Notes on Media Briefing by Atsushi Saito, Director and Representative Executive Officer, Group CEO, Japan Exchange Group, Inc., on January 31, 2014

Transcription

1 Notes on Media Briefing by Atsushi Saito, Director and Representative Executive Officer, Group CEO, Japan Exchange Group, Inc., on January 31, Third quarter financial results for the FY ending March 31, Establishment of a new round table regarding the extension of trading hours 1. Third quarter financial results for the FY ending March 31, 2014 First, I will explain our financial results for the nine months ended December 2013 using the handout. The results for the nine-month period was operating revenue of JPY 89.1 billion, operating income of JPY 40.1 billion, and net income of JPY 24.3 billion. From April to December, the market saw a large increase in trading volume on a year-on-year basis in both the cash equity and derivatives markets, except for a brief correction during the summer. The average daily trading value in the cash equity market (including the TSE 1st and 2nd Sections, Mothers, JASDAQ) was about JPY 3 trillion, up 2.4 times from the same period of the previous year. In addition, ETF and REIT markets expanded considerably, with the average daily trading value of ETFs reaching JPY 110 billion, a six-fold increase from the previous year, while that for REITs reached JPY 35 billion or up 2.6 times from the previous year. As stated in the material, a straight year-on-year comparison cannot be made since JPX had not been established, but compared with the combined figures for TSE Group and OSE for the same period last year, operating revenues have increased by 57.1%. Page 2 of the material contains a revenue breakdown. Due to increased trading in the cash equity and derivatives markets, trading participant fees increased by JPY 18.2 billion or 79% year-on-year, while income from securities settlement received a boost from the launch of JSCC clearing services for yen-denominated interest rate swaps in October

2 last year and saw a 101% increase of JPY 7.8 billion. Listing fees also rose by JPY 1.7 billion or 24% due to an increase in the number of IPOs as well as public offerings by listed companies and REITs. These combined to result in a large increase in overall operating revenue. After considering the 14.5% increase in operating expenses due to the accelerated depreciation of IT systems following system consolidation and goodwill amortization following the business combination, as stated on page 1, operating income increased by 187.3%, ordinary income rose by 157.7%, and net income grew by 161.6%. Based upon these financial results, on Monday (Jan. 27), we released an upward revision to our full-year earnings forecast. We now forecast operating revenue to reach JPY billion (up 35.1% from last year's combined figures), operating income of JPY 45 billion (up 96.8%), and net income of JPY 27 billion (up 108.4%). The consolidated full-year forecast is based on the revised assumptions of average daily trading values and volumes of JPY 2.8 trillion for stocks (up 79%) and 213,000 contracts for Nikkei 225 futures (up 39%), which includes trading volume of mini contracts converted to large-sized contracts. 2. Establishment of a new round table regarding the extension of trading hours I would like to move on to the next topic. We have established a new round table regarding the extension of trading hours. Even as we constantly look at ways to make our markets more attractive and respond to the needs of market users and investors, we recognize that the extension of trading hours or night-hour trading is mentioned very frequently by market users. As such, this is an issue that we need to look into. However, we will also have to consider the far-reaching impacts of a trading hour extension, since it would affect listed companies and other parties related to the market. For example, prices formed on the

3 exchange are used for corporate accounting or tax processing. Therefore, I believe that we should consider the opinions of various parties and have transparent discussions before making a decision. This is why we established the "Round table on extension of cash equity market trading hours," to provide a forum for discussion among academics and market users. The round table will be asked to identify and organize issues related to trading during night-time hours and consider appropriate responses. It will also consider other topics where necessary, such as moving down the end of the afternoon session. Chaired by Yusuke Kawamura, Deputy Chairman of Daiwa Institute of Research, the round table will be made up of academics and market users, as listed in the handout. The round table is scheduled to meet several times up till the end of spring 2014 with the first meeting to be held in early February Q&A: Q: Thank you very much. Let me ask a question about the upcoming derivatives market integration. Could you share with us the current progress of preparations as well as plans to invigorate the derivatives market? In particular, the trading volume of the Japanese derivatives market is understood to be low in comparison with markets elsewhere, so I would like to hear your ideas on expanding the derivatives market. A: So far, the preparations have been progressing as scheduled, although I won't be overly relaxed. We are conducting tests with market users and things have been smooth so far. We will remain vigilant to ensure success on March 24. How to grow the derivatives market is a very important issue for us. As you know, exchanges that operate derivatives markets generally generate higher profits than cash equity exchanges. Only recently, NYSE was acquired by a derivatives exchange.

