Analyst Day 2019

Jul 3, 2019

Slides

Hello, everyone. My name is Miyahara of the TSE. Today, I would like to talk about 2 4 topics: classification change, corporate governance, ADF market revitalization and data service strategy. These four points will be outlined in my presentation. First of all, I would like to talk about the review of the cash market structure. In Darfollof last year, we had our experts Group deliberations, which has continued to match of this year. And in parallel, 70 firms have been subject to hearing from domestic and overseas institutional investors have provided 90 comments as well on this topic. Against this backdrop, we have organized our views. There are 3 challenges that we have identified, which are listed here. First point is that there is ambiguous market concept impairing convenience of investors and losing attractiveness. The TSE and OSE have integrated management and the markets has remained in parallel. More specifically, there were the 2nd section, mothers and Jasnag Overlap, seem to be confusing. There are also differences in criteria as well. The second point is the insufficient incentives for listed companies to sustainably grow and increase corporate value. Concerns that listing criteria for step up to the first sections are not functioning sufficiently to incentivize growth. The criteria was considered to be too low. And the listing on the first section is considered to be the goal. Furthermore, concerns of the need to facilitate market penetration and the third point is that we need an investable index benchmark index that also represents a wide investment opportunities. Therefore, these are the 3 issues that have been identified in the context of cash market structure. Please refer to the following page. Against the backdrop of the 3 challenges, one view or hypothesis has been outlined. We believe that the optimal market structure in the future has been identified. And the growth stage of the listed companies as well as the investors' perspective should be considered in segmentation. Redesigning based on this segmentation is required. This is the hypothesis that we have outlined here. More specifically, we are considering markets of an A and C and B market is the for well established companies with including and investors including retail investors. And C is companies that need requirements for investment instruments in broad range of investors and B are companies with high growth potential. These are the 3 segments that we have identified. If we were to reorganize based on these 3 segments, we have identified the criteria based on the market concept in terms of listing criteria, governance structure, liquidity, profits as well as market valuation criteria will be required for A and C. On the other hand, for market segment B, these are listing opportunities for companies with high growth potential. Therefore, it should be less stringent criteria than those for market segments A and C. Furthermore, in terms of the excellent criteria, sometimes the Japanese market is criticized for not being revitalized. Therefore, the exit criteria should be outlined based on the market valuation as well as financial results. Now in terms of the mechanism to complement the incentives for a sustainable corporate value increase of listed companies will be required as well. For example, from transfers between market segments, yen 4,000,000,000 from others has been identified to list in the first section. Will this be appropriate in terms of enhancing corporate value? We'll have to be subject to review. Therefore, this criteria will have to take into consideration the valuation from the market as well. In particular, the last bullet point should be referred to, which is the market segment C. It should be subject to global institutional investors as well. Therefore, that should be taken into consideration. In terms of setting the criteria at any rate. Regarding this matter, currently, in the Financial Deliberation Council, Expert Group is discussing. Therefore, the progress made in this discussion as well as the ultimate direction identified will be the basis of formulating the design. We believe that this is will have an impact on various stakeholders. Therefore, as mentioned here, the impact will be fully considered in setting forward with the transition, making sure there is a soft landing. Next, I would like to talk about the improvement to the effectiveness of the corporate governance code. In 2014, the stewardship code was formulated and the following year, a corporate governance code has been introduced and 4 or 5 years have already passed since then. And in terms of exercising voting rights by institutional investors as well as improvement in ROE and shareholder return improvement have shown improvement in this area. However, regarding the corporate governance code reform, it should be a continuous process to make improvements. Therefore, we have had appropriate revisions as well in June of last year. As mentioned here in the revised corporate governance code, the 4 or 5 changes have been made, it has been revised or added. First point is management that considers capital cost, More specifically, the business portfolio review should be included and management resources' optimal allocation should be considered by management. 