6-K 1 d24136d6k.htm FORM 6-K Form 6-K
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FORM 6-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

Commission File Number: 1-15270

For the month of November 2020

NOMURA HOLDINGS, INC.

(Translation of registrant’s name into English)

13-1, Nihonbashi 1-chome

Chuo-ku, Tokyo 103-8645

Japan

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F      X             Form 40-F              

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):             

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):             

 

 

 

 


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Information furnished on this form:

EXHIBITS

 

Exhibit Number
1.    (English Translation) Quarterly Securities Report Pursuant to the Financial Instruments and Exchange Act for the Six Months Ended September 30, 2020
2.    (English Translation) Confirmation Letter
3.    Capitalization and Indebtedness as of September 30, 2020

The registrant hereby incorporates Exhibits 1, 2 and 3 to this report on Form 6-K by reference in the prospectus that is part of the Registration Statement on Form F-3 (Registration No. 333-229191) of the registrant, filed with the SEC on January 11, 2019.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  NOMURA HOLDINGS, INC.
Date: November 25, 2020   By:  

/s/ Yoshifumi Kishida

    Yoshifumi Kishida
    Senior Managing Director


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Exhibit 1

Quarterly Securities Report Pursuant to the Financial Instruments and Exchange Act for the Six Months Ended September 30, 2020

Items included in the Quarterly Securities Report

 

     Page  

Part I    Corporate Information

     1  

Item 1. Information on Company and Its Subsidiaries and Affiliates

     1  

1. Selected Financial Data

     1  

2. Business Overview

     1  

Item 2. Operating and Financial Review

     2  

1. Risk Factors

     2  

2. Operating, Financial and Cash Flow Analyses by Management

     2  

3. Significant Contracts

     18  

Item 3. Company Information

     19  

1. Share Capital Information

     19  

2. Directors and Executive Officers

  

Item 4. Financial Information

     22  

Preparation Method of Consolidated Financial Statements and Quarterly Review Certificate

     22  

1. Consolidated Financial Statements

     23  

(1) Consolidated Balance Sheets (UNAUDITED)

     23  

(2) Consolidated Statements of Income (UNAUDITED)

     26  

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

     28  

(4) Consolidated Statements of Changes in Equity (UNAUDITED)

     29  

(5) Consolidated Statements of Cash Flows (UNAUDITED)

     31  

Notes to the Consolidated Financial Statements (UNAUDITED)

     33  

2. Other

     113  

Part II    Information on Guarantor of the Company

  

Quarterly Review Report of Independent Auditors

     114  

 

Note: Translations for the underlined items are attached to this form as below.


Table of Contents

Part I    Corporate Information

Item 1. Information on Company and Its Subsidiaries and Affiliates

1. Selected Financial Data

 

        Six months
ended
September 30,

2019
    Six months
ended
September 30,

2020
    Three months
ended
September 30,
2019
     Three months
ended
September 30,
2020
     Year ended
March 31,
2020
 

Total revenue

  (Mil yen)     1,085,283       933,391       573,904        419,342        1,952,482  

Net revenue

  (Mil yen)     715,381       829,745       383,380        368,998        1,287,829  

Income before income taxes

  (Mil yen)     203,292       265,438       128,486        83,627        248,261  

Net income attributable to Nomura Holdings, Inc. (“NHI”) shareholders

  (Mil yen)     194,407       210,158       138,574        67,642        216,998  

Comprehensive income attributable to NHI shareholders

  (Mil yen)     156,014       147,557       131,586        4,909        219,943  

Total equity

  (Mil yen)     2,788,175       2,786,054       —          —          2,731,264  

Total assets

  (Mil yen)     45,677,106       42,684,437       —          —          43,999,815  

Net income attributable to NHI shareholders per share
—basic

  (Yen)     58.89       68.87       42.11        22.13        67.76  

Net income attributable to NHI shareholders per share
—diluted

  (Yen)     57.66       67.10       41.23        21.52        66.20  

Total NHI shareholders’ equity as a percentage of total assets

  (%)     5.9       6.4       —          —          6.0  

Cash flows from operating activities

  (Mil yen)     (32,336     823,011       —          —          (15,943

Cash flows from investing activities

  (Mil yen)     227,507       (4,534     —          —          216,336  

Cash flows from financing activities

  (Mil yen)     (28,466     (48,617     —          —          332,062  

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

  (Mil yen)     2,824,614       3,941,941       —          —          3,192,310  

 

