Referential Translation

"TSE Carbon Market Study Group"

Summary Minutes of the 3rd Meeting
1. Date: 10:00-12:00, Friday, July 25, 2008
Venue: Hall on the 2nd floor of the Tokyo Stock Exchange
3. Topics for Discussion: Clearing and Settlement
4. Summary of the Meeting
The meeting began with the Mitsubishi Research Institutes outline of the clearing
and settlement system of some exchanges in Europe. Next, the secretariat explained
about the issues and tentative plans related to the carbon market exchanges clearing
and settlement, including a question and answer session. The key points of the meeting
are as follows.
Establishment of Clearing Institution
When creating an organized market, we should establish a clearing institution having
a CCP (Central Counterparty) system for both spot and futures trading.

As a certain

amount of time is required from trading to settlement, such a settlement institution

may be necessary to manage risks during this period. In addition, there may be some
combination in which delivery versus payment (DVP) will be conducted on a gross
basis during the settlement process even if clearing is conducted by netting.
In the event a clearing institution is established, similar to the ECX, there should be a
middle party such as a clearing member between the institution and the customer, in
consideration of settlement safety, management of margins, etc.
We should separate qualification requirements for clearing members from those for
trading participants.
The clearing institution needs to meet specific criteria should one be established,
including international recommendations on securities and financial clearing and
settlement systems.

1
DISCLAIMER: This English version is not an official translation of the original Japanese document. In cases where any differences
occur between the English version and the original Japanese version, the Japanese version shall prevail. Tokyo Stock Exchange
Group, Inc. (TSEG), Tokyo Stock Exchange, Inc. (TSE) and/or Tokyo Stock Exchange Regulation (TSER) shall individually or
jointly accept no responsibility or liability for damage or loss caused by any error, inaccuracy, or misunderstanding with regard to
this translation. This translation may be used only for reference purposes.

Referential Translation

Settlement Method
While there may be a number of variations on the DVP settlement method, a netnet
DVP system under which both products and payments are netted appears to be
reasonable in terms of effective fund circulation. For JGBs, we changed the
settlement method from a net-net DVP system to a gross-gross DVP system on a
real-time basis. This change was made due to a sharp rise in unsettled balances that
occurred when a net-net DVP system was adopted in response to an increase in
transactions.

Unlike JGBs, however, outstanding balances are less likely to rise in

an emission trading market.

If a net-net DVP system is adopted, we will need to draw up rules for specifying CER
identification numbers and methods for allocating them to buyers.
In relation to a national registry and system requirements for the clearing institution
and settlement banks, we should develop as fair a method as possible, such as by
random selection like the ECX.

In addition, some specific rules will be required in

the case of debit transfers.

Like overseas markets, OTC trading is likely to account for a greater portion of spot
transactions. If clearing of OTC trading is conducted at the same clearing institution
and the size of the spot market is taken into consideration, we may be able to consider
adopting a gross-gross DVP system.

In the end, we may reach an agreement with

the national registry, clearing institution, and settlement banks.

Fail (delay in delivery settlement)
As exchanges are institutions of a highly public nature, failure to settle before a
deadline (hereinafter fail) should not be permitted. Fails have not been permitted
for spot settlement at commodities exchanges.

If fails are permitted at exchanges,

spot transactions, at least, would probably be conducted in an OTC market. Low-risk

transactions are more likely if they are conducted with a trustworthy counterparty on
the OTC market.
Fails should not be permitted.

For financial instruments, there should be no problem

settling with money when there is failure. However, as emissions are amortized,
buyers will suffer a loss when there is a fail, even if punitive measures against such
are introduced.
Fails are permitted for securities delivery at exchanges in order to prevent an
immediate default. However, the actual fail rate is extremely low.
The biggest problem for compliance buyers is that they do not receive the product.
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DISCLAIMER: This English version is not an official translation of the original Japanese document. In cases where any differences
occur between the English version and the original Japanese version, the Japanese version shall prevail. Tokyo Stock Exchange
Group, Inc. (TSEG), Tokyo Stock Exchange, Inc. (TSE) and/or Tokyo Stock Exchange Regulation (TSER) shall individually or
jointly accept no responsibility or liability for damage or loss caused by any error, inaccuracy, or misunderstanding with regard to
this translation. This translation may be used only for reference purposes.

Referential Translation

Therefore, we should consider allowing fail for a set period of time. In this case, we
should implement appropriate punitive measures to ensure a high probability of
settlement.
As fail risks depend on the functions and structures of the national registry, we need to
coordinate with these infrastructural elements.
TSE Listing Department

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DISCLAIMER: This English version is not an official translation of the original Japanese document. In cases where any differences
occur between the English version and the original Japanese version, the Japanese version shall prevail. Tokyo Stock Exchange
Group, Inc. (TSEG), Tokyo Stock Exchange, Inc. (TSE) and/or Tokyo Stock Exchange Regulation (TSER) shall individually or
jointly accept no responsibility or liability for damage or loss caused by any error, inaccuracy, or misunderstanding with regard to
this translation. This translation may be used only for reference purposes.