2nd point is Board effectiveness. Utilizing an independent advisory committee or having nomination committee on a value basis should be introduced. Regarding agenda and international aspect, globalization should be considered in the makeup of the Board as well. 4 point across shareholdings, this has been pointed out by many institutional investors abroad. Regarding the reduction thereof, the policy and review should be disclosed. That is included in the quote, am you? And the roles of the corporate pension funds as asset owners will have to be improved. These are the main revisions to the corporate governance code as of June last year with the FSA. We shall continue with the follow-up in a proactive manner so that corporate governance reform in Japan will become more effective going forward. Next, from the viewpoint of the market, I would like to talk about the market making system incentive scheme of the ETF. On the part of the TSE, from the past, ETF has been a focus of revitalization efforts. But in general, on the listed, we have more than 230. So we have seen a significant increase. However, for certain ETFs, it's subject to concentration of liquidity and investors cannot sell when they want or buy when they want. Therefore, as a first step, last year, in July, for individual as well as smaller institutional investors, market nurturing has been made. It says for some ADF spent, in fact, trading value as well as the AUM has increased significantly. We have seen good results in terms of the introduction of the market making scheme. Having entered this year for the market making incentive scheme, the institutional investors are engaging in trading. And from their side, they have requested more scope in terms of investing in Market Making. And against this backdrop from April of this year, For example, Nikkei225 and TROPICS, the ETFs enhancement has been made in terms of liquidity, which is called the STAR ETFs. These are the within the scope of institutional investors. And for these products, we have introduced a market making system as well. Fortunately, having started, it's already 3 months. In some products, we have seen significant trading value as well as AUM. There are 7 market makers and 120 in terms of the ETFs. And we will work continuously to improve the ETF market making incentive system. Next page is the ATF market making and settling scheme for version 2.0. Please refer to the next page. Now, in order to revitalize the ETF market, I have already talked about liquidity, but we would like to also diversify the ETFs as well. We have been making efforts appropriately. And more recently, we have established a scheme of Japan China EDF Connectivity. China related EDF have been listed. And through these activities and going forward, we would like to offer more in terms of EDF. For example, the emerging countries as well as equity ETFs are the areas we will be focused on going forward. The last topic I would like to share with you is regarding the vision for the next generation data business. In a nutshell, information uses and the distribution system should be diversified so that, ultimately, it shall lead to increase in investments. That is the type of ecosystem we hope to establish. In the past, from JPX through information vendors as well as the participants. We have provided dedicated lines to provide information. And the information vendors had provided such information to the users of the services. However, going forward, we will also link the startups and service providers. We will establish another route for startups and service providers. Specifically, market data required by startups can be provided using API as well as cloud. Next generation distribution system will be utilized for this purpose. By so doing, the market data utilization can be unleashed in areas we have not contemplated before. By so doing, ultimately, we hope that ordinary persons will have better understanding about the Tokyo market information. It will become more familiar to the ordinary person so that this will ultimately lead to more investments by people in general. Specifically, for startup companies and providing information to the startups, together with KDDI. We are now working in collaboration and API portal site of KDDI is receiving the stock market historical data. Please refer to the next page. This is the POC or the proof of concept program for utilizing data, as I have already mentioned. With party sector, we had not had very strong relations in the past will now be in the scope of collaboration so that we can provide data in a wider context. And in order to verify, we are doing this POC from Asumuzai, is a company with enormous databank and the intangible asset information as well as IP, human resources information. And our listed companies' data are combined so that new program or new index can be formulated. This has been subject to the POC program. And from 10 companies, we have received inquiries to participate in this POC program. And this program has already started. Going forward, data business is very important in terms of business relationship. It is important source of revenue for us as well. Therefore, we shall continue to focus efforts in this area in a proactive manner. With this, I would like to conclude my brief presentation. Thank you very much for your kind attention. Thank you very much. I am Yamaji from Osefa Stock Exchange, and I'd like to go over with you our derivatives market strategy. First of all, let me give you the overview of the Osaka Stock Exchange Derivatives market. So here on this page, we have bar graphs a bar graph as well as a line graph. But then if you'd be able to look at the dark blue line, this looks at the Nikkei average. And the lighter blue shows the volatility index of Nikkei average or