Osaka Securities Exchange – Driving the Japanese Derivatives Markets

OSE aims to be a leading- edge exchange that embodies international standards, such as through the installation of an ultra high speed trading system.

The Securities Exchange (OSE) is the leading Japanese Derivatives Exchange. The company is aiming to tackle new trading reforms by utilizing the opportunity presented through the new installation of a next-generation trading system which is scheduled for the latter half of fiscal year 2010. OSE Director Kotaro Yamazawa described to us the overall view of the derivatives market, and OSE’s future goals and strategies.

Kotaro Yamazawa Director Osaka Securities Exchange Co., Ltd. Osaka Securities Exchange

OSE’s Greatest Strength: The third strength is the trading overseas inventors. Being the Mother Market system. In recent years market makers This fiscal year, OSE introduced a so- of the Leading Japanese and prop traders have rapidly increased called Remote Membership System. This Benchmark Index – Nikkei their exposure and presence in our system marks a fundamental change of 225 Futures and Options derivatives market. In particular, these rules as foreign securities companies are so-called High Frequency players are enabled to obtain trading memberships OSE is the top market in very keen to let us upgrade our IT with our exchange. We are therefore for derivatives transactions. The infrastructure. The performance of the expecting a huge increase of players volume of trading during the past current OSE system, which was built accessing our markets directly from fiscal year grew by 32.2% year-on- from scratch by Hitachi approximately overseas. As this requires the permission year, demonstrating overwhelming three years ago, has achieved a round- of the Financial Services Agency, we are strength. Where does the secret of trip latency of about 60ms; this set the currently setting the stage to prepare this lie? benchmark among Japanese securities the environment so that the Remote exchanges both in terms of performance Membership system can go live as soon Yamazawa – There are three reasons why as well as stability. The next-generation as possible. OSE is strong in derivatives trading. trading system OSE plans to install next OSE rolled out the co-location service The main reason is that both the fiscal year will generate large increases in November 2008. This service enables Futures and Nikkei 225 in speed to further facilitate and improve latency sensitive participants to conduct Options, which are the most popular the trading experience for our domestic trades without a time lag by installing their derivatives contracts in Japan, are listed and international users. servers next to the OSE matching engine. on OSE. Their underlying assets are the The service has been very well received Nikkei Stock Average, and it is common by foreign securities firms and investors for 225 to be mentioned Heighten Convenience because, with some of their mostly when discussing Japan’s stock indices through Co-Location algorithmic trading strategies, time to overseas. In other words, we managed to Service to Meet market is the paramount factor for the establish the Nikkei 225 Index as the Expectations of Overseas success of their trading. To them, every leading benchmark to gauge the Japanese Investors nano second counts. OSE is very proud economy. of the fact that it rolled out all OSE co- One of the targets listed in OSE’s The second strength can be attributed location racks within a very short period medium-term business plan is to the close relationship between OSE and of time. In a way, this clearly indicated to “capture overseas investors.” its trading participants. In Japan, the flow that OSE is a thriving and competitive What types of measures are you from savings to investment is accelerating exchange. considering to achieve this? and the financial assets of individuals, For a long period of time, participants which are said to be among the highest in have mentioned that the business hours the world, are on the verge of being shifted Yamazawa – In the case of OSE, more of “Japanese exchanges are much too away from savings to derivatives and other than 50% of futures trades and more short.” OSE has begun to extend its asset classes. OSE is proceeding with than 60% of options trades are conducted trading hours in response to this complaint. reforms to the Exchange to enable it to by overseas investors. OSE is presently In correlation with European markets, serve as a receptacle for these derivatives implementing the following measures OSE extended its Evening Session last and other financial products. to capture even more trading flow from September to allow trades until 20:00 and

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OSE is also considering a Night Session to correlate with the opening hours of the New York market. OSE believes that its experience in operating the OSE-FX market helps to accumulate the necessary know-how to further extend the trading hours of Nikkei 225 derivatives’ markets.

OSE Aims to Invigorate Emerging Markets through Integration of Its Hercules Market with the JASDAQ Market

Much attention has been given to OSE’s integration with JASDAQ and the Hercules Market. How is OSE moving towards integrating these markets in its operations?

