<
U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

November 15, 2002

Richard P. Streicher
U.S. Legal Counsel
Tokyo Stock Exchange, Inc.
New York Representative Office
45 Broadway, 12th Floor
New York, NY 10006

Re: Tokyo Stock Exchange, Inc. Options on the S&P/TOPIX 150 Index; and Applicability of No-Action Relief Granted to the Tokyo Stock Exchange to the Tokyo Stock Exchange, Inc.

Dear Mr. Streicher:

In your letter dated July 11, 2002, on behalf of the Tokyo Stock Exchange, Inc.1 ("TSE" or "Stock Exchange"), the organization responsible for the management and surveillance of the Stock Exchange and its markets, you request advice from the Division of Market Regulation ("Division") of the Securities and Exchange Commission ("Commission") that, as described more fully below: (1) the no-action relief the Division granted to the Tokyo Stock Exchange in 19992 applies to the TSE and its officers, directors, representatives, and Trading Participants (as described below); and (2) the Division will not recommend enforcement action to the Commission if the TSE and its Trading Participants undertake the limited activities described in the 1999 Letter with respect to S&P/TOPIX 150 Index options (the "New Option Contracts") traded on the TSE.

Specifically, you request advice, first, that the no-action relief granted in the 1999 Letter to the Tokyo Stock Exchange and its officers, directors, representatives, and market participants extends and applies to the TSE and its officers, directors, representatives, and Trading Participants as if (a) the 1999 Letter referred to the TSE in place of the Tokyo Stock Exchange, and (b) the 1999 Letter referred to Trading Participants in place of Regular Members and Special Participants.

Second, you request advice that the Division will not recommend enforcement action to the Commission if, as described below and subject to the terms and conditions set forth herein and to compliance with all of the terms and conditions of the 1999 Letter, in connection with the offer and sale of the New Option Contracts in the United States:

(1) The TSE and its Trading Participants act, as contemplated in the 1999 Letter, to familiarize "Eligible Broker-Dealers" and "Eligible Institutions"3 in the United States with the New Option Contracts without registering with the Commission as broker-dealers under Section 15 of the Exchange Act;

(2) The TSE or its Trading Participants do the following, solely in connection with the satisfaction of obligations Rule 9b-1(d) under the Exchange Act, without registering with the Commission as broker-dealers under Section 15 of the Exchange Act:

(a) a TSE Representative,4 a Trading Participant, or an Eligible Broker-Dealer provides the updated TSE disclosure document, dated March 2002 ("Updated Disclosure Document")5 to an Eligible Broker-Dealer and the Trading Participant effects transactions in the New Option Contracts with or for that Eligible Broker-Dealer pursuant to Rule 15a-6(a)(4) under the Exchange Act;

(b) a TSE Representative furnishes an Updated Disclosure Document to an Eligible Institution, or a Trading Participant furnishes an Updated Disclosure Document to an Eligible Institution, in response to an otherwise unsolicited inquiry concerning the New Option Contracts, and the Trading Participant effects transactions in the New Option Contracts with or for that Eligible Institution pursuant to Rule 15a-6(a)(1) under the Exchange Act;

(3) the TSE does not register with the Commission as a clearing agency under Section 17A of the Exchange Act as contemplated in the 1999 Letter;

(4) the TSE does not register with the Commission as a national securities exchange under Section 6 of the Exchange Act as contemplated in the 1999 Letter; and

(5) an Eligible Broker-Dealer, TSE Representative, or Trading Participant furnishes the Updated Disclosure Document to an Eligible Broker-Dealer or Eligible Institution before the Eligible Broker-Dealer or Eligible Institution effects a transaction in the New Option Contracts subject to continuing compliance with all of the terms and conditions of the 1999 Letter except: (i) as modified by this letter; (ii) that the TSE Disclosure Document referred to in the 1999 Letter shall mean the Updated Disclosure Document; and (iii) that TSE furnishes the Division, at least 30 days prior to the date definitive copies are furnished to Eligible Broker-Dealers or Eligible Institutions, with a copy of any amendment made to the Updated Disclosure Document because the information contained in that document becomes or will become materially inaccurate or incomplete, or because there is or will be an omission of material information necessary to ensure that the document is not misleading.

Third, you request confirmation that (a) the furnishing of the Updated Disclosure Document by a TSE Representative, by a Trading Participant, or by an Eligible Broker-Dealer, in each case, to an Eligible Broker-Dealer or Eligible Institution will satisfy the obligation under Rule 9b-1 under the Exchange Act to furnish an options disclosure document before accepting an order from a customer to purchase or sell the New Option Contracts, and (b) that neither the furnishing of the Updated Disclosure Document to an Eligible Broker-Dealer or Eligible Institution by the TSE or by a TSE Representative, nor the furnishing of the Updated Disclosure Document by a Trading Participant to an eligible Broker-Dealer or, in response to an unsolicited inquiry concerning the New Option Contracts, to an Eligible Institution, will constitute either solicitation or the provision of a research report as those terms are used in Rule 15a-6 under the Exchange Act.

