Special Feature on Dematerialization

The introduction of a leading-edge system willlead to the further development of securities
markets in Japan.

Dematerialization is scheduled for January 2009
The joint-stock company system was introduced into Japan
more than 100 years ago. Stock certificates have long represented ownership rights of shareholders. The function of stock
certificates, however, is soon to be eliminated, and physicalcertificates will be phased out.
In January 2009, the stock certificates of listed companies
in Japan will become null and void. In turn, electronic records
registered on computer systems will prove share ownership.
This process is referred to as dematerialization of stock
certificates. As an organization responsible for developing andmaintaining Japan’s stock clearing and settlement system,
JASDEC has been cooperating with other relevant institutions
for the conversion to the new system.
In this special feature, we will explain why the dematerialization of stock certificates is needed and its merits, as well as
provide an overview of the new book-entry transfer system.

12 Japan Securities Depository Center, Inc. ANNUAL REPORT 2008

Why dematerialize stock certificates?
Stock certificates, with their watermarked paper and delicate ink, are part of
the traditional world of stock ownership. The weight and texture of the certificates in their hands remind shareholders of the value of their rights. The
paper certificates, however, require the cost of printing, the security needed
to ensure their safekeeping, and the insurance required at the time of transfer,as well as the risks associated with their loss, theft or forgery. So long as
stocks exist as physical certificates, they involve inherent costs and risks.
Dematerialization of stock certificates can eliminate such costs andrisks. Under the new system, shareholders’ rights are recorded electronically on the ledger of the book-entry transfer accounts. This system totally
removes the risk of forgeries or loss (due to the lack of information regarding
their place of storage) at the time of inheritance. For issuing companies,
dematerialization of stock certificates not only results in cost reduction, butalso improves the management of shareholder ledgers and allows for theeasy recognition of the composition of shareholders, enabling the companies
to use shareholder information effectively for IR activities and flexible
capital policy.
In the 1990s, following the burst of Japan’s economic bubble, thebankruptcy of large financial institutions caused a temporary halt in securities settlements, revealing various problems in Japan’s securities clearing
and settlement system. Since then, it has taken 10 years to reform thesystem; JASDEC, a key player of the reform, introduced a Delivery versus
Payment (DVP) system that links the delivery of stocks with payments and a
Straight-through-processing (STP) system, where entire trade processes andpayment transactions are processed electronically without manual handling.
In addition, we introduced book-entry transfer systems for dematerializedcommercial papers, corporate bonds, and investment trusts. In January
2009, dematerialization of stock certificates will be commenced, as a further
significant step for the securities clearing and settlement systems reform.
Such initiatives provide higher levels of efficiency for system users, thereby
lowering administrative costs and dramatically reducing the number of errors
by manual processing.

October

1991

JASDEC commenced depository and book-entry transfer system initially for
50 stocks listed on the Tokyo Stock Exchange.

October

1992

JASDEC began full-scale services of depository and book-entry transfer.

September 2001

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

November 2001

JASDEC started handling convertible bonds (CBs).

March

2003

JASDEC inaugurated its electronic book-entry system for dematerialized commercial paper (CP).

May

2004

JASDEC commenced DVP settlement services for NETDs.

January

2006

JASDEC debuted its book-entry transfer system for corporate bonds.

May

2006

JASDEC launched its depository and book-entry transfer system for foreign stocks.

January

2007

JASDEC introduced its book-entry transfer system for investment trusts.

January

2008

JASDEC commenced its dematerialized Exchange-Traded Funds (ETFs) book-entry
transfer system.

January

2009

JASDEC will implement dematerialization of stock certificates.

Japan Securities Depository Center, Inc. ANNUAL REPORT 200813

Special Feature on Dematerialization

The New System and JASDEC’s Role
Under the current depository and book-entry transfer system, JASDEC, as the sole provider of central
securities depository, accepts orders for securities
deposits and withdrawals. JASDEC also holds the
securities in custody and operates the book-entry
transfer of the securities traded. In the event thatshareholders, through securities companies, banks
and other participants of the depository and bookentry transfer system, deposit their stock certificates with JASDEC, the certificates are managed in
the ledger of book-entry transfer accounts provided
by the participants. Under the current system,
shareholders are allowed to keep stock certificatesoutside of the depository and book-entry transfer
system. Therefore, issuing companies are required
to keep two kinds of books: one of shareholders
and the other of beneficial shareholders. This creates
the additional task of identification of shareholders’names on both books ahead of the record date.
After conversion to dematerialization ofstock certificates, stock certificates will become
invalidated, being replaced by electronic records

