TOKYO STOCK EXCHANGE’S YASUO TOBIYAMA
Interview by Tom Leander

As head of computer systems at the Tokyo Stock Exchange (TSE), Yasuo Tobiyama worked feverishly to debug a newly installed transactions system that interrupted trading for 90 minutes last November. Then in December, the computer system failed to respond to a cancellation order on a botched trade, causing the stockbroker to lose US$347m. Tobiyama resigned, along with the bourse’s president and its managing director. He returned as senior managing director, COO, and CFO in January – just in time to help clean up a mess involving TSE-listed internet company livedoor. Tobiyama spoke to Tom Leander.

What actions have you taken to recover from the technology errors that plagued the TSE at the end of last year?

In regard to the number of orders, we have to be able to respond to the increase in the algorithmic transactions. We have a two-fold plan to create systems that can respond to such numbers, but it’s going to take until 2009 to complete. Right now, we’re increasing the capacity of our current system and dealing with the situation. In February, we created a chief information officer position and put together a department to ensure that our system is very solid under his control. By 2009, we intend to be number one in the world in the ability to handle not only volume, but also transaction speed.

Has the fraud case at livedoor affected TSE?

There are many issues at stake. They did stock splits on an arbitrary basis. Splitting stock is something that a company is free to do, but livedoor’s splits were excessive. Its managers split the stock into 100 stocks, which means that the share prices in the interim became very volatile, creating inconvenience for investors. We certainly don’t think it’s a good idea for a company to go immediately from one to 100. So now we’ve given a strong recommendation that companies cannot split more than one to five. We’re thinking of making it an actual rule. Another aspect of the livedoor scandal was the false information issued by the company. And the accounting firm could not detect the fraud. We’ve asked for ideas and comment regarding better ways to prevent this lack of transparency. After we collect the comments, we’ll release an action plan.

How is the exchange promoting itself to foreign companies?

In our heyday, before the collapse of Japan’s asset bubble (in the 1990s), we had 127 foreign companies listed. Today there are 28. Besides the collapse, something else drove foreign investors away. Demands upon foreign companies for listing in Japan were very severe. For example, disclosure documents had to be published in both English and Japanese. There were high legal fees because we required companies to attest that documents were prepared properly and according to law. In
addition, there were not many Japanese investors interested in foreign stocks. All this led to many foreign companies delisting.

There’s a compelling reason for foreign companies to invest now, much different than before. Japanese people have a very high degree of personal savings. With interest rates still very low, they are eager to make good investments. If you look at China, where business is expanding rapidly, companies there need more and more capital. And there are lots of assets (management companies) in Japan that are looking for a place to invest. That’s why we are working with a particular focus on China and South Korea. Last year, Posco, the major Korean steel company, listed on the TSE.

What arguments did you use to bring Posco around?

As you know, there are many serious political problems between South Korea and J-apan, and so it was not so simple to convince them to list in Japan. Besides, Posco is already listed in London and New York. Our former president approached Posco about three years ago. Nomura Securities also endorsed and promoted the idea that they should list on the Tokyo Stock Exchange. We argued that Japanese investors have special characteristics. For example, when a company is not doing well, foreign investors tend to start selling. But Japanese investors seem to work in the opposite way. When the market is selling, they tend to buy. This tends to make stock prices more stable, overall. We also had them compare stock prices to Nippon Steel, the largest local steel company. Posco’s price-to-equity ratio was much lower, which would make them more attractive to Japanese investors. They finally saw the financial benefits of listing.

I understand your most aggressive drive is to bring in Chinese companies, particularly the red chips.

We have a new department that supports the launch of new listings, and they’re responsible for conducting seminars. We’ve done many in China and South Korea in the last year. So far, we’ve approached 50 companies in China and 40 in South Korea. We also plan to do what the New York Stock Exchange and the London Stock Exchange do: visit individual companies with a team of people, from securities, law, and accounting firms to make the case, along with their own representatives.

Are there any obstacles to your efforts in China?