 

1

The selected financial data of Nomura Holdings, Inc. (the “Company”) and other entities in which it has a controlling financial interest (collectively referred to as “Nomura”, “we”, “our”, or “us”) are stated in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”).

2

Taxable transactions do not include consumption taxes and local consumption taxes.

3

As the consolidated financial statements have been prepared, selected financial data on the Company are not disclosed.

2. Business Overview

There were no significant changes to the businesses of the Company and its 1,316 consolidated subsidiaries for the six months ended September 30, 2020.

There were 14 affiliated companies which were accounted for by the equity method as of September 30, 2020.

 

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Item 2. Operating and Financial Review

1. Risk Factors

There is no significant change in our Risk Factors for the six months ended September  30, 2020 and until the submission date of this report.

2. Operating, Financial and Cash Flow Analyses by Management

(1) Operating Results

Nomura reported net revenue of ¥829.7 billion, non-interest expenses of ¥564.3 billion, income before income taxes of ¥265.4 billion, and net income attributable to NHI shareholders of ¥210.2 billion for the six months ended September 30, 2020.

The breakdown of net revenue and non-interest expenses on the consolidated statements of income are as follows:

 

     Millions of yen  
     Six months ended September 30  
     2019     2020  

Commissions

   ¥ 133,454     ¥ 177,765  

Brokerage commissions

     90,597       131,130  

Commissions for distribution of investment trust

     29,054       33,352  

Other

     13,803       13,283  

Fees from investment banking

     49,576       37,859  

Underwriting and distribution

     23,694       22,352  

M&A / financial advisory fees

     17,614       11,435  

Other

     8,268       4,072  

Asset management and portfolio service fees

     119,889       111,073  

Asset management fees

     111,891       103,044  

Other

     7,998       8,029  

Net gain on trading

     218,434       270,552  

Gain (loss) on private equity and debt investments

     1,772       2,875  

Net interest

     45,452       85,391  

Gain (loss) on investments in equity securities

     (755     5,413  

Other

     147,559       138,817  
  

 

 

   

 

 

 

Net revenue

   ¥ 715,381     ¥ 829,745  
  

 

 

   

 

 

 
     Millions of yen  
     Six months ended September 30  
     2019     2020  

Compensation and benefits

   ¥ 245,527     ¥ 275,303  

Commissions and floor brokerage

     49,997       56,186  

Information processing and communications

     84,118       85,822  

Occupancy and related depreciation

     37,480       36,114  

Business development expenses

     15,734       6,464  

Other

     79,233       104,418  
  

 

 

   

 

 

 

Non-interest expenses

   ¥ 512,089     ¥ 564,307  
  

 

 

   

 

 

 

 

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Business Segment Information

Results by business segment are noted below.

Reconciliations of Net revenue and Income (loss) before income taxes on segment results of operations and the consolidated statements of income are set forth in Item 4. Financial Information, 1. Consolidated Financial Statements, Note 17. “Segment and geographic information.