Nikkei225. Bar graph into the quarterly ADV, average daily trading volume, ADTV. And you also see the red line, which looks into the yearly average trading volume. And we find good great correlation between this blue line. In other words, I'm talking about the lighter blue. In other words, when we have more volatile index, we have more derivatives being traded. The Nikkei average volatility itself is not exactly what I'd be focusing on, but then the volatility is actually what I'd be looking at. And whenever there is a shock, that does have a correlation with the tradings of the derivatives. So for example, in 2016, there was no excuse me, this was 2015, there was the China shock in summer. But if you exclude this event, you can find that at the early part of the year, that would be the 1st and second quarter. In other words, April all the way to September would usually be the time when we have less ADV. And towards the second half, you have more volatility, which means you have more ADV. So this is the pattern that we have been continuously been seeing, especially last year, that would be FY 2018. We were able to have a very high ADTV, the 2nd record high after 2015. And looking at our main products, that would be the next slide. So you know that we have Nikkei 2 to 5 large and mini. And we also have TOPIX Futures, and we also have Nikkei 2 to 5 option. So these would be our main product lines. When TSE and OSE was merged, we were able to have the 2 markets merged. And we were able to have an expansion of the investment as well as improvement in liquidity. And so there were more trading volume. But then at the same time, we have more passive management. I think this is also coming from the increased liquidity. And so with that, ever since 20 13, topics futures in Nikkei-two twenty five, the trading volume has been increasing. And at the moment, we have been able to reach the 2nd highest on record. But then there's also another main product, which would be the 10 year JGB Futures. In January 2016, this was a time when BOJ introduced negative interest rate, the negative rate. And after right after that, the trading volume declined quite immensely. And I think this is something you'd be able to see on this bar graph, the blue bar graph. 2016, it falls, but then recently, you can find that it's been going up again. Especially last year, there were more than 40,000 contracts of ADV. One would be 100,000,000 yen. So that means we're talking about 4,000,000,000,000 yen size of trade being done in a day. So one reason behind that is because this one tip is 10,000 yen so the national capital notional capital becomes large. And so it's not about the direction per se, but even when you'd be able to still enjoy a large yield, so these are the styles of the investment that we're finding amongst the investors. And so some of the investors which were reluctant, for example, we're now having PropTechs of securities people being more active in the 10 year JGB Futures. But then, other than these main products, that's something that we have also specified in the following page. So here you have the blue bar graph, which looks at the mother's index futures. Yellow looks at the Nikkei average weekly option. Green would be TSE REIT Index Futures. So you can find you can see that many people are spending more work, effort and time into these non major products. And so this is so we are trying to pursue that, pursue this trend, endorse this trend, and we are trying to hold seminars together with some of the online securities people as well. And so this have contributed in high record high trade volume. But then even for mothers, it's not even reached 30,000,000. And so it's still small to be called a major or even a sub major product. But we do believe these products would well become the next promising product as we look towards the future. Now going to the next extended the trading hours till 5:30 a. M. Of the following day. And so you'll be so it's so summertime, it is open until 4:30 in U. S. And so that means you'd be able to cover the entire hours market hours of the U. S. But then in winter, then the time gap would be 10 hours. And so that means there is this very final part where we would not be able to cover from Tokyo side from Japan side, but then Europe or the U. S, especially, now we have Donald Trump. And so there are a lot of events coming from the U. S. And so that seems to trigger the actions in the other global markets as well. And with that, our night session trading, in other words, from 4:30 from 4:30 p. M. Japan time all the way to 5:30 a. M. On the following day, that would be 13 hours. There are tradings going on all through the hours. Now this now is almost is more than 40%. It's actually exceeded 40%. It's almost up to 46% in October 2018. That is the amount of the share of these night session within the entire trading. And of course, we night session trading, you would be able to have double the time of the usual, the trading session in Japan. But we do believe this share will keep on increasing. And now let me go into the 3rd midterm management plan, and I will be focusing on the derivatives part. In other words, what we aim to achieve. The first part is about realizing the comprehensive exchange. This was 2 years ago when we were able to speak about this in this similar occasion. And I also emphasized the significance of realizing comprehensive exchange But FSA or METI or the Ministry of Agriculture was also able to back up in creating this comprehensive exchange. So we're able to make a large