We have been thinking in the last two to three years that we should create a permanent office in Beijing, like our offices in New York, London, and Singapore. But there are many regulatory and other difficulties in regard to China.

Is there a block by the Chinese government?

That is my understanding. Apparently there is not complete clarity as to whether we will be able to open an office or not. We are in process of talking with the China Securities Regulatory Commission. In the interim, we decided to send a person there on a permanent basis, and maybe he could use the facilities of a Japanese organization in Beijing. We wouldn’t have a direct or ‘official’ presence, but someone would be there. It is my understanding that this situation applies to all foreign stock exchanges seeking to open an office in China.

How do you argue TSE’s case to a Chinese red chip?

It’s very hard. The larger a company is, the stronger its political ties tend to be. And a lot of the large companies started out as national companies.

Nevertheless, how would you argue this to a red chip?

We say that many kinds of companies in China have close relationships with Japanese companies. Chinese companies should want to list in Japan, because Japanese investors are likely to be more comfortable investing in Chinese companies listed in Japan that Japanese companies already have some sort of business partnership with. Some Chinese companies have listed on the New York Stock Exchange. If they’ve already listed on a foreign exchange there’s a strong argument that they should list in Japan as well. We’re such close neighbors.

Are Japanese retail investors ready to invest in red chips?

Japan’s economy has started to recover, and I think we’ve entered a period of stability. Japanese quite often ask securities companies to invest their monies in foreign securities and foreign exchanges. If they were able to do that on the TSE, these securities would be that much more accessible.

Are Japanese investors worried about governance in Chinese companies?

Yes, of course that is a factor. There is some opaqueness, and investors don’t understand everything. When they list in Japan, all of those problems have to be cleared up. That is one of the prerequisites for them to list on the Tokyo Stock Exchange. They must accept Japanese accounting standards and disclosure requirements. Quite often many of the companies eager to list end up not being able to do so. We’ve gotten to the point that we have to be very careful.

How does the screening process work?

First of all, we have to ensure that the company is easily accessible and understandable to Japanese. Ideally, if they already listed in their home countries, they’ve met many hurdles. If they haven’t listed [overseas] before, they are required to follow Japanese accounting standards. If they’ve already listed elsewhere, they can use international accounting standards (IAS). We look at their governance and disclosure systems to assess whether there are any failings.

Would you say that you’re equal to NYSE in terms of stringency?

The US stock exchanges are operating under the Sarbanes-Oxley law, which is very, very stringent. Many companies have looked to London as an alternative to New York. But your question is a delicate one. Perhaps we can go all out and say that we are not as severe. But we still without question feel that we have very, very strong standards. Even if we can say that NYSE is stronger, we have very, very strong measures.

A revision of the corporate law in Japan is being considered, and it reflects the Sarbanes-Oxley law in the US. It’s called J-Sox. But what is being said now in Japan is that the burden on companies is too heavy. We hope that the regulators here draw a lesson from that. We want to create a J-Sox, but one that does not create too excessive a burden on companies.

Is TSE playing a front-line role in the shaping of corporate governance practices?

In general our demands on companies go beyond what is stated in corporate laws. For example, according to the law, companies are required to report their financials at least twice a year. But we at the TSE feel that this is not enough. We strongly encourage companies to report on a quarterly basis. Now it will be incorporated into law. We instruct companies to release vital information to investors on a timely basis, and this includes plans to increase capital or to merge. This goes beyond the scope of the law.

There’s a lot of M&A activity among exchanges around the world. Is this going to happen in Asia?

There’s not much movement now, but we will eventually see the trend emerge. It is only a matter of time. It’s very important to establish good communications among Asian exchanges, so we can make the best response as the situation develops.

What kind of competition will TSE encounter in the future?

This is really a personal opinion. A strong competitor might emerge in China, which already has a strong industrial base. In time, more and more Chinese individuals will have personal assets to invest and China’s market will only continue to grow. We indeed could see a strong competitor emerge there.