Electronic Business: Concepts, Methodologies, Tools, and Applications (4-Volumes) P137

Laws and Regulations on Proprietary Trading System (PTS) in Japan In the background of the above provisions, there seems to be a difference between the subject of establishing a market and PTS, which have simi-lar functions to the market. Securities businesses (securities companies) which establish the PTS are under the registration system and the Securi-ties Dealers Association is under the regulatory authorization system and stock exchanges are under the permission system and the contents of regulations therefore are naturally different. While stock exchanges and the Securities Dealers Association have broad authority in self-UHJXODWLRQLWLVDVLJQL¿FDQWLVVXHWKDWVHFXULWLHV companies which establish PTS do not originally have a self-regulatory function such as ensuring fair trade against market participants. A securities market may not be established by other than those who obtained permission from the Prime Minister, except for the Securi-ties Dealers Association. On the other hand, in the event that securities companies, and so forth, perform purchase and sale and its intermediation, brokerage, or agency of securities, permission is not required (SEA, Art. 80). That is, in the event that securities companies, and so forth, perform purchase and sale of secu-rities, it does not fall under establishment of the securities market, which requires permission. The concept suggested by the Securities and Exchange Act is that it exempts the securities business from application of a permission system, while it brings into its view that a securities busi-ness might be inherently a market. Such a method of provision is perceived that conducting the se-curities business collectively on the Internet and VSHFLDORQOLQHWHUPLQDOVXVLQJDVSHFL¿FPHWKRG for determining the execution price of an order, is not regarded as securities business under the registration system, but it is the purpose of the Act to make them subject to more sophisticated regulations under the permission system. That is, there was such line drawn as those with a more sophisticated price discovery function require permission and if it is not so sophisticated, LWLVVXI¿FLHQWWRUHFHLYHUHJLVWUDWLRQDVDVHFXULWLHV business or regulatory authorization of PTS. It may be understood, in essence that the presence of a sophisticated price discovery function is added as an element for determining whether it is a securities market or not in SEA. This explains the reason why auction method applied to PTS is subject to volume regulations and conditions for regulatory authorization of PTS prescribe quantitative criteria concerning trade volume, which details are discussed later. ARRANGEMENTS FOR PRICE DISCOVERY AND EXECUTION As of 2006, arrangements for price discovery and H[HFXWLRQLQ376KDYHWKHIROORZLQJ¿YHPHWKRGV In 1998, when the provisions of PTS were newly enacted in SEA, only the price-importing refer-ence market method and negotiated method were the methods to determine the execution price of an order of PTS. Supply and demand in securi-WLHVWUDGLQJDUHQRWUHÀHFWHGLQSULFHVRIWKHVH methods, which did not have a price discovery function. Thereafter, as already explained, in order to promote competition among stock exchanges including the PTS, limit order matching method and market maker method were added in 2000, and auction method was added in 2005. Price-Importing Reference Market Method19 It is a crossing system, and does not discover prices itself but import prices from the stock ex-change market/OTC market where the securities to be traded are listed. For example, a transac-tion is concluded based on the closing price or VWAPVolume Weighted Average Price of the stock exchange market/OTC market where the securities to be traded are listed. 1294 Laws and Regulations on Proprietary Trading System (PTS) in Japan Negotiation Method20 It is a kind of order-driven method. Bid and ask quotes are collected and displayed to PTS partici-pants. They respond, enter into negotiations, and conclude a trade under the agreed terms within the system. Orders are not matched automati-cally. PTS provides facilities and opportunities to negotiate and execute. This method would be appropriate for large block trades. Limit Order Matching Method21 If a limit order price to sell and a limit order price to buy are matched, those orders are executed based on that limit order price. It is an order-driven method, however, it is different from an auction method applicable to stock exchange trades be-cause a market order and Itayose