Mr. Arthur Levitt Chairman Securities and Exchange Commission 450 Fifth Street, N.W., Washington, D.C. 20549 USA October 3, 1997 Re: Release No. 34-38672; International Series Release No. IS-1085; File No. S7-16-97; Regulation of Exchanges Dear Mr. Levitt, We highly appreciate being given the opportunity to make comments upon the SEC concept release, "Regulation of Exchanges", which we received last May from Mr. Richard R. Lindsey, Director, Division of Market Regulation. We pay our respects to the SEC for its unremitting efforts to cope with the rapid changes occurring in the securities markets. Firstly, as one of the organizations which provide and operate securities markets, we would like to express our views regarding the alternative trading systems (ATSs). In the near future, we too may face the same issues resulting from the on-going comprehensive reform of the Japanese securities market as described in the concept release. We believe that any organization which provides facilities to trade securities, whether it is a membership organization or proprietary entity, should assume a level of public responsibility corresponding to the importance of the role that securities markets play in national economies. We are pleased to learn from the concept release that the SEC shares this basic recognition with us. It also seems very reasonable to us, as one of the concerned parties in foreign countries, that the SEC is attempting, in light of this recognition, to respond to the increasing presence of ATSs in the U.S. market by thorough review of the existing regulatory framework. We understand that the SEC has attached much importance to incentives to technological innovation, and thus has so far focused attention on avoiding excessive regulation of ATSs. From our point of view, any ATS, as it comes to function substantially as a securities market, should be required as a matter of course to satisfy high standards of conduct which ensure market transparency and prevent unfair trading practices. In other words, the integrity of an organization using innovative technologies should be consistently reviewed. We expect that the SEC's forthcoming regulatory review will place ATSs under proper regulations in accordance with the degree of their influence on securities markets and the national economy. Competition between traditional exchanges and ATSs should then become fairer, thereby enhancing the functioning of the U.S. markets. Secondly, we would like to comment on the regulations applicable to foreign market activities. In modern securities markets, where investors have sufficient motives and abilities to conduct cross-border investment, it is the responsibility of market regulators to establish environments in which investors can make cross-border transactions as freely as possible. Cross-border transactions widen the range of securities available for investment and thereby facilitate more efficient allocation of financial assets on a global scale. At the same time, invested funds promote the growth of issuers as well as the economic development of the countries where such investment is accepted. Recently the presence of the foreign investment sector has been substantially increasing in Japan as well. The concept of international diversified investment prevails among Japanese institutional investors, and Japanese investment in foreign securities is now active. We understand that investors' self-responsibility and reliance on home country regulations should be the basic principles behind the regulation of cross-border transactions. We should make efforts to harmonize regulations and practices among securities markets on an international basis, in the expectation that such harmonization would ultimately lead to the acceptance of global standards. We have to recognize, however, the reality that market regulations and practices differ from country to country, and that we should take necessary measures based on that reality. If the SEC requires foreign exchanges or issuers to follow certain procedures to register or to be exempted from such registration, there is a strong possibility of hindering the cross-border transactions of U.S. investors. The introduction of such a registration system would impose temporary and continuous cost increases upon the foreign markets and issuers capable of providing U.S. investors with a variety of investment vehicles. As a result, the range of investment choices for U.S. investors would be narrowed. Moreover, if each jurisdiction came to introduce similar registration requirements, it would almost certainly result in extremely tangled situations all over the world. In addition, we are concerned that this kind of direct regulation of foreign markets and issuers could restrict traditional cross-border transactions through securities intermediaries We do not necessarily take a negative view of the SEC's idea of regulating entities that function as providers of interfaces with investors, and asking them to meet a certain level of regulatory requirements in order to ensure investor protection. However, such an approach should be carefully implemented because a complicated regulatory scheme could potentially impede cross-border trading activities. If the SEC were to introduce the concept of an "access provider" into the U.S. regulatory framework, it should limit such regulation to a relatively narrow range of requirements, such as disclosure of differences in investor protections between the U.S. and foreign countries. We believe that the SEC will give due consideration to this regulatory matter in order to further encourage cross-border transactions. Sincerely yours, Mitsuhide YAMAGUCHI President & CEO Tokyo Stock Exchange 2-1, Nihombashi-Kabuto-cho Chuo-ku, Tokyo, 103 JAPAN