligations to JDCC are met.
When a DVP participant fails to meet its obligations to JDCC, JDCC is authorized to dispose of the entrusted collateral securities by selling them in securities markets or throughother methods deemed appropriate by JDCC.
As of March 31, 2005, the market value of collateral securities entrusted to JDCC was¥128,125,806 thousand.

4.
US Dollar
Amounts

Amounts in U.S. dollars are included solely for the convenience of readers outside Japan. The rateof ¥107.39=U.S. $1, the rate of exchange as of March 31, 2005, has been used in translation. The
inclusion of such amounts is not intended to imply that Japanese yen have been or could be readily converted, realized or settled in U.S. dollars at this or any other rate.

5.
Lease
Transactions

Finance lease transactions, other than those in which the ownership of the leased asset is transferred to the lessee, are accounted for as operating leases. Certain key information (in equivalentdata) on such lease contracts of the Company for the periods ended March 31, 2004 and 2005 is
as follows:¥ (thousands)

Tools and furniture:
Acquisition cost
Accumulated depreciation
Net book value

2004

2005

¥268,933(48,108)¥220,825¥265,068(97,836)¥167,232$ (thousands)
2005$2,468(911)$1,557The scheduled maturities of future lease payments, including the portion of interest thereon, onsuch lease contracts as of March 31, 2004 and 2005 are as follow:¥ (thousands)

Due within one year
Due over one year
Total

2004

2005

$ (thousands)
2005¥ 52,660
169,597¥222,257¥ 52,469
117,128¥169,597

$ 488
1,091
$1,579Finance lease charges as well as depreciation and interest amounts (in equivalent data) for
the years ended March 31, 2004 and 2005 are as follow:¥ (thousands)

Finance lease charges
Depreciation (in equivalent data)
Interest (in equivalent data)

2004

2005

¥31,697
30,4352,135¥55,80153,5933,140$ (thousands)
2005

$519
499
29

(Note) Methods applied in computation of the equivalent data are as follows:
Depreciation: Straight-line method with zero residual value over the lease contract period
Interest:
Computed as the difference between the lease obligations and the acquisition cost, allocated for thelease contract period based on the interest rate method.

25

Notes to the Consolidated Financial Statements

6.
Short-Term
Debts

Short-term debts at March 31, 2005 comprised loans from banks with a weighted average interest
rate of 1.675% per annum.

7.
AccruedSeverance
Indemnities for
Employees

Accrued employees’ retirement benefits at March 31, 2005 represented the amount that would bepayable for the Company if all eligible employees voluntarily terminated their employment at thebalance sheet date. Severance costs for employees charged to income for the year ended March 31,
2005 amounted to 26,643 thousand yen (248 thousand U.S. dollars). Severance costs for employees charged to income for the year ended March 31, 2004 amounted to 13,350 thousand yen.

8.
Income Taxes

The Company and its subsidiary are subject to a number of different income taxes which, in theaggregate, indicate a nominal statutory tax rate in Japan of approximately 40.6% for the period
ended March 31, 2005. Reconciliation between the nominal statutory income tax rate and theeffective income tax rate in the consolidated statements of income for the years ended March 31,
2004 and 2005 is as follows;
Nominal statutory income tax rate
Adjustments:
Permanent non-deductible difference
Equal proportion of inhabitant taxes
Income tax credit on investment in IT
Other, net
Effective income tax rate

2004

2005

42.0%

40.6%

0.2
0.2
(6.8)
0.1
35.7%

0.3
0.3
(6.9)
0.4
34.7%

¥ (thousands)

Deferred tax assets:
Accrued bonuses
Enterprise tax payable
Unpaid social insurance premiums
Business facility tax
Tax loss carried forwards
Accrued retirement benefits to employees
Accrued retirement benefits to executives
Excess depreciation of fixed assets
Excess deferred asset depreciation
for tax purposes
Other
Deferred tax assets$ (thousands)
2005

2004

2005

¥ 41,175
72,408
5,465
2,334
8,108
13,342
17,527—¥ 46,936(5,421)
6,275
2,681
—
21,21322,43588,624

$ 437
(50)
58
25
—
198
209
825

—
—
¥160,359

22,572103¥205,418210
0$1,912

9.
Segment
Information(1) Business Segment
The Company operates a single business unit, the central securities custody and book-entry
transfer system.
(2) Geographic Information
The Company has no overseas consolidated subsidiaries and no overseas branches for theyears ended March 31, 2004 and 2005.
(3) Overseas sales
The Company does not have any overseas sales for the years ended March 31, 2004 and 2005.