4 We also see similar cases elsewhere. Looking at our revenue composition, cash equities account for about twice as much as derivatives. With the obvious potential and diversity of derivatives products worldwide, we are naturally looking to significantly expand our derivatives market. Following the upcoming market integration in March, the trading of derivatives currently listed on TSE, such as TOPIX futures or 10-year JGB futures, will be handled under OSE rules. This means that investors will be able to trade these products up to 3:00 a.m. This was not possible under TSE rules. The impact of this alone could be immense as OSE continues to consider other measures. In addition, trading of CNX Nifty futures will begin on March 24, the day of the market integration, as announced previously. These futures contracts based on the Indian benchmark are listed on the National Stock Exchange of India as well as Singapore Exchange and are quoted by many market makers. They have expressed interest in the listing of these contracts on OSE, in fact, we have had a better response from market makers than I had expected. Therefore, I think we can expect a reasonable amount of liquidity in the market. Looking further ahead, we will be re-launching 20-year JGB futures on April 7 in response to strong market demand. The contracts were listed before but trading was eventually suspended due to low trading volume. We also understand that there is interest among foreign investors in futures contracts tracking the JPX-Nikkei Index 400 and we hope we can offer a positive response. If the integration of the derivatives markets goes smoothly on March 24, then we will turn our attentions to the next-generation derivatives trading system. Of course, we will be considering opinions from a wide variety of market users and we hope to design a multi-functional system that accommodates diverse needs.

5 In 2015, we are planning to replace "arrowhead," the TSE cash equity trading system. After that, we will replace the derivatives trading system. While I cannot offer a specific timeline, we hope to do this as soon as possible. The replacements will significantly boost capacity and enable us to diversify our product lineup, which will contribute to growth in both the cash and derivatives markets. Q: Can I have one more question? Uniqlo owner Fast Retailing have recently been in the news with their plans to list in Hong Kong, while a foreign company will list on TSE next month for the first time in some years. What do you think of such moves by companies to list overseas? Do you think we will see competition to attract foreign listings among exchanges intensifying again? A: I see that news surrounding Uniqlo has caught your attention but the reality is that there are already 11 Japanese companies listed on other exchanges in Asia, 2 of which are listed in Hong Kong. Actually, there were some cases of delistings or trading suspensions soon after listing. There has not been a particularly big incident but, as I have said before, it is a strange idea to think of listing only in Japan. Depending on the business type or business model, companies can and should flexibly select a listing market suitable for their purpose. For example, some may list in a country to raise awareness of their company and products among local consumers. Others may list to conduct financing in other currencies. In this sense, the idea that Japanese companies must list in Japan is very odd. So, TSE welcomed two Korean companies, NEXON and W-SCOPE, in Although there have not been other companies following suit since then, we will continue to attract foreign companies to list here. Having said this, I also want to point out the problem of investor protection in cross-border listings. A cross-border listing means different sets of rules for different markets. This is especially important in markets, such as the US and Japan, where there is a lot of retail investor

6 participation in addition to institutional investors. In any case, I am very glad that TSE will welcome Acucela Inc., a biomedical venture that develops therapy for ophthalmic diseases. The founder and CEO is Japanese, an ophthalmologist who obtained his M.D. and Ph.D. at Keio University and later performed ocular research at the University of Washington. As you know, it s easier to start a business in the US than in Japan. Especially, biomedical ventures face a lot of red tape to obtain licenses from the Japanese authorities. This is why he started the business in the US, but he has chosen the Japanese market for their IPO. I do hope that, being in an industry that is popular among investors and with its Japanese CEO, Acucela will attract investor interest in Japan. We had been talking with the regulators for a while before, 2 years ago, they allowed foreign companies listed in Japan to file securities registration statements in English. Foreign companies which have been making disclosure in English in overseas markets have the option of doing a large part of the statutory disclosure in the English language. As such, we look forward to welcoming foreign companies which are seeking to list on another market. Looking at the US markets, we see a struggle between the SEC and the Big Four global accounting firms concerning problems with US-listed Chinese companies. They have also talked with the regulators in Beijing and are disputing the credibility of disclosure by US-listed Chinese companies. While it was US exchange operators that had aggressively approached Chinese companies to come forward to list in the US in the first place, some of these companies were later delisted. In my view, this is one issue with cross-border listings. While I recognize the importance of listing individual foreign companies, I think that bringing them here in the form of ETFs may be a better method. Thinking of the 16 foreign stock ETFs that listed on our market last year, I feel that the ETF scheme could allow retail investors to trade foreign companies more easily. Of course, we