Net revenue

 

     Millions of yen  
     Six months ended September 30  
     2019      2020  

Retail

   ¥ 157,522      ¥ 173,873  

Asset Management

     60,176        60,866  

Wholesale

     316,184        468,974  

Other (Incl. elimination)

     183,584        121,775  
  

 

 

    

 

 

 

Total

   ¥ 717,466      ¥ 825,488  
  

 

 

    

 

 

 
Non-interest expenses      
     Millions of yen  
     Six months ended September 30  
     2019      2020  

Retail

   ¥ 144,143      ¥ 135,979  

Asset Management

     31,988        30,312  

Wholesale

     277,256        315,628  

Other (Incl. elimination)

     58,702        82,388  
  

 

 

    

 

 

 

Total

   ¥ 512,089      ¥ 564,307  
  

 

 

    

 

 

 
Income (loss) before income taxes      
     Millions of yen  
     Six months ended September 30  
     2019      2020  

Retail

   ¥ 13,379      ¥ 37,894  

Asset Management

     28,188        30,554  

Wholesale

     38,928        153,346  

Other (Incl. elimination)

     124,882        39,387  
  

 

 

    

 

 

 

Total

   ¥ 205,377      ¥ 261,181  
  

 

 

    

 

 

 

Retail

Net revenue was ¥173.9 billion primarily due to an increase in commissions from sales of stocks and investment trusts. Non-interest expenses were ¥136.0 billion and income before income taxes was ¥37.9 billion. Retail client assets were ¥115.2 trillion as of September 30, 2020, a ¥11.2 trillion increase from March 31, 2020.

Asset Management

Net revenue was ¥60.9 billion. Non-interest expenses were ¥30.3 billion and income before income taxes was ¥30.6 billion. Assets under management were ¥55.7 trillion as of September 30, 2020, a ¥6.4 trillion increase from March 31, 2020, primarily due to market appreciation and net inflow into funds such as ETF.

 

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Wholesale

Net revenue was ¥469.0 billion. Non-interest expenses were ¥315.6 billion and income before income taxes was ¥153.3 billion.

The breakdown of net revenue for Wholesale is as follows:

 

     Millions of yen  
     Six months ended September 30  
     2019     2020  

Global Markets

   ¥ 268,556     ¥ 424,839  

Investment Banking

     47,628         44,135  
  

 

 

   

 

 

 

Net revenue

   ¥ 316,184     ¥ 468,974  
  

 

 

   

 

 

 

Global Markets net revenue was ¥424.8 billion. Fixed Income net revenue increased from ¥159.7 billion as of September 30, 2019 to ¥259.5 billion as the rate products continued to perform well in the falling interest rate environment. Equities net revenue increased from ¥108.9 billion as of September 30, 2019 to ¥165.4 billion primarily due to robust derivatives businesses. Investment banking net revenue was ¥44.1 billion.

Other Operating Results

Other operating results include net gain (loss) related to economic hedging transactions, realized gain (loss) on investments in equity securities held for operating purposes, equity in earnings of affiliates, corporate items, and other financial adjustments. Other operating results for the six months ended September 30, 2020 include losses from changes in the fair value of derivative liabilities of ¥15.7 billion attributable to the change in its own creditworthiness and gains from changes in counterparty credit spread of ¥9.3 billion. Net revenue was ¥121.8 billion, mainly due to the recognition of ¥71.1 billion profit resulting from the rights conversion related to the Tokyo Nihonbashi district redevelopment project. Non-interest expenses were ¥82.4 billion and income before income taxes was ¥39.4 billion for the six months ended September 30, 2020.

Geographic Information

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 17. “Segment and geographic information” for net revenue and income (loss) before income taxes by geographic allocation.

Cash Flow Information

Please refer to “(6) Liquidity and Capital Resources.”

 

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(2) Assets and Liabilities Associated with Investment and Financial Services Business

1) Exposure to Certain Financial Instruments and Counterparties

Market conditions continue to impact numerous products to which we have certain exposures. We also have exposures to Special Purpose Entities (“SPEs”) and others in the normal course of business.

Leveraged Finance

We provide loans to clients in connection with leveraged buy-outs and leveraged buy-ins. As this type of financing is usually initially provided through a commitment, we have both funded and unfunded exposures on these transactions.

