Mainly as a result of the global financial crisis, 79 companies on the Tokyo Stock Exchange (TSE), (the largest stock exchange in Japan) delisted in 2008 - the second largest number to delist in the TSE's history. In addition, more than 20 companies delisted in the first few months of 2009.

In these circumstances, to avoid unnecessary delisting by companies in temporary financial difficulty because of the global financial crisis, the TSE announced, in the last few months, two deregulatory measures aimed at relaxing the criteria for companies to delist:

Also, the TSE has announced that it will endeavour to ensure fair administration of the delisting process in appropriate cases (for example, where a company has a severe problem with its management).

On 9 February 2009, the Tokyo Stock Exchange (TSE) implemented its revised rules to effect the Remote Trading Participant System. The Osaka Stock Exchange (OSE) is currently planning implementation of a similar system. This system enables foreign securities firms to trade on Japanese securities and derivatives exchanges directly from overseas by operating their computer system terminals but without establishing local branches in Japan.

This Remote Trading Participant System is based on a regulatory framework called the Exchange Trading Authorisation regulation, a special exception to the general rule that requires financial instruments business operator to register, under the Financial Instruments and Exchange Law (Japanese Law No.25 of 1948, as amended) (FIEL).

The general rule under the FIEL is that no-one can engage in financial instruments business, including securities and derivatives trades on exchanges in Japan, unless they have been registered at the Financial Services Agency of Japan (JFSA) as a financial instruments business operator. To obtain such registration, securities firms must have their business offices in Japan, and registered financial instruments business operators, including foreign securities firms, are subject to requirements for maintaining certain amounts of capital (if engaged in certain types of business including securities and derivatives trades on exchanges) and certain reserves in Japan.

The Exchange Trading Authorisation framework does not impose requirements of the type referred to above. This framework is aimed at boosting Japanese exchanges' competitiveness against foreign exchanges and to enable Japanese exchanges to establish cross-membership relationships with foreign exchanges. The Exchange Trading Authorisation framework was implemented this February in the real market operation rules by the TSE as the Remote Trading Participant System.

One point which may be an issue in operating the Remote Trading Participant System is a requirement for there to be a "representative in Japan". Even though the Exchange Trading Authorisation framework in the FIEL and the TSE's Remote Trading Participant System intend to omit the requirement that foreign securities firms have real business functions in Japan, the Companies Law (Japanese Law No. 86 of 2005) has not been changed accordingly. The Companies Law still requires that any foreign company wishing to do business continuously in Japan must appoint a "representative in Japan" who is domiciled in Japan and has been assigned comprehensive power to take any actions on behalf of the foreign company with regard to its business in Japan.

In addition, such representative in Japan must, under the Exchange Trading Authorisation framework, owe a duty (the breach of which is subject to criminal penalty) to liaise with the JFSA on behalf of the relevant foreign securities firm (including a duty to respond to the JFSA order to submit reports or materials or to allow officials to inspect such reports or materials, and a duty to annually submit to the FSA the foreign securities firms' business report (in Japanese).

This situation may leave parties (such as Japanese law firms) who would consider accepting the position of representative in Japan in uncertainty about what kind of risk they will take in accepting the position. Such uncertainty needs to be clarified by the JFSA or other authorities to develop the practice of the Remote Trading Participant System.

On 14 October 2008, the Financial Services Agency of Japan (JFSA), to ensure market transparency and facilitate the monitoring of short selling in the Japanese markets, requested exchanges (such as the Tokyo Stock Exchange and the Osaka Stock Exchange) to enhance their disclosure of information about short selling, from only disclosing the aggregate of short sales on a monthly basis, to requiring disclosure of the aggregate and sector-by-sector volumes of short sales.

On 30 October 2008, the JFSA amended regulations to prohibit naked short selling, and on 7 November 2008, it amended other regulations to require holders of short positions to report their holdings (subject to a threshold requirement) to exchanges through securities firms.

In 1948, the Japanese government established a ban on selling securities at a price lower than their purchase price in relation to short sales along the same lines as those contained in the then US Securities Exchange Act of 1934. However, such restrictions were rarely enforced because Japanese stock prices were increasing.

In 2002, when some non-Japanese securities companies made proprietary short sales without disclosing them, the JFSA imposed a business improvement order. The JFSA found that those securities companies sold short positions through margin trading (which was then exempted) so the FSA amended the relevant regulations to narrow the exemptions to the general restriction and to prohibit short selling unless the sale price was higher than the purchase price (the "Uptick Rule").

Although the US Securities Exchange Commission abolished the Uptick Rule, the JFSA has not reconsidered the appropriateness of retaining it.

Because of the severity of the current financial crisis, the Japanese government, without requesting public comments in advance, introduced temporary restrictions on short selling. The JFSA added a blanket prohibition on naked short sales (sales of securities not held by the seller at the time of sale).

The JFSA also introduced an obligation to report, subject to certain exceptions, short sales of 0.25% or more of the outstanding issued share capital of the relevant company and an obligation on exchanges to publicly disclose such reports. However, unlike many other countries, creating a new short position or increasing a short position on financial institutions has not completely been prohibited, even temporarily.

The government has, therefore, consistently been strengthening the restrictions on short sales in response to the global financial crisis. At the beginning of March 2009, the chief of the JFSA stated that these new restrictions were aimed at preventing an intentional bear raid (that is, when traders attempt to force down the price of a security by various means, including short selling).

Unfortunately, in spite of these restrictions (which are stricter than those of other developed countries), the stock price average of the TSE remains at quite a low level and the amount of the reduction is in many cases higher than in markets in other countries.

PLC Global Finance has published a Q&A guide on the causes, effects and regulatory impact of the financial crisis in Japan, contributed by Atsumi & Partners.

This article is part of our new series of Country Q&A Guides to the Financial Crisis, available on the PLC Global Finance site.