A bill to amend the Financial Instruments and Exchange Act (FIEA) was promulgated on 19 May 2010 by the Japanese Parliament. The bill will enter into force within one year of promulgation. One of the most important amendments is to introduce supervision of securities companies on a consolidated basis.

The amendments seek to create the supervisory rules under which the Japan's Financial Services Agency (FSA) will conduct the supervision of large scale securities companies (referred to as 'special financial instruments business operators' (SFIBOs)) on a consolidated basis.

Before these amendments supervision has, in principle, been conducted on a non-consolidated basis under the FIEA. However, internationally active securities companies have been overseen on a consolidated basis as a supervisory measure rather than as a statutory measure. The FSA recently expressed concern that it is difficult to analyse the whole financial and business circumstances of securities companies because of the conglomeration of their groups and enlargement of companies' organisations.

The amendments set out provisions with regard to consolidated basis supervision of SFIBOs which have more than a certain amount of assets (to be stipulated by government ordinance). Specifically, SFIBOs are required to file/submit to the FSA:

Under the amendments, the FSA can issue administrative orders in respect of an SFIBO if the FSA believes that it is necessary to do so, taking into account the management and financial circumstances of the SFIBO and its affiliates.

Secondly, the amendments set out provisions regarding the supervision of parent companies of SFIBOs. In particular, the amendments stipulate that the FSA will designate parent companies that it will supervise where such parent companies or affiliates provide significant financial support for SFIBOs and where the FSA considers it is necessary to ensure their appropriate and sound management.

The designated parent companies are required to file certain information with the FSA, such as its name and capital. In addition, it must submit business reports and other documentation in relation to financial soundness in each fiscal year. Furthermore, the FSA will be able to issue an administrative order in respect of a parent company if the FSA considers it is necessary to do so taking into account the business and financial situation of that company or its affiliates.

The FSA has indicated that internationally active securities companies that are subject to the capital requirements under Basel II will continue to be subject to them.

Also, the supervisory provisions for simple basis supervision in the FIEA will apply to small scale securities companies that are not SFIBOs. Therefore, the current provisions for the supervision of securities companies continue to apply to those small scale securities companies.

The amendments state that the FSA may not apply the provisions regarding parent companies if they are subject to supervision by other government authorities under other laws or subject to the supervision by foreign government authorities.

At the end of 2008, new turnaround ADR procedures and corporate reorganisation proceedings were introduced into Japanese law and in September 2009 the Enterprise Turnaround Initiative Corporation of Japan (ETIC) commenced operations (see Legal update, New option for out-of-court workouts of Japanese companies). Further, the ongoing cases of WILLCOM (a mobile telecommunication company) and Japan Air Lines (JAL), which are lead by the ETIC and used the corporate reorganisation proceedings, demonstrated the collaboration of ETIC and court-sanctioned proceedings as well as practice developments on pre-negotiated corporate reorganisation proceedings.

As at the end of March 2010, 21 companies had formally applied for turnaround ADR, among which 12 cases successfully ended in agreements to enter into restructuring plans.

With regards to AIFUL Corporation, a large consumer finance company, an ISDA Determination Committee affirmed in December 2009 that the agreement by its creditors to a restructuring plan constituted a "restructuring" credit event for the purpose of credit derivatives including it as a reference entity.

Interestingly, market participants discussed whether any earlier stage of the ADR procedures constituted a credit event, including, for example:

However, the ISDA refrained from making determinations on these issues on the ground of a lack of sufficient publicly available information.

On two occasions, entities have switched between turnaround ADR procedures and the ETIC:

Both WILLCOM and JAL, on the suggestion of the ETIC, applied for corporate reorganisation proceedings, which are now ongoing. ETIC proceedings normally do not involve court sanctioned proceedings. However, ETIC decided these two cases should be the subject of corporate reorganisation proceedings, based mainly on the need for achieving majority consent of lending banks under strict court sanctioned rules.

According to publicly available information, the Tokyo District Court, in presiding over the JAL proceedings, granted permission to continuously repay commercial transaction payables (for example, fuel costs, machine and airplane component costs, various service fees and rents, landing fees and airport usage fees), which are vital for the companies' ability to operate its business.