The following table sets forth our exposure to leveraged finance with unfunded commitments, presenting funded and unfunded

portions by geographic location of the target company as of September 30, 2020.

 

     Millions of yen  
     September 30, 2020  
     Funded      Unfunded      Total  

Europe

   ¥ 4,287      ¥ 38,539      ¥ 42,826  

Americas

     4,899        85,470        90,369  

Asia and Oceania

     12,543        4,966        17,509  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 21,729      ¥ 128,975      ¥ 150,704  
  

 

 

    

 

 

    

 

 

 

Special Purpose Entities

Our involvement with these entities includes structuring, underwriting, as well as, subject to prevailing market conditions, distributing and selling debt instruments and beneficial interests issued by these entities. In the normal course of securitization and equity derivative activities business, we also act as a transferor of financial assets to, and underwriter, distributor and seller of repackaged financial instruments issued by these entities. We retain, purchase and sell variable interests in SPEs in connection with our market-making, investing and structuring activities. Our other types of involvement with SPEs include guarantee agreements and derivative contracts.

For further discussion on Nomura’s involvement with variable interest entities (“VIEs”), see Item 4. Financial Information, 1. Consolidated Financial Statements, Note 6. “Securitizations and Variable Interest Entities.

2) Fair Value of Financial Instruments

A significant amount of our financial instruments are carried at fair value, with changes in fair value recognized through the consolidated statements of income or the consolidated statements of comprehensive income on a recurring basis. Use of fair value is either specifically required under U.S. GAAP or we make an election to use fair value for certain eligible items under the fair value option.

Other financial assets and financial liabilities are carried at fair value on a nonrecurring basis, where the primary measurement basis is not fair value. Fair value is only used in specific circumstances after initial recognition, such as to measure impairment.

In accordance with Accounting Standard Codification (“ASC”) 820 “Fair Value Measurements and Disclosures”, all financial instruments measured at fair value have been categorized into a three-level hierarchy based on the transparency of inputs used to establish fair value.

 

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Level 3 financial assets as a proportion of total financial assets, carried at fair value on a recurring basis was 4% as of September 30, 2020 (5% as of March 31, 2020) as listed below:

 

     Billions of yen  
     September 30, 2020  
     Level 1      Level 2      Level 3      Counterparty
and
Cash Collateral
Netting
    Total  

Financial assets measured at fair value

(Excluding derivative assets)

   ¥ 8,230      ¥ 8,885      ¥ 554      ¥ —       ¥ 17,669  

Derivative assets

     32        16,891        164        (15,997     1,090  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 8,262      ¥ 25,776      ¥ 718      ¥ (15,997   ¥ 18,759  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 2. “Fair value measurements” for further information.

(3) Trading Activities

Assets and liabilities for trading purposes

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 2. “Fair value measurements” and Note 3. “Derivative instruments and hedging activities” regarding the balances of assets and liabilities for trading purposes.

Risk management of trading activity

We adopt Value at Risk (“VaR”) for measurement of market risk arising from trading activity.

1) Assumptions on VaR

 

   

Confidence Level: 99%

 

   

Holding period: One day

 

   

Consideration of price movement among the products

2) Records of VaR

 

     Billions of yen  
     March 31, 2020     September 30, 2020  

Equity

   ¥ 8.9     ¥ 3.4  

Interest rate

     22.3       12.0  

Foreign exchange

     5.1       6.1  
  

 

 

   

 

 

 

Subtotal

     36.3       21.5  

Diversification benefit

     (11.0     (8.5
  

 

 

   

 

 

 

VaR

   ¥ 25.3     ¥ 13.0  
  

 

 

   

 

 

 

 

     Billions of yen  
     Six months ended September 30, 2020  
     Maximum(1)      Minimum(1)      Average(1)  

VaR

   ¥ 27.0      ¥ 9.6      ¥ 16.1  

 

(1)

Represents the maximum, average and minimum VaR based on all daily calculations over the six-month period.

