Impact of Lehman Brothers bankruptcy on post-trade system in Japan

4 July, 2009 Dhaka, Bangladesh Japan Securities Depository Center, Inc.

2

IMPACT

of Subprime Crisis and Lehman Brothers Bankruptcy on Asian Economies and Japan

Impact of Subprime Crisis on Asian Economies - Real GDP Growth Rate 3

Country, Region 2007 2008 2009e China India Bangladesh Mongolia Vietnam Indonesia Pakistan 13.0 9.3 6.3 10.2 8.5 6.3 6.0 9.0 7.3 e5.6

e8.9

6.2 6.1 6.0 6.5 4.5 5.0 2.7 3.3 2.5 2.5 Malaysia Thailand Korea Hong Kong Japan 6.3 4.9 5.1 6.4 2.4 4.6 2.6 2.2 2.5 -0.6 -3.5 -3.0 -4.0 -4.5 -6.2 Taiwan Singapore 5.7 7.8 0.1 e1.1

-7.5 -10.0 (Source) International Monetary Fund, World Economic Outlook Database, April 2009 2010e 7.5 5.6 5.4 4.3 4.0 3.5 3.5 1.3 1.0 1.5 0.5 0.5 0.0 -0.1 2005-07 11.7 9.4 6.4 8.7 8.4 5.8 6.6 5.8 4.9 4.7 6.8 2.1 4.9 7.8 08-10 7.7 5.8 5.3 5.2 4.5 4.0 4.0 0.8 0.2 -0.1 -0.5 -2.2 -2.5 -3.1

4 Before & after Lehman Brothers bankruptcy - Asian Stock Performance -

Market China Indonesia Malaysia India Taiwan Bangladesh Vietnam Hong Kong Korea Thailand Singapore Japan Pakistan Mongolia Index SSE Composite Jakarta Composite KLSE Composite SENSEX TSEC weighted General VN Hang Seng KOSPI Composite SET Straits Times Nikkei225 TOPIX KSE100 TOP20 (a) 12-Sep-08 2,079.67 1,804.06 1,044.03 14,000.81 6,310.68 2,850.17 476.00 19,352.90 1,477.92 654.34 2,570.67 12,214.76 1,177.20 9,253.92 8,505.14 (b) Lowest after 12-Sep-08 1,706.70 (04-Nov-08) 1,111.39 (28-Oct-08) 829.41 8,160.40 4,089.93 2,408.67 235.50 (29-Oct-08) (09-Mar-09) (20-Nov-08) (09-Apr-09) (24-Feb-09) 11,015.84 938.75 384.15 1,456.95 7,054.98 700.93

4,815.34 4,583.69 (27-Oct-08) (24-Oct-08) (29-Oct-08) (09-Mar-09) (10-Mar-09) (12-Mar-09) (26-Jan-09) (19-Feb-09) (c) 25-Jun-09 2,925.05 2,044.17 1,074.11 14,345.62 6,457.61 2,891.05 453.76 18,275.03 1,392.73 590.60 2,302.46 9,796.08 919.77 7,128.83 4,853.71 %change (b)/(a) -17.9 -38.4 (c)/(a) 40.6 13.3 -20.6 -41.7 -35.2 -15.5 -50.5 2.9 2.5 2.3 1.4 -4.7 -43.1 -36.5 -41.3 -43.3 -42.2 -40.5

-48.0 -46.1 -5.6 -5.8 -9.7 -10.4 -19.8 -21.9

-23.0 -42.9

Impact of Subprime Crisis on Japan (1) 5 Financial Sector First, financial sector’s involvement in subprime products was limited.

But after Lehman Brothers’ bankruptcy… Sharp decline in stock prices + Bad loans + Low liquidity =Negative effect on financial institutions’ balance sheets Manufacturing Sector Sudden higher value of the yen + Falling-off of consumer demand = Sharp decline of export & overseas production

6 Impact of Subprime Crisis on Japan (2)

(Billion Yen)

Major Banks, etc.