step ahead. We've been able to sign a basic agreement this March, and we are going through the due diligence, and we are almost about to decide on the TOB pricing. When we realize a comprehensive exchange, what can happen? So the global futures or the derivatives, this has been expanding by 5 times over the past decade. But then in Japan, on the contrary, it's been reduced to 1 5th. And there are several reasons behind this. One would be, for example, TOKOM. The credibility of TOKOM has not been assessed properly, and so some investors are hesitant in the commodity market and also the clearings function. It seems like the credibility of the Clearance Corporation lacks the credibility. And so as if will we be able to consolidate all as JPX Group, we do believe it should make it easier for more investors to come in this space. And also, the FSA, of course, FSA would be regulating us, the Financial Instruments Exchange Act. But then there will be other regulators, including METI or the MAF in terms of the futures trading. So investors who will be globally investing on these derivatives would only be looking into the Tokyo side. But then these if we'd be able to take in the needs of the financial players, their flow, we should be able to enhance more liquidity. Now again, I mentioned that liquidity has become very low. And so therefore, people who would have the actual needs or the actual business operators, business participants, their needs have not been well captured. But then if we'd be able to enhance the liquidity, I think it should be a very positive turn for the business participants as well. Where are we trying to focus? We're trying to make sure we'd be able to enhance the competitiveness in Japan, the Japanese economy and the capital market. For example, Daein and Shanghai, we know that there would be very high activities. And but then there was this China shock also in Zhengzhou. And so with the China shock, investors will be looking at the lack of stability, which is also something that would be related to political standard. And looking at the political structure, Japan would be deemed as more stable. And so that is why more investors would be expecting more to Japan. And so with that all in mind, if we'd be able to enhance the competitiveness of Japan, the Japanese market, we should be able to enhance the competitiveness of Japan as a whole. We certainly do have more we need to do. It is unfortunately going to take more time. We need to look at different rules and regulations. We need to talk to different authorities. When we merged TSE and OSE, it was a merge of people doing the same work. But then we are talking about trying to merge people who are who've been engaged in different fields, different sphere. So there are more hurdles that we need to overcome, but we still do want to make sure we'd be able to steps forward. Now we have J Gate or the second version of J Gate for the transaction, the trading. But in 2016, as we've been able to start J Gate, and so we've tried to replace this once in 5 years. So the next one is going to come in 2021. And so we're preparing for this 2021. We're trying to select the right vendor for this. The first generation was launched in 2011. As we try to upgrade into the second version, we were able to listen to many investors and a lot of the requests were about the processing speed. They people wanted more speed. And so a millisecond to microsec was something that we'd like to upgrade ourselves in terms of the processing speed. But as we try to migrate into the 3rd generation, we again did this market research of what the requests were. Would people want to go into nano speed? That wasn't exactly it. It was about the robustness of the matching engine. And I've also wrote as the core concept, but it's really about launch timely. In other words, it's really about how timely we'd be able to and flexibly we'd be able to launch in new products. So that was the request. And so that is going to be the important core concept as we try to launch the next version of J Gate. It is 2019 now. In other words, we have 2 more years for the development, but we do want to make sure we'd be able to create a very competitive system or competitive matching engine. Next page looks into some of the changes in the market environment and how we want to create a market platform that adapts to the market needs. After Limon Shog, many regulators around the world wanted to pursue for more OTC trading going on to regulated exchanges. Now OTC trading, this is something that people would be undergoing a bilateral and but then if it is on exchange system, other regulated exchanges, it would be different. And we have the JNET, but this OTC, we were working with IDB or interdealer brokers. These were the people who worked between the players to match the needs of the participants. If we're going to put this into the regulated exchanges, that means we need to bring it to our side, but then enter dealer broker. We're not direct participants. In other words, we used to have the limit in going into directly going directly into this into dealer broker activities. But then through JNET portal, we have now have the flexibility to do this. This enables us to have a more smoother trading, so that we'd be able to the trade will be executed under JNET Trading, and we're trying to make sure we'd be able to launch this during 2019. And there was a question earlier about information service, but then again, we are going to be utilizing AWS in offering information. For example, all the order data