26

Notes to the Consolidated Financial Statements

10.
Related Party
Transactions

The material transactions of the Company with related companies or individuals, excluding transactions with the consolidated subsidiary that are excluded from the consolidated financial statements, and other than those disclosed elsewhere in these financial statements, for the years ended
March 31, 2004 and 2005 are as follows:(1) Directors
As of March 31, 2004
TitlesName

Director

Director

Toshiji Shimizu(Note 1)

Masayuki Tanaka(in thousand yen)Ending balance

Business

Transactions

AmountAccount

Director of the Company
Director of Japan Securities
Settlement & Custody, Inc

Outsourcing(Note 1)

1,728,381

Account
payable-trade65,113Use ofequipment(Note 1)
Repayment ofborrowings
Interest on
borrowings(Note 2)
Short term
borrowing
Interest(Note 2)51——

1,330,000——

10,302——2,140,000

Short-term
deptPrepaidinterest

2,140,000

Director of the Company
Senior Managing
Director of The Bank ofTokyo–Mitsubishi, Ltd

2,749

6,383

(Notes) 1. The transaction amounts above exclude consumption tax. However, ending balance includes consumption tax.
2. Terms and Conditions(1) These amounts include transactions with Japan Securities Settlement & Custody, Inc (JSSC) for the nine month period from July
2003 because Toshiji Shimizu was appointed representative director of JSSC at June 19, 2003. JASDEC outsources its operations to
JSSC as needed.
(2) The terms and conditions of the above transactions are on an arm’s-length basis.
(3) Interest on borrowing is determined based on the market interest rate from banks.
As of March 31, 2005
TitlesName

Director

Director

Toshitugu Shimizu(Note1)

Fumiyuki Akikusa(in thousand yen)Ending balance

Business

Transactions

AmountAccount

Director of the Company
Director of Japan Securities
Settlement & Custody, Inc

Outsourcing(Note 1)

2,499,104

Account
payable-trade337,704

Use ofequipment(Note 1)
Director of the Company
Repayment ofManaging Director ofborrowings
The Bank of Tokyo–Mitsubishi, Interest on
Ltdborrowings(Note 2)
Short term
borrowing
Interest(Note 2)71——

645,000

—

—

2,693

—

—

430,000

Short-term
deptPrepaidinterest

1,925,000

315

5,918

(Notes) 1. The transaction amounts above exclude consumption tax. However, ending balance includes consumption tax.
2. Terms and Conditions(1) These amounts include transactions with Japan Securities Settlement & Custody, Inc (JSSC) for the period from April 1, 2004 to
March 31, 2005.
(2) The terms and conditions of the above transactions are on an arm’s-length basis.
(3) Interest on borrowing is determined based on the market interest rate from banks.

27

Notes to the Consolidated Financial Statements(2) Principle shareholder and its subsidiaries
As of March 31, 2004

(in thousand yen)

Principal
business

Relationship
Percentage
Directors Businessof ownership holding
relationshipwith voting
concurrent
right
positionsNames of companies

Address

Capital

Tosho System
Service Co.
(Subsidiary ofother affiliates)

Koto-ku,Tokyo

100,000 Design,development ofsoftware——Japan Securities
Clearing Corporation(Subsidiary ofother affiliates)
Japan Securities
Settlement &Custody, Inc(Subsidiary ofother affiliates)

Chuo-ku, 1,700,000 ClearingTokyo
securities

—

Three

Chuo-ku,
Tokyo

—

One

300,000 Custody &settlementof securities

Transactions

Amount oftransactions

Endingbalance

Descriptions

Purchase of Outsourcing
softwarePurchase ofsoftwareCommission Commission
incomeincome1,359,083

Trade account 148,426
payable1,626,653 Other account 67,200
payable2,845,288 Trade account 556,184
receivable

Outsourcing Outsourcing

1,728,321

Trade accountpayable51 —Use ofequipment

65,113—(Notes) 1. These transaction amounts above exclude consumption tax. However, ending balance includes consumption tax.
2. The terms and conditions of the above transactions are on an arm’s-length basis.
As of March 31, 2005

(in thousand yen)

Principal
business

Relationship
Percentage
Directors Businessof ownership holding
relationshipwith voting
concurrent
right
positionsNames of companies

Address

Capital

Tosho System
Service Co.
(Subsidiary ofother affiliates)

Koto-ku,Tokyo

100,000 Design,development ofsoftware——Japan Securities
Clearing Corporation(Subsidiary ofother affiliates)
Japan Securities
Settlement &Custody, Inc(Subsidiary ofother affiliates)

Chuo-ku, 1,700,000 ClearingTokyo
securities

—

Three

Chuo-ku,
Tokyo

—

One

300,000 Custody &settlementof securities

Transactions

Amount oftransactions

Descriptions

Endingbalance

Purchase of Outsourcing
softwarePurchase ofsoftwareCommission Commission
incomeincome1,325,628

Trade account 123,467
payable942,028 Other account 151,438
payable3,536,034 Trade account 647,525
receivable

Outsourcing Outsourcing

2,499,104Trade account 337,704
payable71 ——Use ofequipment(Notes) 1. These transaction amounts above exclude consumption tax. However, ending balance includes consumption tax.
2. The terms and conditions of the above transactions are on an arm’s-length basis.