The 1999 Letter allowed the Tokyo Stock Exchange and its Regular Members and Special Participants to undertake the activities described in the 1999 Letter to familiarize certain Eligible Broker-Dealers and Eligible Institutions with the equity options and TOPIX options traded on the TSE. You represent that the TSE has implemented and complied with the terms and conditions of relief set forth in the 1999 Letter and that the TSE will continue to comply with the terms and conditions of the 1999 Letter with respect to the options that are the subject of the 1999 Letter as well as the New Option Contracts. In addition, you represent that, among other things, the TSE has established careful limitations to assure compliance with applicable U.S. securities laws and that the TSE will continue, as necessary, to establish further limitations to assure continued compliance with such laws. You also represent that the TSE will not provide persons located in the U.S. with direct electronic access to the TSE without express approval from the Commission.

We understand the facts to be as follows:

Regulatory Background

On November 1, 2001, the Tokyo Stock Exchange demutualized, changing its form of organization from a membership corporation to a joint stock company and changing its name to "Kabushiki-gaisha To-kyo Sho Ken Tori Hiki Jo" (in English, the "Tokyo Stock Exchange, Inc."). The TSE is established in accordance with the Securities and Exchange Law of Japan (Law No. 25 of 1948, as amended) ("Securities and Exchange Law"). At present, the only stockholders of the TSE are General Trading Participants (defined below). The TSE is licensed to act as a stock exchange by the Prime Minister of Japan pursuant to a license initially granted by the Minister of Finance of Japan under the Securities and Exchange Law. As a licensed stock exchange, the TSE is authorized to trade stocks, bonds, fixed income derivative products and equity derivative products. The equity derivative products authorized for trading include futures and options on stock indexes and options on equities. Under the Securities and Exchange Law, the Prime Minister has supervisory authority over all stock exchanges in Japan. The Prime Minister is empowered to regulate stock exchanges. Among other things, the Prime Minister is authorized to grant licenses to stock exchanges, to approve their constitutions, business regulations, and brokerage agreement standards, and to approve the fairness and efficiency of transactions in options contracts on stock indexes and equities. The Prime Minister has delegated the authority referred to above, other than the authority to grant licenses to stock exchanges, to the Commissioner of the Financial Services Agency.

Under the Securities and Exchange Law, only stock corporations registered by the Prime Minister may engage in the securities business. Only such Japanese securities companies, and foreign securities companies registered by the Prime Minster pursuant to the Securities and Exchange Law and to the Law Concerning Foreign Securities Firms, can become Trading Participants on the TSE.

Market Participants

Trading Participants on the TSE are divided into four types, based on categories of "Trading Qualification Status" (i.e., categories of trading in which the TSE has authorized participants to trade), as follows: "General Trading Participants," who are qualified to trade all securities and contracts on the Stock Exchange; "Bond Futures Trading Participants," who are qualified to trade government bond futures contracts and options thereon on the Stock Exchange; "Stock Index Futures Trading Participants," who are qualified to trade stock index futures and option contracts on the Stock Exchange; and "Equity Options Trading Participants," who are qualified to trade equity options contracts on the Stock Exchange. All Trading Participants are members of the Japan Securities Dealers Association, and thus are subject to its rules. Also, Trading Participants' transactions on the Stock Exchange are subject to the relevant provisions of the Stock Exchange's Constitution and its rules and regulations. All Trading Participants, to the extent that they are qualified by the TSE to trade option contracts on individual stocks listed on the TSE or on stock indexes, function similarly to each other with respect to their trading activities, and are subject to the TSE's Constitution, rules, and regulations. Therefore, all Trading Participants both as to themselves and equity options and stock index options are subject to similar regulatory requirements.

All current Trading Participants are the same entities that, at the time of demutualization, were either Regular Members or Special Participants.

Clearing System and Margin

Since the 1999 Letter, the TSE has adopted a clearing system pursuant to which Trading Participants clear their transactions for themselves. Trading Participants are not, however, necessarily required to acquire Clearing Qualification status. If they do not have the appropriate Clearing Qualification status, they clear their transactions through other Trading Participants that have appropriate Clearing Qualification status. The TSE acts as a clearing body.

Another change since the 1999 Letter is that the TSE margin rules for Trading Participants and their customers are now based on the Standard Portfolio Analysis of Risk System developed by the Chicago Mercantile Exchange.