is already being flowed. But then some of the other, for example, order data that had not been put into the information system is going to be available to people who will be able to access to AWS. At the moment, we know that there is this certain amount of demand, and we hope to be able to start this data service. So that was a very brief overview of what we are trying to do. Thank you very much. My name is Yomiya Ma of GSCC. From my part, I would like to start off with talking about the outline of the JSCC business and then talk about the strategy thereafter. First of all, this is the JSSC business scope. We are not well known, but so many people do not understand what we are doing. But we started clearing services related to listed products in 2003 and expanded its clearing coverage to OTC derivatives as well as others we have conducted for OTC derivatives. As you can see here, we are providing clearing for the listed products as well as for the OTC transactions, CDS as well as IRS and JGB Bond as well. Regarding CDS, we had 10 indices in the beginning, but single name have been added as well. We have 53 altogether now. Next is the status of the JSCC revenue. Please refer to the bar graphs. As for the operating revenues, we have been benefiting from Abe Economics and operating revenue has been showing a moderate expansion trend. Now share of OTC Transactions in operating revenue has a gradual increase and reached 26% in fiscal year 2018. And share of revenue from clearing services and operating revenue of the entire JPS has certainly shifted to approximately 20%. Please refer to the paragraphs. On the left hand side, the JLCC operating revenues provided from 2014. You can see that in 2018, the other than the list of products, you can see growth. Odyssey Derivatives and T+1 has been very beneficial. And with that, we have reviewed the fees. With that, operating revenues for OTC derivatives have increased significantly. The list this is not longer significantly impacted from the performance of the listed products. Next, JSCC, management policy is outlined. Left hand side is the management policy and core strategies under JPX's 3rd medium term management plan. Specific to JSS, there is the shortening of the stock settlement cycle. And the second is the launch and develop a comprehensive exchange. Mr. Yamagi has already provided explanations on this matter, and various questions were received. Now we would like to enhance the reliability by adopting measures from clearing commodity derivatives. As a clearing function, we shall reinforce the basic functions and offer clearing services responsive to new needs. These are the 2 focus strategies for JSCC. So from here off, I'd like to go over the future business strategies in each clearing service. So first of all, for the list of products clearing service, so we have cash equities and derivatives. But then we first of all do want to reinforce the basic functions at CCP. And first of all, it's about shortening the stock settlement cycle. And we're trying to implement this new cycle on July 16. And at the moment, we don't find any problems, so we should be able to implement as scheduled on July 16. And also, we want to sophisticated margin calculation method for the listed derivatives. Now we have CME Spam that we are using. It is being used widely, especially from the U. S, and it'd be able to have a more specific calculation. And we wanted to search in how we'll be able to adopt this in for Japan. And also, the CME, we have SPAN 2, and it goes under a very different concept, but then value added risk method is something that we want to capture, especially from the commodity side, 1st of all. So we've been trying to capture the necessary information so that we'd be able to implement this as soon as possible on our side. The second part is about offering clearing services responding to needs. So it becomes a bit technical. But when we have ETF creation and redemption, there's lots of back office work, and we want to make sure we'd be able to do this more smoothly. And so we're trying to create a system to enable us to do this. We already heard from Mr. Miyahara from TSE, but the market making of ETF on the ETF side, it needs to be done on a more smoother way. And if we'd be able to have a better clearing service or have more smoother operation around ETF creation redemption that should help more activities in ETF. This is something that we're already finding outside Japan, and so we're trying to do this in Japan as well. By being able to offer this service, whether or not our part of the revenue really increases is something that we would not be able say. But if we'd be able to activate the EDF market, I'm sure that would increase the trade value that we'd be able to enjoy. So it may not go exactly in a short term basis, but this is something that should add benefit in the end. Next is about OTC Derivative Clearing Service, so within the activities that we're trying to do. So for example, LIBOR in 2011, there's been a lot of reasons, but the LIBOR calculation is going to be discontinued. And so for example, there is 1400,000,000,000,000 yen amount of an interest. And if we'd be able to have a smooth transition, that is going to be very beneficial. And we currently are trying to make sure we'd be able to discuss with the necessary parties. And next is about offering services to new needs. So it's about enhancing the ease of use. First, it's about increasing the participants, the clearing participants, and so that is going to be very important. And if