7 want to continue to attract foreign company listings at the same time. Q: I have 2 questions. The first question is about CNX Nifty. What do you think of its prospects among retail investors? Do you see strong demand? Please let me know your analysis, for example, through online retail brokerages. A: In Singapore, CNX Nifty futures are traded mainly by professional investors rather than retail investors. However, in my opinion, such an instrument can allow retail investors to invest in emerging economies, like India in this case, if a certain level of liquidity is provided by market makers. Although investing in emerging economies is accompanied by some risks as seen in the recent market developments, retail investors may be able to invest in their rapid growth and diversify risks simultaneously by using financial instruments like the CNX Nifty contracts. Q: My second question is about the round table regarding night-hours trading. Do you attend the meeting every time? A: No, I don t. I only hear about proceedings. Q: What do you mean? A: The round table is a sort of advisory body. So, it is our responsibility to make a final decision based upon their recommendations. Q: I want to ask about the next-generation derivatives trading system. If there is a kind of negotiation going on with Tokyo Commodity Exchange (TOCOM) about shared use of the next-generation system, I would like to know its progress as well as your

8 opinion of its impact on the vision of comprehensive exchange. A: We have proposed to TOCOM several times, but they postponed a decision every time. They have asked us to submit our proposal again when they conduct another process. We will respond by proposing a next-generation system that accommodates their needs as far as possible and includes commodities trading into its capability specifications. We want this project and we will make our bid based on such a proposal. While I guess that you are more familiar with the topic of comprehensive exchange, I have been saying for a long time that it's not an issue of just wanting to be but that we must be a comprehensive exchange. I m saying this looking at Asia, especially China, Hong Kong, and Singapore. The German exchange has become the majority shareholder of a Singapore-based commodity derivatives exchange, while ICE has bought the Singapore Mercantile Exchange, which also offers energy derivatives. Everyone would also agree that times have changed and the rising middle class is a global phenomenon. Success depends on your approach toward this middle class segment. This may explain why some Japanese consumer electronics, mass-production manufacturers are having problems. Japan was once a developing country which exported products that met the needs of global consumers in developed nations. However, Japan is now a mature, developed nation, while emerging economies have come up and a new market, the middle class, is growing rapidly. Japanese companies are struggling to sell overly sophisticated, high-tech products to this market segment of ordinary households. There is an obvious mismatch and this strategy will not work. On the other hand, Korean or Taiwanese companies have been marketing their products to this segment from the beginning. The scale of the market is billions, not millions, so that's also totally different. In this context, I think many strategists or politicians in the world agree that prices will be decided in Asia, whether it is consumer goods, fuel, food, or manufactured goods. This is also why price formation venues are coming to Asia. One example is the acquisition of London Metal Exchange (LME) by Hong Kong Exchanges and

9 Clearing. Britain did not hesitate to sell the long-established LME because they understood that the center of metal futures trading will be Asia. This is the power shift happening in the world today. If Japan continued to hold this comprehensive exchange vision but make no real progress, we would be doing serious damage to Japan's future. Q: Let me know your macro view on the current stock market. Including today, the market has been rather volatile or bearish due to the concerns about the risks of emerging economies. What is your outlook for the market? A: It s a difficult question. The media also seem to be very cautious in presenting their market outlook. Whatever outlook you may be presenting, bright or grim, you never forget to add however at the end of their statement. I share your position, it is difficult to present an outlook. As all of you are already aware, the big problem is how to reverse the monetary easing which the EU, Japan, and especially the US have continued during the global downturn following the Lehman Shock. Continuing this policy would create problems but to return to normal they would have to "taper." It s easier to start monetary easing than to undo it. One thing I can say is that US policy makers are getting more and more confident about the recovery of the US economy, if they are to stay the course by tapering another USD 10 billion, as reported recently by the US media. If they should not be confident enough, they may say things like we will continue QE3 or we have to continue QE3 under the current situation. However, the Fed is tapering monetary easing right before the inauguration of its new chair Ms. Janet Yellen who comes with a Keynesian record. This means that the US economy is on the trajectory of recovery drawn by Mr. Bernanke s Fed.

