Sales Representatives Manual Volume 1 2020 Foreword Financial instruments business operators and registered financial institutions play very important roles as market intermediaries in order to ensure that the financial markets can properly exert their function to distribute funds efficiently through market mechanisms, and they are entrusted with an important social mission. Accordingly, Sales Representatives engaged in the financial instruments business are required to have a great deal of expertise in financial instruments, as well as a high awareness and consciousness of compliance and strong professional ethics. To meet the goals above, the Japan Securities Dealers Association (JSDA) administers the Sales Representative Qualification Examinations in accordance with its self-regulatory rules from the perspective of achieving a suitable level of quality on the part of Sales Representatives, in order to ensure that Sales Representatives who belong to Association Members (financial instruments business operators and registered financial institutions) will respond to the trust placed in them by society and carry out their activities appropriately. The present Manuals provide explanations concerning laws and regulations that people engaged in the Type I financial instruments business need to understand, as well as the various products and operations with which they deal in their business. These Manuals are expected to serve as reference materials for such people to acquire the knowledge necessary for acting as Sales Representatives. The 2020 edition has been edited based on the laws, regulations, rules and systems, etc. in effect or publicly available as of September 1, 2019 in principle, which may be subject to revision in the future. It should be noted that with the enactment of the Financial Instruments and Exchange Act in 2007, the legal names of entities such as securities companies and exchanges governed by this legislation have respectively been changed to financial instruments business operators, etc. and financial instruments exchanges. However, for the purpose of convenience and ease of understanding, in this text, some explanations have been made using preexisting expressions such as “securities company” or “stock exchange”. These Sales Representatives Manuals are tentative translations for non-Japanese readers’ reference. Please be aware that the Japanese originals are the authoritative versions. While every effort has been taken to ensure the accuracy of the translations in these Manuals, the translation is mainly based on the available information at the time of publication of Japanese versions and as such may not reflect subsequent developments. No guarantee is made with regard to its accuracy, completeness, applicability or usefulness. Under no circumstances will the JSDA be liable for any direct, indirect, incidental, special, or consequential loss or damage caused by reliance on the content of these Manuals. February 2020 Japan Securities Dealers Association Volume 1 Table of Contents Basic Knowledge Chapter 1 ……………………… 1 Concerning Securities Markets Chapter 2 Financial Instruments and Exchange Act ………45 Laws Relating to Solicitation and Sales Chapter 3 …… 287 of Financial Instruments Articles of Association and Chapter 4 ……………… 317 Various Rules of the Association Articles of Incorporation and Chapter 5 ……… 449 Various Regulations of the Exchanges Outline of the Qualification Examination System for Sales Representatives ………………………………………………………………… 517 Chapter 1 Basic Knowledge Concerning Securities Markets Section 1. Financial System and Securities Markets ∙∙∙∙∙∙∙∙ 3 1.1 Financial Markets and Securities Markets ∙∙∙∙∙∙∙∙ 3 1.2 Two Channels of Financing ∙∙∙∙∙∙∙∙ 5 1.3 Banks and Securities Companies ∙∙∙∙∙∙∙∙ 6 Section 2. Securities and Structure of Securities Markets ∙∙∙∙∙∙∙∙ 8 2.1 What Are Securities? ∙∙∙∙∙∙∙∙ 8 2.2 Primary and Secondary Markets ∙∙∙∙∙∙∙∙ 9 2.3 Exchange Markets and Over-the-Counter Market ∙∙∙∙∙∙∙∙ 10 2.4 Financial Instruments Business ∙∙∙∙∙∙∙∙ 11 2.5 Investor Protection and Depositor Protection ∙∙∙∙∙∙∙∙ 13 2.6 Self-Regulatory Organizations ∙∙∙∙∙∙∙∙ 14 2.7 Major Securities-Related Institutions ∙∙∙∙∙∙∙∙ 15 Section 3. Development of Securities Markets in Japan ∙∙∙∙∙∙∙∙ 18 3.1 Securities Markets Before World War II ∙∙∙∙∙∙∙∙ 18 3.2 Post-War Development of Securities Markets ∙∙∙∙∙∙∙∙ 19 3.3 Post-War Financial System and Japanese Big Bang ∙∙∙∙∙∙∙∙ 20 3.4 Establishment of the Financial Instruments and Exchange Act ∙∙∙∙∙∙∙∙ 25 3.5 Corporate Governance Code and ESG Investment ∙∙∙∙∙∙∙∙ 27 Section 4. Changes in Circumstances Surrounding Securities Markets ∙∙∙∙∙∙∙∙ 28 4.1 Current Status of Financial Instruments Exchanges ∙∙∙∙∙∙∙∙ 28 4.2 Changes in Competitive Environment Surrounding Securities