11.
Net Income
per Share

The basis for calculating earnings per share for the years ended March 31, 2004 and 2005 are as follows:¥ (thousands)
2004
2005

Net income as reported in the consolidated statements of income ¥1,650,629
Directors’ bonuses through the appropriation of retained earnings
13,700Net income pertaining to common stock shareholders¥1,636,929
Weighted average number of common stock shares
outstanding (in shares)
8,500$ (thousands)
2005¥1,050,244
17,400¥1,032,844$9,779162$9,617

8,500

—

12.
Subsequent
EventsAppropriations of retained earnings:
Appropriations of retained earnings are recorded in the accounts only after shareholders’ approvalhas been obtained. The following appropriation of retained earnings of the Company for the year
ended March 31, 2005 was approved at the Ordinary General Shareholders Meeting held on June21, 2005:
Cash dividends
Bonuses to executives¥ (thousands)$ (thousands)¥212,500
17,400$1,979162(Including bonuses to statutory auditors amounting to 2,900 thousand yen (27 thousand U.S. dollars))

28

Report of Independent Auditors

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
JAPAN SECURITIES DEPOSITORY CENTER, INC.

We have audited the accompanying consolidated balance sheets of Japan Securities Depository
Center, Inc. and its subsidiary as of March 31, 2004 and 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended, all expressed inJapanese yen. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Japan Securities Depository Center, Inc. and its
subsidiary as of March 31, 2004 and 2005, and the consolidated results of their operations andtheir cash flows for the year then ended in conformity with accounting principles and practices
generally accepted in Japan.
The amounts expressed in U.S. dollars, which are provided solely for the convenience of readers,have been translated on the basis set forth in Note 4 to the accompanying consolidated financial
statements.

ChuoAoyama PricewaterhouseCoopers
Tokyo, Japan
June 21, 2005

29

Board Members and Auditors
As of June 30, 2005

BOARD OF DIRECTORSPRESIDENT& CEO

MANAGING
DIRECTOR

Yoshinobu Takeuchi

Masao Yagi

President,
JASDEC DVP
Clearing Corporation

Managing Director,
JASDEC DVP
Clearing Corporation

DIRECTOR

Toshio Goto
Managing Director, The
Mitsubishi Trust andBanking Corporation

DIRECTOR

30

MANAGING
DIRECTOR

Shoji Murata

MANAGING
DIRECTOR

Shigeru Omae
Managing Director,
JASDEC DVP Clearing
Corporation

DIRECTORDIRECTOR

Kunihisa Hama

Fumiyuki Hara

LawyerManaging Director, UBS
Securities (Japan) Limited

DIRECTOR

Takaaki Hatabe

Hidemi Ijichi

Director, Senior Executive Officer,
The Sumitomo Trust &Banking Co., Ltd.

General Manager,
Japan Securities
Dealers Association

DIRECTOR

Toshiaki Kawashima
Managing Director,
Chief Administrative Officer,
Nikko Citigroup Limited

Board Members and Auditors

DIRECTORDIRECTOR

Shigeyuki Maeda
Professor of Law, Gakushuin
University Law School

DIRECTOR

Akira Naito

DIRECTOR

Akihiko Nakamura Toshitsugu Shimizu

Managing Director,
Member of Board of
The Bank of TokyoExecutive Officers,
Mitsubishi, Ltd. Nomura Securities Co.,Ltd.

DIRECTOR

Motoi Takahashi
Executive Officer,
Daiwa Securities
SMBC Co. Ltd.

DIRECTOR

Masaru Takei
Executive Officer, Tokyo ElectricPower Company

Executive Officer,
Tokyo Stock
Exchange, Inc.

DIRECTOR

Shinichiro Tanaka
Managing Executive Officer,
Mizuho Corporate Bank, Ltd.

AUDITORSSTANDING AUDITOR

AUDITOR

Michio Sakai

Tetsuya Kubo

Takeshi Kusakabe

Auditor, JASDEC DVP Clearing
Corporation

Director, Sumitomo Mitsui
Banking Corporation

Executive Advisor,
Shinko Securities Co., Ltd.

AUDITOR31

History

May 1984

The Law Concerning Central Securities Depository and Book-Entry Transfer of Stock
Certificates and Other Securities (CSD Law) was passed, and enforced in November 1984.