All transactions creating or closing positions in New Option Contracts are executed and settled in Tokyo by Trading Participants that are authorized by the TSE to trade New Option Contracts. New Option Contracts are not fungible or interchangeable with options that are traded on any other market.

The New Option Contracts

You represent that the S&P/TOPIX 150 Index ("Index") is derived from the over 1400 stocks that comprise the TOPIX, a composite index of all the common stocks listed on the First Section of the TSE. You represent that the 150 stocks included in the Index are highly liquid securities selected from each major sector of the Tokyo market and represent approximately 70% of the market value of the First Section.

Standard & Poor's, in collaboration with the TSE, maintains the Index. The TSE began trading the New Option Contracts and futures contracts on the Index on June 11, 2001.

Surveillance

You represent that the TSE is the primary trading market in Japan for almost all of the component stocks of the Index. In addition, both the New Option Contracts and futures contracts on the Index trade on the TSE. Consequently, you represent that the TSE has access to all material information necessary to conduct surveillance.

Response:

Based on the facts and representations set forth above, the Division confirms that the no-action relief granted in the 1999 Letter extends and applies to the TSE and its officers, directors, representatives, and market participants as if (a) the 1999 Letter referred to the TSE in place of the Tokyo Stock Exchange, and (b) the 1999 Letter referred to Trading Participants in place of Regular Members and Special Participants.

In addition, based on the facts and representations set forth above, and subject to all of the terms and conditions of the 1999 Letter, the Division will not recommend enforcement action to the Commission against the TSE, any of the officers, directors, or representatives of the TSE, or any Trading Participants under Section 15(a) of the Exchange Act if the TSE or Trading Participants take the limited steps described in the 1999 Letter to familiarize Eligible Broker-Dealers and Eligible Institutions in the United States with New Option Contracts without the TSE or Trading Participants registering with the Commission as broker-dealers under Section 15(b) of the Exchange Act.

The Division also will not recommend enforcement action to the Commission against the TSE, any of the officers, directors, or representatives of the TSE, or Trading Participants under Section 15(a) of the Exchange Act if, solely in connection with the satisfaction of obligations under Rule 9b-1(d) under the Exchange Act and under the limited circumstances set forth in the 1999 Letter, (1) a TSE Representative, Trading Participant or Eligible Broker-Dealer provides the Updated Disclosure Document to an Eligible Broker-Dealer and the Trading Participant effects transactions in New Option Contracts with or for that Eligible Broker-Dealer pursuant to Rule 15a-6(a)(4) under the Exchange Act; or (2) a TSE Representative furnishes an Updated Disclosure Document to an Eligible Institution, or a Trading Participant furnishes an Updated Disclosure Document to an Eligible Institution, in response to an otherwise unsolicited inquiry concerning New Option Contracts, and the Trading Participant effects transactions in New Option Contracts with or for that Eligible Institution pursuant to Rule 15a-6(a)(1) under the Exchange Act. The staff notes, in particular, that the TSE will continue to advise Trading Participants, as provided in the 1999 Letter, that, under U.S. law, Trading Participants which are not U.S. registered broker-dealers may deal with Eligible Institutions only in accordance with Rule 15a-6 under the Exchange Act, principally through U.S. registered broker-dealers as provided in the Rule.

Additionally, based on the foregoing, the Division also will not recommend that the Commission take enforcement action against the TSE under Section 17A of the Exchange Act if it operates solely in the manner described above for New Option Contracts without registering with the Commission as a clearing agency. In addition, the Division will not recommend that the Commission take enforcement action against the TSE, any of the officers, directors, or representatives of the TSE or Trading Participants under Section 5 of the Exchange Act if the TSE and its Trading Participants operate solely in the manner described in the 1999 Letter with respect to New Option Contracts without the TSE registering with the Commission as a national securities exchange under Section 6 of the Exchange Act.

The Division has reviewed the Updated Disclosure Document. Based on our review of that document, the Division advises that it will not recommend that the Commission take enforcement action against a TSE Representative, a Trading Participant, or an Eligible Broker-Dealer pursuant to Rule 9b-1(d) under the Exchange Act, if the TSE Representative, Trading Participant, or Eligible Broker-Dealer furnishes the Updated Disclosure Document to an Eligible Broker Dealer or Eligible Institution before the Eligible Broker-Dealer or Eligible Institution effects a transaction in the New Option Contracts, subject to the following conditions:

(1) the Eligible Broker-Dealer or Eligible Institution previously has received the ODD;

(2) the TSE requires that Trading Participants, before effecting a transaction with or for an Eligible Broker-Dealer or eligible Institution in the New Option Contracts determine, as described in the 1999 Letter, that the Eligible Broker-Dealer or Eligible Institution has received the ODD and the Updated Disclosure and maintains a record of that determination; and

(3) the TSE furnishes the Division, at least 30 days prior to the date definitive copies are furnished to Eligible Broker-Dealers or Eligible Institutions, with a copy of any amendment made to the Updated Disclosure Document because the information contained in that document becomes or will become materially inaccurate or incomplete, or because there is or will be an omission of material information necessary to ensure that the document is not misleading.