you'd be able to look at the bottom right, we've been keeping track of the number of clearing interest rates, JCC has a 60% share at the moment. Number 3 is about OTC JGB clearing service. So it was last May when we tried to shorten the settlement cycle to T plus 1. And if you'd be able to look at this graph, it's been a bit slow. There's a bit of an idling period, But we have been able to promote the system. And also, some of the major participants have been able to become more confident. And so from December, you can see the trade the clearing volume has been increasing. And DVP settlement of JGB, BOJ, In the past, our share was just like 60%, but now it is reaching 80%. So what does this mean? JGB transaction, we do believe the major participants in JGB Investments is now utilizing our clearing service. And there will be will be able to increase this 80% further is still a question to be asked. But if we'd be able to capture, we have been able to capture more clearance participants. But then if we have 80% of the share, that also means we have to be more responsible in making sure we have a stable infrastructure. So we are trying to make sure we'd be able to offer stability. And also, with T Plus 1, we had to make a lot of capital expenditure. And so we are at the moment reviewing our fee structure, and so that is why operating revenue has been increasing. Of course, the fee itself is increasing. And I think this is one area that we have to really focus on. It's about the new service and about the commodities clearing. You've just heard from Mr. Yamagi that OSE and Tokom well, Tokom, in the end, is going to become a subsidiary of JPX. And some of the products will be transferred to Osaka Exchange. And as for the clearings, there's also the rice from the Osaka Dojima Commodity Exchange. And so we have to really make a very large step forward at the CCP. And JCCH, which is Tokkom 100% subsidiary, Japan Commodity Clearing House, is now being merged is going to be merged with JSCC. So we are going to be taking all the activities done at JCCH. The front office part, we Tokom is already using the system that is being utilized at OAC, so that itself would not become a problem. But then when it comes to the clearance part, we use a different system. So how much expense is going to be required to go through the integration is something that we still are researching. So maybe at the point of integration, maybe we might want to have 2 systems running at the same time or maybe we might want to integrate soon. This is something that we still are discussing. And probably what you would be interested is whether or not we'd be able to really enhance the credibility through these activities. And I think there are 2 things that we have to look at. 1, credibility as the central the CCP. And JCCH has not been seeing a loss, whereas TOKOM has. And but then probably not many would be able to simply enhance the credibility of an entity that had been seeing a loss. And when it comes to the capital side, it's just about oneten. But then we are trying to make sure we'd be able to enhance the credibility as the first step. And also for the commodities of the futures, there is still a gap in the financial durability or the robustness. And so that is one reason why we have to make sure all the quantity derivatives be transferred to OSE, where you have very strong market players there. But then I think this is really up to whether or not we'd be able to go through a thorough risk management and whether or not we'd be able to invite overseas investors. And so to do that, we need to make sure we have a very robust clearing function available. And if so Osaka derivatives, more than commodities, I think these nonresident players, how they be able to take part in the activity is going to be immensely important. And once we'd be able to have that, I think we'd be able to make the sea change. So again, when it comes to risk management, the current JSCC activity will be continued, depending on participants, maybe become tougher. So we'd like to place a specific grace period, if you will, but we expect JSEC activity is what would be the mainstay. Now JCCH, Japan Commodity Clearing House, when this JCCH was established, a lot of members from JSCC went to help. And so that means the thoughts behind risk management is the same. But rules have changed and so margin regulations have also been changing. And there were some activities where JSCC had been trying to keep up with, whereas JCCH was a bit lagging behind. And so, if we'd be able to enhance that part in enhancing our risk management, I think we should be able to see a very good result. Now, of course, the question is how much we'll be able to do within the limited amount of time. If the market expands, that means we will be able to enjoy more operating revenue. On the backside, we will make sure we'd be able to strengthen the credibility. So we, 1st of all, do want to make sure that the market size would become larger. Now Tokom is still going to remain. In other words, oil will stay in Tokom. And the as for the listings, for the electricity, in the end, it would come into participants that failed in Europe. And I know there were a lot of discussions behind that. When it comes to electric and so therefore, when it comes to electric futures, a lot of overseas investors would be very strict here. In other words, especially in terms of the risk management, because there was such an event in Europe. And so that is something that we have to keep in mind. So, that ends my presentation.