Dec. 1984

Japan Securities Depository Center (JASDEC) was founded as a not-for-profit foundation
under a permit granted by the Minister of Finance and the Minister of Justice (competent
ministers) pursuant to Article 34 of the Civil Code.

May 1985

JASDEC was designated as a depository under the CSD Law by the competent ministers.

Oct. 1991

JASDEC began offering its depository services for stocks listed on the Tokyo Stock Exchange.

Jun. 1993

The U.K. Securities and Futures Authority approved JASDEC as an eligible foreign custodian.

Aug. 1993

The U.S. Securities and Exchange Commission issued a no-action letter to exempt JASDEC
from Section 17(f) of the Investment Company Act of 1940 and Rule 17f-5(c)(2)(iii).

Jun. 1997

The Association of German Banks approved JASDEC as an eligible foreign custodian.

Sep. 2000

JASDEC constructed a back-up center in Osaka.

May 2001

JASDEC launched its system for delivery versus payment (DVP) settlement of exchange tradesin Tokyo and Osaka.

Sep. 2001

JASDEC implemented the Pre-Settlement Matching System (PSMS) for domestic trades bydomestic institutional investors.

Jan. 2002

Japan Securities Depository Center, Inc., was established.

Jun. 2002

All central custody and book-entry transfer business was transferred to the new, incorporated
entity and the former entity was dissolved.
The Association of German Banks approved the new incorporated entity as an eligible foreign
custodian.

Jan. 2003

The Law Concerning Book-Entry Transfer of Corporate Bonds, etc. became effective and
JASDEC was designated as a transfer institution under the law.

Mar. 2003

JASDEC launched the Securities Information Tracing System (SITRAS) for lost stocks.
JASDEC inaugurated its Dematerialized Commercial Paper book-entry system.

32

Jun. 2003

JASDEC established JASDEC DVP Clearing Corporation (JDCC) to undertake clearing services
related to DVP settlement services for non-exchange transaction deliveries (NETD).

Aug. 2003

JASDEC signed a memorandum of understanding with The Depository Trust & Clearing
Corporation of the United States.

May 2004

JASDEC commenced DVP settlement services for NETD.

Jun. 2004

The Law for partial amendments to the Law concerning Book-entry Transfer of Corporate
Bonds and other Securities for the purpose of streamlining the settlement for trades of stocks
and other securities was promulgated.

Corporate Information
As of June 30, 2005

COMPANY NAME:

Japan Securities Depository Center, Inc.

DATE OF INCORPORATION:

January 4, 2002

DATE OPERATIONS BEGAN:

June 17, 2002

CAPITAL:¥4.25 billion (shareholders’ equity ¥11.4 billion)

COMMON STOCK ISSUED:

8,500 shares

NUMBER OF SHAREHOLDERS:

191

NUMBER OF EMPLOYEES:123

REGISTERED HEAD OFFICE

1-1, Nihombashi-Kayaba-cho 2-chome
Chuo-ku, Tokyo 103-0025, Japan
Phone:+81-3-3661-0161

Facsimile: +81-3-3661-2810
Website:http://www.jasdec.com

OPERATIONS OFFICESTokyo Office:6th Floor, Daini-Shoken Kaikan Bldg.
1-1, Nihombashi-Kayaba-cho 2-chome, Chuo-ku, Tokyo 103-0025

Osaka Office:6-10, Kitahama 1-chome, Chuo-ku, Osaka 541-0041

Nagoya Office:3-17, Sakae 3-chome, Naka-ku, Nagoya 460-0008

Fukuoka Office:14-2, Tenjin 2-chome, Chuo-ku, Fukuoka 810-0001

Sapporo Office:14-1, Minamiichijo-Nishi 5-chome, Chuo-ku, Sapporo 060-0061

SUBSIDIARY COMPANY
Company Name:JASDEC DVP Clearing Corporation

Date of Incorporation:

June 6, 2003

Commenced Operations: May 17, 2004
Capital:¥310 million

Registered Head Office:1-1, Nihombashi-Kayaba-cho 2-chome, Chuo-ku, Tokyo 103-0025

Organization Structure(As of June 30, 2005)● M EETING OF S HAREHOLDERS● A UDITORS O FFICE● B OARD OF D IRECTORS● P RESIDENT & CEO● A UDITORS● General Administration Department● General Affairs Section● Accounting Section● Corporate Planning Department● Business Administration Department● Bond and Commercial Paper Department● Business Planning Department● First System Department● Second System Department● Tokyo Operations Office● Osaka Operations Office● Nagoya Operations Office● Fukuoka Operations Office● Sapporo Operations Office33

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