Regional Banks Cooperative Financial Institutions Total

Sep 08 Dec 08 Mar 09 Sep 08 Dec 08 Mar 09 Sep 08 Dec 08 Mar 09 Sep 08 Dec 08 Mar 09 Valuation profits/losses for equity holdings 2,201 111 -597 1,620 666 474 -132 -327 -268 3,690 450 -390 Exposures to subprime-related products Book value Realized profits/losses 719 496 -727 -842 397 46 39 31 31 30 22 797 565 449 -916 -47 -48 -52 -29 -29 -34 -803 -919 -1,001 (Source) Financial Service Agency, Exposures of Japanese deposit-taking institutions to subprime-related products, 2008-2009

7 IMPACT of Lehman Brothers Bankruptcy on the Post-trade system in Japan

8 Trade, Clearing and Settlement flow in securities transaction

Non-Exchange Trade 【

Market

】

Customer Trade Data

【

Matching

】

JASDEC (PSMS) Trade Data Broker Participant

Exchange Trade

Participant Stock Exchange

【

Clearing

】

JDCC

(DVP Clearing) Gross-Net

JSCC

(DVP Clearing) Net-Net

Securities Settlement Cash Settlement

【

Settlement

】

JASDEC Bank of Japan

Action taken after Lehman Brothers Bankruptcy 9

Day

September 2008

LBHI *(US) Lehman Brothers Japan, Inc 15 16 filed for Chapter 11 bankruptcy apply to the court for bankruptcy rehabilitation FSA 15 issued the order of retention of assets within Japan and the business improvement order toward Lehman Brothers Japan, Inc Stock Exchanges

JSCC

16 16 17 imposed trading suspension toward Lehman Brothers Japan, Inc suspended new obligation assumption for Lehman Brothers Japan Inc.

stopped payment of cash and delivery of securities to Lehman Brothers Japan Inc.

started buying and selling securities to close out unsettled clearing positions of Lehman Brothers Japan Inc.

announced the completion of close-out transactions related to Lehman Brothers Japan Inc.

25

JDCC

16 17 stopped payment of cash and delivery of securities to Lehman Brothers Japan Inc.

fulfilled obligations of payment with Participant Fund sold securities intended for delivery to Lehman Brothers Japan Inc.

22 appropriated proceeds of a sale of securities intended for delivery to Lehman Brothers Japan Inc. for Participant Fund * Lehman Brothers Holdings, Inc. (Source) Bank of Japan “Reports and Research Papers” March 2009

Action taken by JSCC right after Lehman Brothers’ Default 10 Obligation Assumption Suspended Purchased from the market (17 September ~) Obligation Assumption Guaranteed

Failure of Securities Delivery Cleared away

Securities Company Shortage of Securities Lehman Brothers Japan, Inc

X X

Shortage of Cash Covered by over-draft agreements with fund-settling banks (16~18 September) JSCC

Cash Delivery Completed

Securities Company Securities Company

Average Daily Volume of Failed-Delivery in JSCC - 2008 -

(thousand Shares) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 系列 1

11

Note1: Figures are average daily failed-delivery shares against expected number of shares to be settled based on netting for JASDEC eligible domestic stocks.

Action taken by JDCC right after Lehman Brothers’ Default 12

Securities Delivery Completed (16 September)

Securities Company Securities Company Custodian Bank

Sold to restore Participant Fund

Obligation Assumption Guaranteed JDCC

X X

Shortage of Cash Lehman Brothers Japan, Inc Covered by Participant Fund (16 September) Obligation Assumption Suspended

Default Protection by JSCC & JDCC in Lehman Brothers bankruptcy 13

  – –

JSCC

For the shortage of securities, JSCC > was financed by over-draft agreements with fund-settling banks, and > purchased securities from the market For the shortage of cash, JSCC > was financed by over-draft agreements with fund-settling banks

>>> Amount financed was covered by selling securities intended for delivery to Lehman Brothers Japan, Inc. and its Clearing Fund later

–

JDCC

For the shortage of cash, JDCC > used its Participant Fund

>>> Participant Fund was covered by selling securities intended for delivery to Lehman Brothers Japan, Inc. later

CCPs’ Loss Compensation Scheme functioned properly - DVP limited losses of counterparties within price volatility

14 For inquiries… Please contact: Naoko Watanabe International Department Japan Securities Depository Center, Inc.

([email protected])