method22 are not allowed and orders are executed just through matching limit orders placed by PTS participants. A PTS that executes orders by this method is considered not to have a price discovery function VXI¿FLHQWO\FRPSDUDEOHWRWKDWRIDPDUNHWIRU exchange-listed securities. Market Maker Method23 In a quote-driven, market maker system, transac-tions are concluded between investors and market makers. The latter continuously quotes binding bid and ask prices for certain securities, however, a market maker of the PTS is not obliged to do so, thus, he does not guarantee that securities can be traded immediately at any time. This is a material difference between a market maker of a PTS and that of the market for the Over-The-Counter traded securities. Therefore, a PTS using this method is considered not to have as much a sophisticated price discovery function as the market for OTC traded securities. If a PTS operator is obliged continuously to quote binding bid and ask prices for certain securi- ties, as it is no different from the price discovery function through market making in the regulated OTC market, it is required to be subjected to legal regulations of the regulated OTC market and it may not be performed as a securities business. Only the Securities Dealers Association, which was incorporated by regulatory authorization from the Prime Minister, may establish the market for OTC traded securities. This is currently the Japan Securities Dealers Association (JSDA).24 Auction Method25 By the revision of the Securities and Exchange Act26, from April 1, 2005, the auction method was introduced as a method for determining the execution price of an order and it has been in effect up to the present. In terms of formulating DQ HI¿FLHQW DQG FRPSHWLWLYH PDUNHW DVD SDUW of improvement in the institutional framework of competition among stock exchanges, equal footing on competing conditions between stock exchanges and PTS was intended to be secured and the same method for determining prices by the auction method as stock exchanges was introduced to PTS. Since PTS may perform purchase and sale of securities by the Auction method similar to that of stock exchanges, purchase and sale by the Itayose method27 or market order became possible. Under this scheme, there is no longer a difference in the method of purchase and sale between PTS and stock exchanges, the only dif-ference is the trade volume and the degree of the price discovery function. On other methods to determine the execution price of an order, volume regulation is not imposed under the Securities and Exchange Act, but in the case of the auction method, it is provided, ³LWLVOLPLWHGWRWKHYROXPHRISXUFKDVHDQGVDOH of securities which does not exceed the criteria determined by the Cabinet Order.” (SEA, Art. YLLD7KLV&DELQHW2UGHULV³&ULWHULDLQ the case of the Auction Method” provided by Art. 1295 Laws and Regulations on Proprietary Trading System (PTS) in Japan 1-9-2 of the Cabinet Order for Enforcement of the Securities and Exchange Act (Cabinet Order No. 321 of 1965) and it has the following content (Nakanishi & Ogura, 200528). The average amount of the gross trade amount per business day concerning purchase and sale of exchange-listed securities and OTC traded securi-ties performed by the Auction method in the past 6 months is 1% of the average amount of the gross trade amount per business day concerning pur-chase and sale of exchange-listed securities and OTC traded securities performed by the market for exchange-listed securities and the market for OTC traded securities in the past 6 months. The average amount of gross trade amount per business day concerning each item of exchange-listed securities and OTC traded securities per-formed by the Auction method in the past 6 months is 10% of the average amount of the gross trade amount per business day concerning purchase and sale of exchange-listed securities and OTC traded securities performed by the market for exchange-listed securities and the market for OTC traded securities in the past 6 months. Due to the described quantity regulation, it is perceived that PTS using the auction method does not have such a sophisticated price discovery function as the market for exchange-listed secu-rities. However, in the event that the criteria are exceeded, acquisition of permission for establish-ment of the market for exchange-listed securities as the stock exchange shall be required. In this regard, it is to be noted that when the securities company receives regulatory authoriza-tion for PTS business from the Prime Minister