on the customer accounts at account management
institutions such as securities companies and banks.
The new system will consolidate two separatebooks of shareholders at issuing companies into asingle book of shareholders. When a shareholder
has accounts at more than one account management
institution, name identification (which is currently
carried out by individual issuing companies) will
be conducted in JASDEC’s system. Under the new
system, shareholders information which is alreadyidentified by JASDEC will be delivered to issuing
companies as “General Shareholders Notification”
sooner than under the current system. It will greatly
streamline the administrative procedures at issuing
companies.
Moreover, the new system allows for a
multitiered account structure for account management institutions, which is not recognized under thecurrent system, and thus, further innovations in thesystem can be expected.

Current Depository and Book-Entry
Transfer System

New Dematerialized Book-Entry
Transfer System

Request for

Issuing company

Issuing company

Book of shareholders
Book of beneficial shareholders

Book of shareholders
General Shareholders

registration

Notice ofof name transfer

beneficial shareholders

Notification

JASDEC
Request for registrationof title transfer

Ledger ofparticipants’accounts

JASDEC

Account transfer

Stocks(deposits)

Ledger ofparticipants’accounts

Request forwithdrawal

Stocks(deliveries)

StocksParticipantsParticipants(Hold own stock
certificates or entrusts
them to securities companies)(securities companies, banks, etc.)(securities companies, banks, etc.)

Shareholders outside
the current depository andbook-entry transfer system

Stocks(deposits)

Request forwithdrawal

Stocks(deliveries)

Customers

Customers(beneficial shareholders)(beneficial shareholders)

14 Japan Securities Depository Center, Inc. ANNUAL REPORT 2008

Transfer
Account

Account transfer

Direct Account Management Institution(securities companies, banks, etc.)

Transfer
Account

Direct Account Management Institution(securities companies, banks, etc.)

Indirect Account Management Institution(Indirect AMI)

ParticipantsParticipantsParticipants(Shareholders)(Shareholders)(Shareholders)Enhancing the flexibility of corporate financing policies
electronically in JASDEC’s database. JASDEC
will consolidate the management of the data which
is currently tracked by each issue and each custodian, respectively. Under the new system, General
Shareholders Notification can be sent to issuing
companies within three business days after therecord date, thereby streamlining administrative
procedures to identify shareholders more quickly
and efficiently.
Moreover, under the new system, issuing
companies are able to request JASDEC for
General Shareholders Notification, thereby
promptly recognizing the composition of theirshareholders. Thus, it leads to greater flexibility
for issuing companies for their IR activities andcorporate finance policy formulation.
In addition, issuing companies are able
to request JASDEC to submit information onwhether a certain individual or organization is on
Transfer Account Book. Shareholders, for theirparts, are entitled to request JASDEC to send

The stock market is by far Japan’s largest
securities market, both in terms of the number ofparticipants and the value of trading. The market
comprises a broad spectrum of participants,
including approximately 4,000 listed companies,
and around 50 million shareholders. To convert
this large market to a fully electronic system, large
investment was required. The dematerialization ofstock certificates, however, provides tremendous
efficiencies, much more than the investment. By
taking advantage of the opportunities offered bythis new environment, JASDEC is preparing avariety of new services.
Until now, issuing companies have had tobear substantial administrative costs for nameidentification, delivery of dividend payments, andprocedures involving corporate actions, such as
capital increase and exercise of voting rights.
In contrast, with the dematerialization ofstock certificates, names and addresses of a totalof 50 million shareholders’ data will be recorded

Outline of Greneral Shareholders Notification
Issuing company

Data transfer
Paper document

Book of shareholders
Comparison by shareholder reference code

Notification data after name identification(Character data)

Stock balance data after name identification(Numerical data)

JASDEC
interlink
Notification data

Data edit

Name identification
Participant information

Participant information

Participant information

Participant information

Shareholders’ information (standardized Chinese character data)
Data input
Account Management
Institution (AMI)

Data input
Account Management
Institution (AMI)

Data input
Account Management
Institution (AMI)

Daily stockbalance data
(Numerical data)

Data input
Account Management
Institution (AMI)

Participants (Shreholders)Japan Securities Depository Center, Inc. ANNUAL REPORT 200815

Special Feature on Dematerialization

notifications to the relevant issuing companies toconfirm the number of shares they hold, thereby
allowing them to exercise their rights as minority
shareholders.
The dematerialization of stock certificatesthus streamlines not only administrative tasks
of issuing companies but also shareholders’procedures for the exercise of their rights.