Companies ∙∙∙∙∙∙∙∙ 33 Section 5. Challenges in Japanese Securities Market ∙∙∙∙∙∙∙∙ 42 5.1 Globalization of Capital Markets and Japanese Securities Market ∙∙∙∙∙∙∙∙ 42 5.2 Challenges of Japanese Securities Industry ∙∙∙∙∙∙∙∙ 43 Section 1. Financial System and Securities Markets 1 Financial System and Securities Markets Chapter 1 1 1 Financial Markets and Securities Markets (1) Functions of Financial Markets Each economic entity collects, supplies and invests funds when engaging in economic Chapter 2 activity. This causes the trade of funds between those who supply (lenders) and those who demand (borrowers), and funds are transferred. The place where such transactions occur is the financial market. Between economic entities, the total amount of funds in supply equals the total amount of Chapter 3 funds in demand, but between different sectors of the economy, the amount of funds in supply and demand do not necessarily correspond to each other. The shortage and surplus of funds correspond to the difference between total savings and investments in each sector of the real economy. If there is a shortage of funds in a sector, the total amount of investments is greater than Chapter 4 that of savings, while in the case of a surplus of funds in a sector the total amount of investments is less than that of savings. Postwar Japan experienced a long trend in which a surplus of funds (excess savings) was present in the household sector, while a shortage of funds (excess investment) was seen in the Chapter 5 corporate and government/public sectors. Since fiscal year 2006, however, the corporate sector has been showing a tendency of excessive savings (see Chart 1-1). (2) Classification of Financial Markets Financial markets can be classified into several types depending on the participants, contract terms, traded assets, and methods of transactions (see Chart 1-2). Focusing on the participants of transactions, financial markets are largely divided into market-type transaction markets where an unspecified number of participants engage in transactions, and negotiation-based transaction markets where transaction takes place between specified participants such as depositors and banks or companies and banks. The market-type transaction markets are referred to as financial markets in a narrow sense. Financial markets in a narrow sense are categorized according to the contract term of transaction, into short-term financial markets (one year or less) and long-term financial markets (more than one year). Short-term financial markets are further classified into interbank markets where only banks and other specified participants are eligible for transactions, and open markets where general companies may also take part in transactions. On the other hand, long-term financial markets are largely classified into bond markets, equity markets and financial derivatives markets. Negotiation-based transaction markets include loan markets, deposit markets and foreign exchange markets. Sales Representatives Manual 2020 ● Volume 1 3 Chapter 1. Basic Knowledge Concerning Securities Markets Chart 1-1 Surplus/Shortage of Funds by Sector (JPY trillion) 60 Private nonfinancial corporations (Surplus of funds) 40 Household JPY26.4 trillion JPY14.5 trillion 20 JPY14.3 trillion JPY11.1 trillion 0 -JPY12.2 trillion -JPY10.9 trillion －20 -JPY19.3 trillion -JPY21.9 trillion －40 Overseas General government (Shortage of funds) －60 2005 06 07 08 09 10 11 12 13 14 15 16 17 18 (FY) (Source) Bank of Japan, “Basic Figures of the Flow of Funds (Preliminary Figures, 1st Quarter 2019)” Chart 1-2 Classification of Financial Markets in Japan Call markets Interbank markets Bill markets, etc. Short-term Bond gensaki markets financial markets CD markets CP markets Open markets Treasury discount bill (TDB) markets Cash-secured bond lending transaction markets (repo markets) Short-term interest rate derivatives transaction markets (OIS markets) Market-type trading JGB markets markets (financial Municipal bond markets markets in a narrow Government-related agency bond sense) Bond markets markets Financial Long-term Straight bond markets markets (in a financial markets Convertible bond (CB) markets broad sense) (securities Equity markets Bond with share options (WB) markets markets, capital Financial bond markets markets) Financial derivatives Futures markets markets Options markets Negotiated trading Loan markets, deposit markets, foreign exchange markets, etc. markets 4 Sales Representatives Manual 2020 ● Volume 1 Section 1. Financial System and Securities Markets 1 2 Two Channels of Financing The channels through which funds flow from suppliers (lenders) to demanders (borrowers) Chapter 1 can be classified into (i) financial institutions or (ii) the securities markets. In channel