VWDWHG³TXDQWLWDWLYHFULWHULDFRQFHUQLQJWKHWUDGH volume” 29 which are attached to the conditions for regulatory authorization are different from the described criteria. GUIDELINES FOR ESTABLISHMENT OF PTS With respect to a new form of securities business, PTS, it was expected that there might be various problems that were not anticipated in the tradi-tional securities business in terms of securing fair trade and investor protection. Accordingly, the Financial Services Agency has recognized the need for promoting environ-mental improvements contributing to the digi-talization of securities exchanges based on the viewpoint of investor protection and the Financial 6HUYLFHV$JHQF\SXEOLVKHGWKH³*XLGHOLQHVIRU Establishment of Proprietary Trading Systems” on November 16, 2000. Regulatory authorization of the PTS business, based on revised ordinances under these guidelines and administrative guide-lines, was enforced as of December 1, 2000 at the same time as the enforcement of the revised Securities and Exchange Act. These Guidelines consist of the following content (Osaki, 2001; Yoshino, 200130). Enhancement of Arrangements for Price Discovery and Execution in PTS Business In addition to the conventional price-importing reference market method and negotiated method, WKHGHVFULEHG³OLPLWRUGHUPDWFKLQJPHWKRG´DQG ³PDUNHWPDNHUPHWKRG´ZHUHQHZO\DXWKRUL]HG 6SHFL¿FDOO\WKH2UGLQDQFHRIWKH*HQHUDO$G-ministrative Agency of the Cabinet concerning GH¿QLWLRQVSUHVFULEHGE\$UWLFOHRIWKH6HFX-rities and Exchange Act31 was revised and the SURYLVLRQVRI$UWWLWOHG³$UUDQJHPHQWVIRU price discovery and execution of PTS operation business” was enacted. As a result of the addi-tion of two types of price discovery methods, limit order matching method and market maker method, PTS acquired a certain price discovery function. Accordingly, the quantitative criteria 1296 Laws and Regulations on Proprietary Trading System (PTS) in Japan described were established so that it would not have such sophisticated price discovery function as the market for exchange-listed securities and the market for OTC traded securities. Since Art. RIWKHUHYLVHG6($GH¿QHVE\GLYLGLQJLQWR those who require permission for establishment and those who may establish with regulatory authorization without permission, at the enforce-ment of the revised SEA as of December 1, 2000, the Financial Services Agency performed the work to determine among the contents of estab-lished markets the scope where it is performed as PTS, one of the securities businesses, and the scope where it may be performed only with the permission for securities exchange and it was summarized as the quantitative criteria based on the trading volume. Improvement in Rules for Securing Fair Trade: Conditions for PTS Regulatory Authorization Since securities companies have no self-regula-tory function, if a certain price discovery func-tion arises due to addition of the method for determining execution price of an order, there may be the possibility of problems on securing fair trades and investor protection. Therefore, in terms of preventing unfair trade, it is necessary to impose rules depending on the nature of the forum where such trades are conducted, including the nature of handling securities. The quantita-tive criteria based on trading volume share and the external announcements of price information were introduced as conditions for regulatory au-thorization of the PTS. These rules were provided in the administrative guidelines of the Financial Services Agency32 in the beginning of December 2000, but the guidelines were abolished as of July 15, 2005 and the same contents were provided in WKH³&RPSUHKHQVLYH6XUYHLOODQFH*XLGHOLQHVIRU Securities Companies” of the Financial Services Agency, published on the same date. External Announcement of Price Information, and so forth In securing fair trade in off exchange trades, including the PTS business, it is necessary for the price discovery to be made fairly and trans-parently. For that purpose, factors such as report-ing, concentration, and announcement of price information are essential. Therefore, in the PTS EXVLQHVVKDQGOLQJVKDUHFHUWL¿FDWHVSXEOLFDWLRQ is required by the method externally accessible in real time in the form which is able to compare the best quote and trading prices with those of the PTS operated by other securities companies and it is a condition for regulatory authorization of the PTS business that it has the mentioned form.33 It seems to be a provision, considering the U.S. National Market System (NMS), but integration of quote information of the same item is not required unlike the