 

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(4) Deferred Tax Assets Information

Details of deferred tax assets and liabilities

The following table presents details of deferred tax assets and liabilities reported within Other assetsOther and Other liabilities, respectively, in the consolidated balance sheets as of September 30, 2020.

 

     Millions of yen  
     September 30, 2020  

Deferred tax assets

  

Depreciation, amortization and valuation of fixed assets

   ¥ 20,179  

Investments in subsidiaries and affiliates

     1,814  

Valuation of financial instruments

     73,020  

Accrued pension and severance costs

     23,947  

Other accrued expenses and provisions

     58,298  

Operating losses

     299,221  

Lease liabilities

     55,507  

Other

     10,234  
  

 

 

 

Gross deferred tax assets

     542,220  

Less—Valuation allowance

     (371,373
  

 

 

 

Total deferred tax assets

     170,847  
  

 

 

 

Deferred tax liabilities

  

Investments in subsidiaries and affiliates

     93,693  

Valuation of financial instruments

     49,513  

Undistributed earnings of foreign subsidiaries

     2,313  

Valuation of fixed assets

     26,125  

Right-of-use assets

     55,025  

Other

     4,540  
  

 

 

 

Total deferred tax liabilities

     231,209  
  

 

 

 

Net deferred tax assets (liabilities)

   ¥ (60,362
  

 

 

 

Calculation method of deferred tax assets

In accordance with U.S. GAAP, we recognize deferred tax assets to the extent we believe that it is more likely than not that a benefit will be realized. A valuation allowance is provided for tax benefits available to us, which are not deemed more likely than not to be realized.

 

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(5) Qualitative Disclosures about Market Risk

1) Risk Management

Nomura defines risks as (i) the potential erosion of Nomura’s capital base due to unexpected losses arising from risks to which its business operations are exposed, such as market risk, credit risk, operational risk and model risk, (ii) liquidity risk, the potential lack of access to funds or higher cost of funding than normal levels due to a deterioration in Nomura’s creditworthiness or deterioration in market conditions, and (iii) strategy risk, the potential failure of revenues to cover costs due to a deterioration in the earnings environment or a deterioration in the efficiency or effectiveness of its business operations.

A fundamental principle established by Nomura is that all employees shall regard themselves as principals of risk management and appropriately manage these risks. Nomura seeks to promote a culture of proactive risk management throughout all levels of the organization and to limit risks to the confines of its risk appetite. The risk management framework that Nomura uses to manage these risks consists of its risk appetite, risk management governance and oversight, the management of all risk classes, and processes to measure and control risks.

2) Global Risk Management Structure

The Board of Directors has established the “Structure for Ensuring Appropriate Business of Nomura Holdings, Inc.” as the Company’s basic principle and set up a framework for managing the risk of loss based on this. In addition, they are continuously making efforts to improve, strengthen and build up our risk management capabilities under this framework. Moreover, the Group Integrated Risk Management Committee (“GIRMC”), upon delegation from the Executive Management Board (“EMB”), has established the Risk Management Policy, describing Nomura’s overall risk management framework including the fundamental risk management principles followed by Nomura.

Market Risk Management

Market risk is the risk of loss arising from fluctuations in the value of financial assets and liabilities (including off-balance sheet items) due to fluctuations in market factors (interest rates, foreign exchange rates, prices of securities and others). Effective management of market risk requires the ability to analyze a complex and evolving portfolio in a constantly changing global market environment, identify problematic trends and ensure that appropriate action is taken in a timely manner.

Nomura uses a variety of statistical risk measurement tools to assess and monitor market risk on an ongoing basis, including, but not limited to, VaR, Stressed VaR (“SVaR”) and Incremental Risk Charge (“IRC”). In addition, Nomura uses sensitivity analysis and stress testing to measure and analyze its market risk. Sensitivities are measures used to show the potential changes to a portfolio due to standard moves in market risk factors. They are specific to each asset class and cannot usually be aggregated across risk factors. Stress testing enables the analysis of portfolio risks or tail risks, including non-linear behaviors and can be aggregated across risk factors at any level of the group hierarchy, from group level to business division, units or desk levels. Market risk is monitored against a set of approved limits, with daily reports and other management information provided to the business units and senior management.

