An Interview with the President

IN THE FOLLOWING Q&A SECTION, PRESIDENT TAKEUCHI TOUCHESON ISSUES PERTAINING TO THE DOMESTIC SECURITIES CLEARING AND
SETTLEMENT SYSTEM AND JASDEC’S RESPONSES.

D OMESTIC S ECURITIESC LEARING AND S ETTLEMENTS YSTEM R EFORMQuestion

What progress has Japan made in securities clearing andsettlement system reform?

I n 2000, the Financial Services Agency released a report highlighting“safety” and “efficiency” in securities clearing and settlement system reform,
and Japan embarked on the task of creating an internationally competitivefinancial infrastructure of the world’s highest standard.
Three issues have been raised with regard to the domestic securities
clearing and settlement system.
The first issue is costs — that is, the time and money expended byusers — arising from clearing and settlement functions separated by type ofsecurities, be they stocks, government bonds, corporate bonds, investment
trusts or some other type of securities.
The second issue is the realization of straight-through processing(STP), which has been tipped as the key to trimming costs and reducing thesettlement risks that accompany shorter settlement cycles.
The third issue is the standardization of trading data and the harmonization of communication protocols.
Efforts to achieve reform thus hinge on the question of how to maintain safety and efficiency — specifically, how to minimize inherent risks andcosts by enhancing system design and applying information technology —while successfully addressing the three issues outlined above.
JASDEC has tackled its reform in three particular areas.
First, to improve efficiency of the systems used in securities clearing
and settlement, we worked to promote STP for the PSMS and expand eligible
securities and applicable trades.

Straight-through processing (STP) An electronic system that eliminates human intervention from all trade-to-settlement
processes involved in securities transactions.
T+1 (Trade date plus one day)A movement to compress the settlement cycle — from trade date to payment and settlement — to one day after trading, from thecurrent three days after trading.

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An Interview with the President

Target and Theme

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Target 3

TargetTargetCatch up with major foreign
markets

Establish competitive market
infrastructures

Realize most advanced marketinfrastructures

Theme

Theme

Improving Efficiency

Improving Efficiency

PROMOTING STPPROMOTING PAPERLESS SYSTEM● September 2001

Start of book-entry transfer system:

Theme

Reducing Principal Risk
PROMOTING DVPStart PSMS

● May 2004

Start DVP for NETD

INCREASING ELIGIBLE SECURITY TYPES● March 2003

Electronic CP● January 2006

● November 2001

Start convertible bondtransactions
ENHANCING CSD GOVERNANCE● June 2002

Corporate and Municipal SBs● 2006–

Investment trust beneficiaryrights● 2009–Reorganization of JASDEC

StocksPROMOTING DEPOSITSREDUCING LIQUIDITY RISKS● Shorter settlement cycle (T+1)

Second, we utilized our transformation into a stock company to reinforce our corporate governance capabilities as a central securities depository,
while raising our profile through advertising to attract more investors andissuers to our services.
And third, to minimize principal risk, we targeted the development of
a DVP settlement system, and in May 2004, we connected the PSMS to our
newly implemented DVP system for NETD.
Through these efforts, we have contributed to the establishment of aninternationally competitive financial market infrastructure in Japan and theachievement of first-half objectives set out for securities clearing and settlement system reform.

JASDEC’ S T OPICSQuestion

What major systems issues must be tackled now and how
will JASDEC respond?

The next major task of reform is dematerialization. In March 2003, JASDEC
began providing book-entry transfer services for dematerialized CP. As of7

An Interview with the President

March 31, 2004, these services covered 257 issues, and the outstanding amountstood at ¥1,403.2 billion.
By and large, dematerialization of securities removes the risks inherent
in transporting physical certificates and cuts the cost of safekeeping them.
Moreover, dematerialization leads to safer, more efficient settlement andclearing operations, because no certificates have to be produced, delivered orpresented, and CP trades are now settled with the DVP system. Dematerialization also boosts trading of CP, because issuers can use smaller denominations without worrying about the cost of stamp duties on every certificate.
In addition to a book-entry transfer system for corporate and municipal straight bonds scheduled for implementation in January 2006, JASDEC iscurrently preparing for the introduction of a book-entry transfer system forinvestment trust beneficiary rights as well as the further implementation of asystem geared to the dematerialization of stock certificates, the final goal of
the reform process. This corresponds to legislative amendments such as revisionof the Commercial Code.
A higher custody ratio will facilitate the conversion of paper stocks
into dematerialized form, so we aim to pull our custody ratio into the 80%
range through the use of advertising aimed at investors, including individualinvestors.

R ISK M ANAGEMENT
Question

How is JASDEC reinforcing computer system management?
We are fortifying computer systems considerably, paralleling expansion ofservices. Coinciding with the May 2001 start of DVP for exchange tradedeliveries of stock certificates, etc., we upgraded central processing units todouble their processing capability. Then, in March 2002, we installed new
storage equipment in order to boost processing capacity for beneficial shareholder notifications from 21.6 million cases to 30 million cases for eachrecord date.
On the safety front, we established a backup center in September
2000 with the Bank for International Settlements’ Lamfalussy Standards inmind. In addition, we have set up an action plan incorporating all possible
measures to deal with a natural or non-natural disaster.
To reinforce management of information systems, we formulated ourown security policy, based on such international standards as BS ISO/
IEC17799 for information security management.

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