U.S. Consolidated Quotation System (CQS). ,WLVVXI¿FLHQWWKDWTXRWHLQIRUPDWLRQRIWKH376 RSHUDWLRQFRPSDQLHVLV³FRPSDUDEOH´ Such conditions for regulatory authorization are limited to those handling so-called equity securities, including stocks and warrant bonds (securities provided for in Art. 59-2 of the Cabinet 2I¿FH2UGLQDQFHFRQFHUQLQJ6HFXULWLHV&RPSD-nies). These conditions are not imposed on debt securities, including corporate bonds. This takes into consideration the characteristics of bond trading, where there are a great variety of debt securities, including corporate bonds and besides it LVWHFKQLFDOO\GLI¿FXOWWRSXEOLVKLQGLYLGXDOTXRWH and trading information, it is relatively easy to evaluate the validity of price from interest rates and credit ratings. As the system enabling the publication, the PTS Information Network34 operated by the Japan Securities Dealers Association (JSDA) started operation on April 30, 2002.35 JSDA decided to formulate the system satisfying the conditions, as response to request of the Financial Services Agency and in light of its position of managing 1297 Laws and Regulations on Proprietary Trading System (PTS) in Japan and regulating the purchases and sales through off-exchange trades of securities listed on stock exchanges. c. In order to secure safety and certainty of the system capacity, and so forth, VXI¿FLHQW FKHFNV VKDOO EH UHJXODUO\ conducted. Introduction of Quantitative Criteria based on Trading Volume Shares Since securities companies do not have a self-regu-latory function, in the event that trade participants increase and the size (trade volume share) expands beyond a certain level as a result of introducing 2 In the past 6 months, in the event that the ratio has exceeded 20% as to any of an item and 10% of the total securities handled by the PTS, permission for establishment of securities market shall be obtained. The Financial Services Agency is supposed to a certain price discovery function to the PTS, the problems may arise in terms of securing fair trades as well as the liquidity of stock exchanges, and so forth, a major market. These may result in disturbance of fair price discovery. Therefore, for the PTS business which covers stocks and warrant bonds (only those listed on stock exchanges or registered with an OTC market), if trade volume shares exceed a certain level, a certain measures shall be required based on this, which are the conditions for regulatory authorization.36 6SHFL¿FDOO\WKH\DUHDVIROORZV FRQ¿UPWKHUDWLRVHWIRUWKLQLWHPDQGPRQWKO\ The reason for bonds not being the subject of these quantitative criteria is as follows: that is, from the reality of bond trading that such bonds as government bonds and corporate bonds are traded almost all through OTC trading even if they are listed securities, it is not appropriate to determine the level of regulation based on the trading volume at stock exchanges. In addition, with respect to both the PTS which cover stocks or warrant bonds listed in the stock exchange market or the OTC market and other PTS, if it is necessary for public inter- ,QWKHSDVWPRQWKVLIWKHUDWLRRI³WKH daily average trading value at PTS” of stocks and warrant bonds which are listed on the market for exchange-listed securities or the PDUNHWIRU27&WUDGHGVHFXULWLHVWRWKH³WRWDO trading value on the stock exchange market or OTC market” is over 10% as to any of an item and over 5% of the total securities handled by PTS, the following measures shall be taken. est and investor protection corresponding to the expansion of trading volume, new criteria may be established to that extent. Review of Regulatory Authorization Criteria and Periodic Reporting It is expected that new forms of the securities busi-ness will be developed, which was not expected in the traditional securities business, along with a. In order to secure fairness in trades, the system (organization and personnel) which is in charge of trade management and examination shall be enhanced and improved. b. In order to secure the certainty of performance of settlement, a system similar to a reserve for compensation for default loss of stock exchanges shall be prepared. the expansion of the scope of the PTS business. Therefore, in terms of investor protection, and so forth, as the response of examination and supervision of regulatory authorization of a new form of the PTS business, necessary reviews were made for the criteria of regulatory authorization described and periodic reporting, and so forth. 6SHFL¿FDOO\LWZDVSURYLGHGLQWKH$GPLQLVWUDWLYH Guidelines37 and Article 10 of Ordinance of the 1298 ... - tailieumienphi.vn