10 My concern is its impact on the rest of the world rather than the US economy. Unlike export or domestic policies, US monetary policy immediately affects the world. US monetary policy moves impact emerging economies at the end of the money flow, like India and Brazil, the most. I have high expectations for the growth of emerging economies in the long-term and there are both negative and positive sides to the emerging economy slowdown. The market sometimes reacts positively, but generally investors tend to sell when there is bad news from emerging economies. If we look at the Tokyo stock market now, foreign investors have become a little cautious. However, in my view, the fundamentals of emerging economies have been recovering steadily. Q: Another question. What do you think of the impact of the consumption tax rise in April, especially on the stock market? Some say that stock prices will fall due to the negative impact from the rush demand to buy things before tax rise or the downturn that may be triggered by the tax rise. Others say that the Bank of Japan (BOJ) will conduct additional monetary easing to alleviate the impact of the tax rise, or that the market is moving on the assumption that the BOJ should do so. What is your view? A: There is no doubt that the consumption tax rise will be a big negative factor if no other means are not taken to minimize its impact. I agree with Professor Honda and other policy advisers that it will put a downward pressure on the economy, if the tax rise were to be introduced alone in April. However, the government enacted a supplementary budget package of JPY 5.5 trillion plus JPY 1 trillion aimed at stimulating post-hike demand. This amounts to a payoff. This is why some economists are forecasting sustainable growth after a downturn for a single quarter following the tax rise. While I m not an economist, I find their forecast convincing.

11 Q: How about the monetary easing? A: As the monetary easing is a sensitive issue, perhaps we should trust the words of Governor Kuroda. It s easier to start monetary easing than to undo it, as I ve said. Governments are quick to take easing measures when necessary, but find it hard to return to normal policy. The US is performing a balancing act to taper quantitative easing now. Japan will face the same situation sooner or later. The problem is how far we should go in monetary easing. We should never go too far. Q: Please let me ask a question about the financial results of JPX. About the increase in operational expenses described in the handout, when do you expect the synergy effect of the business combination to be felt substantially, with the operational expenses below the combined amount of the former TSE group and former OSE? A: As I first explained before the business combination, we are expecting to see system-related cost reductions of about JPY 7 billion by In this respect, things are moving towards this. Meanwhile, we are writing off or accelerating the depreciation of some former OSE systems. Expenses increased slightly due to these factors. However, other items such as personnel expenses are going to plan, so you could probably understand that we are already starting to feel the synergy effect. Q: Are personnel and other expenses decreasing? A: I would say that it s flat. I said that the synergy effect is being felt, meaning the increase in personnel has not led to rising expenses. Q: I want to ask about the nature of the round table on the extension of trading hours. You said it is an advisory body and only presents recommendations. Could you be a

12 bit more specific about the role of the round table? Will they make business policy recommendations on decisions on whether or not to extend trading hours? Or will they just gather and organize the materials and options that are required for your decision making? Which is a more accurate description of their role? A: We will welcome any opinions, even harsh criticism, from the round table discussions. The round table was set up to identify pros and cons among some very difficult issues and matters that we must solve. For example, whether companies should use March 31 for annual settlement? If so, will they evaluate their assets using prices at the end of trading at 15:00 on March 31? Settlement on March 31 is extremely important. Even companies in the black may have to borrow money. The price on March 31 of stocks that they hold as assets is very significant, whether it is own stock or other stocks. Then, the problem is the price at what time on March 31. There may be an opinion that the price at 15:00 should be applied thinking of accounting issues, but some may say that 22:00 would be better. Then, we have to specify or define what the price at 22:00 on March 31 will be. If the market closes at 22:00, settlement would be conducted on the next day. If so, the price at 22:00 will be defined as the price of the market on the next day. In this case, when the market opens on the next day, under the current practice of Japanese market, auction begins using the previous day s price. Then, we have to clarify which price is the middle price in the order book. It is extremely technical and there are many issues which have great impact. As far as this issue is concerned, since this is a social system, we have to communicate closely with all interested parties. I don't think there can be a complete solution, but it is our mission to respond to strong demand for a trading hour extension. However, some may say that the exchange is not required to go so far, that the priority for the exchange is to maintain social order, so closing at 15:00 or extending trading by one hour to close at 16:00. I do hope that the media brings up these matters for discussion to create some sort of public consensus.