More convenient, efficient dividend payments
shareholders’ accounts at financial institutions
once they designate the accounts via JASDEC toissuing companies.
On top of the previous system, shareholders
also receive dividends through their accounts at
account management institutions of their securities.
In such cases, the issuing companies can pay
the total amount of dividends collectively to theaccount management institutions which deliver thedividends to each shareholder’s account, respectively. This new framework of dividend

By the dematerialization of stock certificates,
dividend payments also become more convenientand efficient. Under the current system, dividends
are paid through bank transfer into shareholders’accounts at financial institutions or using dividend
warrants sent to shareholders. However, thedividend warrants are occasionally lost, and thedividend payment is not properly completed.
After implementation of new system, in addition
to existing procedures, shareholders could receive
dividends from issuing companies throughDividend payment method under dematerialized system
Current system
Payment to a shareholder
submitting adividend warrant

Added options for shareholders after dematerialization

Payment through bank transfar

Mediation of designation of dividend receiving
accounts

Method for proportionate allocation ofdividends based on the number of shares(including bank account registration to receive dividends)

Issuing companies (Transfer Agents)
Intermediary services
CalculatingBankof beneficiary-designation the proportionate transfer
allocation
for dividend paymentson behalf of dividend-paying
companies

Intermediary servicesof beneficiary-designation
for dividend paymentson behalf of dividend-paying
companies
Dividend warrant

Beneficiary-designationBank
form for receiving
transfer
accounts of dividend
payments

Banktransfer

JASDEC
Beneficiary-designation
form for receiving
accounts of dividend
payments

Shareholder A

Shareholder B

Financial institution

16 Japan Securities Depository Center, Inc. ANNUAL REPORT 2008

Shareholder C

Financial institution

JASDEC
Beneficiary-designation
form for receiving
accounts of dividend
payments

Shareholder
D

Account management
institution

Shareholder
E

ShareholderFpayment service would reduce cost and administrative procedures for issuing companies.
In this way, dematerialization of stock certificates would consolidate the management of a totalof 50 million shareholders and increase efficiency
for notification to shareholders by issuing companies and dividend payments.
Other than the new services we have describedabove, the new systems have possibilities for
improving the relationship between issuing

companies and shareholders. JASDEC will continue to further improve convenience for shareholders, issuing companies, and account management
institutions.

Promotion for shareholders to promptly deposit stock certificates withJASDEC through participants in custody under the new depository system
are being held by individuals, while another 12 billion stock certificates are being held by companies
in their vaults, respectively. These stock certificatesshould be deposited with JASDEC through participants by the time of the dematerialization. If thesestock certificates are not deposited with JASDEC
by the time of dematerialization, through accountmanagement institutions, and the shareholders’names are registered on the Book of Shareholders,issuing companies will open special accounts forthese shareholders. Therefore, these shareholders
will not lose their status as shareholders. But, if
shareholders kept stock certificates without registering their own names until implementation dateof the dematerialization, issuing companies would
open the special accounts by names registered on

JASDEC has been developing the new system
in collaboration with related parties, including
account management institutions, issuing companies, stock exchanges, the Bank of Japan, andregulatory authorities. JASDEC are now taking thefinal stage of the preparations by drawing texts ofvarious regulations and manuals, and conducting
test runs of the system.
The remaining task is to keep every shareholder informed about dematerialization of stock
certificates. As of March 31, 2008, the percentageof shares in custody represented 84.3% of all outstanding shares listed on Japanese stock exchanges,
but some 46 billion stock certificates are not yet
deposited for participants, according to surveys in
March 2008. Of them, 13 billion stock certificates

Balance of stock certificates in custody(Millions of shares)