These positions of the Division concern enforcement action only and do not represent conclusions on the applicability of statutory or regulatory provisions of the federal securities laws. The Division has taken these positions based, in part, on the fact that the Commission, along with the Commodity Futures Trading Commission, has entered into a Statement of Intent with the Financial Services Agency of Japan that provides a framework for mutual assistance in investigating regulatory matters,6 and that foreign broker-dealers, including Trading Participants, electing to deal with U.S. institutional investors pursuant to Rule 15a-6(a)(3) under the Exchange Act are required to provide directly to the Commission, upon request, information, documents, testimony, and assistance in taking the evidence of persons that relate to transactions pursuant to Rule 15a-6(a)(3) under the Exchange Act. Moreover, these positions are based on the understanding that under Japanese law only members licensed or registered by the competent Japanese authorities may have direct access to the TSE, which is licensed as a stock exchange and subject to regulation by the Minister of Finance and the Financial Services Agency. Finally, these positions are based on your representation that the TSE will not provide persons located in the U.S. with direct electronic access to the TSE without express approval from the Commission.

The positions of the Division in this letter are based on the representations that you have made; any different facts or conditions might require a different response, and these positions are subject to modification or revocation if the facts and representations set forth above are altered.

Sincerely,

Elizabeth K. King
Associate Director

Endnotes

1 You note that on November 1, 2001, the Tokyo Stock Exchange demutualized, changing its form of organization from a membership corporation to a joint stock company and changing its name to, in English, the "Tokyo Stock Exchange, Inc." You note that as a result of this change, the TSE no longer has members. You state that the Regular Members and non-members authorized to trade on the Tokyo Stock Exchange prior to demutualization ("Special Participants") have been replaced by "trading participants," as described below, that the TSE has authorized to trade in some or all of its markets.

2 See letter from Robert Colby, Deputy Director, Division, Commission, to Richard P. Streicher, Loeb & Loeb LLP, dated July 27, 1999 ("1999 Letter"). The 1999 Letter permitted the Tokyo Stock Exchange and its Regular Members and Special Participants to undertake certain activities to familiarize certain Eligible Broker-Dealers and Eligible Institutions (as defined in the 1999 Letter and as described more fully below) with equity options and Tokyo Stock Price Index ("TOPIX") options traded on the Tokyo Stock Exchange.

3 To be eligible, each such entity must meet the following standards:

(a) it must be a "qualified institutional buyer" as defined in Rule 144A(a)(1) under the Securities Act of 1933 ("Rule 144A" and the "1933 Act" respectively), or an international organization excluded from the definition of "U.S. person" in Rule 902(k)(2)(vi) of Regulation S under the 1933 Act; and

(b) it must have had prior actual experience with traded options in the U.S. options market (and, therefore, would have received the disclosure document for U.S. standardized options called for by Rule 9b-1 (the Options Disclosure Document ("ODD")) under the Securities Exchange Act of 1934 ("Exchange Act").

4 TSE Representatives are representatives in the TSE's office located in New York City or outside the U.S. as described in the 1999 Letter.

5 Under the terms of the 1999 Letter, the Tokyo Stock Exchange agreed, among other things, to require TSE Regular Members and Special Participants to provide Eligible Broker-Dealers and Eligible Institutions with a copy of the TSE disclosure document, which provides an overview of the TSE and the equity options and TOPIX options traded on the TSE, prior to effecting a transaction with or for the Eligible Broker-Dealer or Eligible Institution in those options. In addition, the Tokyo Stock Exchange agreed to provide the Division with a copy of any amendment made to the TSE disclosure document at least 30 days prior to the date definitive copies are furnished to Eligible Broker-Dealers and Eligible Institutions. Pursuant to this condition of the 1999 Letter, the TSE has provided the Division with a copy of the Updated Disclosure Document, which has been revised to provide information concerning various market and regulatory changes in Tokyo since October 30, 2000, when the Tokyo Stock Exchange most recently revised it disclosure document, as well as information concerning the New Option Contracts.

6 See Statement of Intent of the United States Securities and Exchange Commission, the United States Commodity Futures Trading Commission, and the Financial Services Agency of Japan Concerning Cooperation, Consultation, and the Exchange of Information (May 17, 2002).


Incoming Letter:

The incoming letter is attached in PDF format.

http://www.sec.gov/divisions/marketreg/mr-noaction/tse111502.htm


Modified: 02/10/2005