The Tokyo Stock Exchange’s plan to go public in fiscal 2005 (ending next March 31) seems unlikely to go smoothly as the Financial Services Agency opposes the plan. At issue is a debate over whether the bourse can continue to properly execute its public role as a watchdog over the stock market after going public.

Solution of the conflict depends on how to ensure TSE’s neutrality and independence, on the one hand, and its efficiency and speed in collecting financial data on listed companies and making the necessary judgments on their behavior and financial conditions, on the other.

The FSA is concerned that, if the TSE lists its own stock, the bourse might tend to put a greater emphasis on profits, making light of its public role. The FSA demands that the bourse separate its “self-control component,” which oversees daily stock transactions and account settlements for listed companies, from the stock market component before going public.

But the TSE is reluctant to do so. It believes that the self-control component must be close to the stock market component so that it can competently execute its job of detecting stock price manipulations and insider trading. The self-control component also examines the financial conditions of companies seeking to go public as well as the conditions of those that must be delisted, accounting for a quarter of the TSE’s profits. This may be behind the bourse’s reluctance to make it a separate entity.

In order to improve its equipment and to prepare for increased competition with overseas stock exchanges, the TSE needs to raise more capital through stock listings. The spread of Internet stock transactions has led to a steep rise in the numbers of sell and buy orders.

Last spring the TSE increased its processing capacity by 30 percent so that it could handle 6.2 million transactions per day. It plans to increase the capacity to 9 million transactions per day in the spring of 2006. It also needs money to improve its backup system to cope with emergencies. Funds totaling 23.4 billion yen will be needed for a three-year equipment investment program, which starts in the current fiscal year.

At present, the TSE’s revenue from commissions is expanding steadily, thanks to a brisk stock trade. Since it is financially strong enough to use internal reserves for equipment investment, its argument that it needs to go public to raise funds for such investment does not seem sufficiently convincing. FSA officials are of the opinion that the bourse can raise funds through a third-party allocation of newly issued shares or an issuance of debentures. At present, its shares are held by its employees and member securities companies.

If the TSE goes public, it would have the burden of working out measures to counter moves by an investment fund to acquire a large stake, as happened with the Osaka Stock Exchange. In June, Mr. Yoshiaki Murakami, a well-known investor, applied to acquire a more than 20 percent stake in OSE, which in April 2004 had listed its stock in Hercules, a stock market it opened mainly for venture businesses.

Although Mr. Murakami’s application was made in accordance with the Securities and Exchange Law, the FSA in late August rejected it on the grounds that Mr. Murakami’s fund invests in shares listed on the Osaka bourse. The FSA thought that the acquisition of a greater stake in the OSE could adversely affect the OSE’s operations such as its screening of companies seeking to list their stock and its monitoring of market transactions. Mr. Murakami’s fund was already the OSE’s top shareholder with about a 10 percent stake.

Unfortunately, carelessness and opacity have been reported in connection with the TSE. After TSE President Mr. Takuo Tsurushima and other Tokyo bourse executives were found to own unlisted shares in their stock exchange, criticism over the prospect of their earning easy profits once the TSE shares were listed prompted them to sell the shares to the TSE employee shareholders’ association in March. It has also been reported that smaller securities companies with stakes in the Tokyo bourse are anticipating windfall profits once the bourse goes public.

More serious is that a series of events — including window-dressing of Kanebo Ltd.’s financial statements and that company’s subsequent delisting, stock manipulation by Seibu Railway Co. in an effort to remain listed, and the surprise acquisition of Nippon Broadcasting System Inc. shares by Livedoor Co. in off-hours trading — has raised questions about the propriety of trading rules and the TSE’s ability to examine information submitted from listed companies. At stake is the trustworthiness of the bourse. Whether it goes public or not, it should realize its duty as a public entity and improve its ability to monitor the market with efficiency, transparency and strict independence.

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