Shares in custody

400,000% Custody ratio
72

81

84

64

300,000
54

58

42

200,000

30,44429

21,9084

6

34262,128

23

14,108100,000

8

13
46,919077

1761,74784,443 108,064

129,774 157,074

191,562 203,181

320,090
281,914 303,382

228,201(FY)

Japan Securities Depository Center, Inc. ANNUAL REPORT 200817

Special Feature on Dematerialization

Book of Shareholders. After the dematerialization,such shareholders would have been involved incomplicated process to register their own names
and change the shareholders’ status. (In somecases, shareholders could actually lose their rights
to those shares.)
In order to avoid troubles caused by shareholders who rush to deposit their stock certificatesin the last minutes of the dematerialization,
JASDEC and regulatory authorities have asked
issuing companies and securities companies to send
leaflets to shareholders urging them to deposit theirstock certificates as soon as possible. Financial
institutions and some public organizations arealso appealing to shareholders for early depositby using posters and pamphlets. To publicize theissue of dematerialization among shareholders,

we conducted information meetings all over Japanand utilize media channels (television, radio,
newspapers and the newsletters of municipal
governments). We are also making efforts to raiseawareness of issuing companies regarding shares
held in their vaults, and are requesting prompt
deposit of these shares.

Valuable infrastructure in Japan’s society
Dematerialization of stock certificates will transform Japan’s securities markets. In the markets forinvestment trusts and corporate bonds where fully
dematerialized systems already started ahead ofthe equities market, new products which utilize the
new infrastructure have been introduced. As thescale of the equities market is much larger than thatof other securities, a number of new products and18 Japan Securities Depository Center, Inc. ANNUAL REPORT 2008services can be expected to be launched rapidly.
Dematerialization of stock certificates will serve asa key infrastructure for society, thereby benefiting
not only the securities business but also Japan’s
economy.

Schedule for dematerialization of stock certificates and sale of stocks under the new system(Until the date of enforcement)

Case A

Case BFor stock certificates heldin securities companies as custody

For stock certificates held
at home in safe

Shareholders have already agreed to deposit stock
certificates with JASDEC

Shareholders intend to deposit stock certificates withsecurities companies as custody until the enforcement date

Shareholders intend to deposit stocks certificateswith JASDEC until the enforcement date1

Shares are registered in theBook of Shareholders under shareholders’ own nameShareholders will register their own namesby the enforcement date

At the time of sale of stocks

Special accounts 2 are opened
under the names of shareholders at
financial institutions designated byissuing companies, and the sharesare registered in the Transfer
Account Book.

Shareholders cansell their stocks
without
troublesome
procedures.

To sell stocks, shareholders needto transfer their shares from thespecial accounts to otheraccounts opened under their own
names at securities companies orother financial institutions.

Warning

At the time of transfer

Stocks are registered
for accounts held atsecurities
companies.

In an exceptional case,registered persons whosenames are in the special
accounts, sold the shares,
the rights of beneficial
shareholders may be lost.

Special accounts2 are opened atfinancial institutions designatedby issuing companies with theregistered name recorded in theBook of Shareholders

It is impossible to sell shares that are registered in thespecial accounts under the names of other persons. To
secure shareholders’ rights, it is necessary to ask theissuing companies to open special accounts in theirnames, and then to transfer these shares from otherpersons’ special accounts to your accounts3.

1

In a special two-week period which ends two weeks plus one business day before the enforcement date, a provision has been madeenabling securities companies and other financial institutions to entrust stocks in their custody to JASDEC without approval of shareholders. (Following the entrustment of these stocks to JASDEC, securities companies and other financial institutions must contact
the shareholders involved without delay.) After this special period is over, shareholders will be prohibited by law from requesting
securities companies and other financial institutions to deposit or withdraw shares. For this reason, it is critical to arrange for prompt
deposit.

2

In standard practices, shareholders open accounts at financial institutions by submitting application forms. To open special accounts,
however, issuing companies have to apply to financial institutions for opening special account on behalf of shareholders.

3

Ways in which requests for share ownership can be made to issuing companies: 1) Submit a request jointly with persons whosenames are registered in the special accounts; 2) submit a request simultaneously with an order issued by qualified authorities for thetransfer of shares from the special accounts to the persons acquiring those shares; and 3) any other means provided for by the relevant
Finance Ministry ordinances.

Japan Securities Depository Center, Inc. ANNUAL REPORT 200819