Yamazawa – Steps toward integration are presently being taken from three perspectives. The first perspective is system integration. The aim is to dramatically reduce costs through system integration as system expenses comprise 60 to 70% of all costs. The integration is expected to be completed after the consecutive holidays in September. The second perspective is the organizational integration. The aim of this is to fully realize the synergy effects exchanges competing by lowering the to the bottom. It is our goal to use the brought about by integration. We are now stringency of their listing criteria to integration of JASDAQ and Hercules to thinking about the best way of integration attract companies to their markets. This create an innovative market in which in terms of capitalizing the maximum competition is thought to be unhealthy leading-edge companies compete to list. synergies at the earliest timing. for overall investor confidence; many Capitalizing on the strong brand, we The third perspective is market market participants claim that investor plan to call the newly merged market, integration. There are six emerging confidence to the growth market was JASDAQ. markets in Japan and there is a risk of damaged by this so-called competition

20 Click XT TM Would Be Used investors to use without any confusion make OSE-FX known to a wider audience As New Trading System to with regard to trading rules. of investors. Within this fiscal year over Capitalize on Alliance with ten companies are expected to participate NASDAQ Launch of OSE-FX, with in our market. Leading Transparency, Yamazawa – A specific advantage OSE Security and Convenience OSE Desires to Be an would gain through the alliance with Innovative Exchange in NASDAQ OMX Group could be the OSE launched OSE-FX on July 21st Osaka That Inherits the TM adoption of its Click XT system. OSE’s of this year. Please describe the Rich Tradition of the World’s current trading system boasts one of characteristics and goals for the First Futures Exchange the top processing speeds in Japan. OSE-FX market. However, compared with present global What kind of reforms are you standards there is a strong need to Yamazawa – The Financial Instruments considering to maintain OSE as an enhance processing speed and capacity. and Exchange Law implemented in 2007 exchange that attracts the business OSE concluded a strategic alliance with enabled Japanese securities exchanges and interest of overseas investors? the NASDAQ OMX Group, in February to handle financial products other than of this year. OSE is now in the process securities. OSE created the OSE-FX market Yamazawa – OSE is aiming to create an of defining requirements for its next- to provide a new market for foreign currency open and friendly exchange for overseas generation trading platform for derivative products to a broad range of investors. investors. It is also important that our products, toward adopting the Click XT TM The OTC-dominated FX market in Japan exchange is an institution where global provided by NASDAQ OMX. has enjoyed rapid growth since last year’s standards are the norm. This means we The NASDAQ OMX system is used financial crisis as stocks and derivatives need to remain an innovative exchange by about 70 exchanges globally, and the trading have struggled. We at OSE will that is “quick to move” and we have to be comparatively large Click XT TM system work to soundly develop the market by ahead of the curve to anticipate trends is used by 17 exchanges. The average promoting a fair, secure and sound listed and implement new systems and market processing speed of less than 10ms clears alternative to the OTC for our investors. rules swiftly. the global standard hurdle and the system OSE-FX can be characterized as a From the perspective of being a leading is also highly evaluated for its scalability market that has fused the market maker edge exchange in Japan, OSE is carrying and reliability. method and auction method in order on its rich tradition as the exchange that In correlation with the installation to secure both transparent pricing and conducted the world’s first futures trading, of the new system, OSE plans to reform liquidity. The utilization of the fused namely, the rice futures trades conducted the trading rules used for derivatives method has made it possible for retail at the Dojima Rice Exchange in Osaka products. Japanese exchanges have investors to participate in trading via the (1730). This enterprising attitude continues evolved by transferring the rules of floor auction method within a pricing range to be passed on and OSE was also the first trading to computers, but OSE would indicated by the market makers. The exchange in Japan to list stocks. OSE will like to change them to better facilitate market initially began with two market continue to emphasize exchange reforms and fit in the current computer trading markers and five online brokers that and introduce new products and services environment. OSE aims to introduce started to distribute the products, and we to further strengthen our image and global standard trading rules, thus expect a further increase of participants compete with leading-edge exchanges creating a system that is easy for overseas to expand the distribution channels and globally.

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