Credit Risk Management

Credit risk is the risk of loss arising from an obligor’s default, insolvency or administrative proceeding which results in the obligor’s failure to meet its contractual obligations in accordance with agreed terms. This includes both on and off-balance sheet exposures. It is also the risk of loss arising through a credit valuation adjustment (“CVA”) associated with deterioration in the creditworthiness of a counterparty. Nomura manages credit risk on a global basis and on an individual Nomura legal entity basis.

The measurement, monitoring and management of credit risk at Nomura are governed by a set of global policies and procedures. Credit Risk Management (“CRM”), a global function within the Risk Management Division, is responsible for the implementation and maintenance of these policies and procedures. These policies are authorized by the GIRMC and/or Global Risk Strategic Committee (“GRSC”), prescribe the basic principles of credit risk management and set delegated authority which enables CRM personnel to set Credit limits.

Credit risk is managed by CRM together with various global and regional risk committees. This ensures transparency of material credit risks and compliance with established credit limits, the approval of material extensions of credit and the escalation of risk concentrations to appropriate senior management.

 

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CRM operates as a credit risk control function within the Risk Management Division, reporting to the Chief Risk Officer. The process for managing credit risk at Nomura includes:

 

   

Evaluation of likelihood that a counterparty defaults on its payments and obligations;

 

   

Assignment of internal credit ratings to all active counterparties;

 

   

Approval of extensions of credit and establishment of credit limits;

 

   

Measurement, monitoring and management of Nomura’s current and potential future credit exposures;

 

   

Setting credit terms in legal documentation;

 

   

Use of appropriate credit risk mitigants including netting, collateral and hedging.

For regulatory capital calculation purposes, Nomura has been applying the Foundation Internal Rating Based Approach in calculating credit risk weighted asset since the end of March 2011. The Standardized Approach is applied to certain business units or asset types, which are considered immaterial to the calculation of credit risk weighted assets.

The exposure calculation model used for counterparty credit risk management has also been used for the Internal Model Method based exposure calculation for regulatory capital reporting purposes since the end of December 2012.

Operational Risk Management

Operational risk is the risk of financial loss or non-financial impact arising from inadequate or failed internal processes, people and systems, or from external events. Operational risk includes in its definition Compliance, Legal, IT and Cyber Security, Fraud, Third Party and other non-financial risks. Operational risk does not include strategic risk and reputational risk, however, some operational risks can lead to reputational issues and as such operational and reputational risks may be closely linked.

Nomura adopts the industry standard “Three Lines of Defence” for the management of operational risk, comprising the following elements:

 

  1)

1st Line of Defence: The business which owns and manages its risks

 

  2)

2nd Line of Defence: The Operational Risk Management (“ORM”) function, which co-ordinates the Operational Risk Management Framework and its implementation.

 

  3)

3rd Line of Defence: Internal and External Audit, who provide independent assurance

An Operational Risk Management Framework has been established in order to allow Nomura Group to identify, assess, manage, monitor and report on operational risk. The GIRMC, with delegated authority from the EMB has formal oversight over the management of operational risk.

Nomura Group uses The Standardized Approach for calculating regulatory capital for operational risk. This involves using a three-year average of gross income allocated to business lines, which is multiplied by a fixed percentage (“Beta Factor”) determined by the Financial Services Agency (“FSA”), to establish the amount of required operational risk capital.

Model Risk Management

Model Risk is the risk of financial loss, incorrect decision making, or damage to the firm’s credibility arising from Model errors or incorrect or inappropriate Model application.

To effectively manage the Firm’s Model Risk, Nomura has established a Model Risk Management Framework to govern the development, ownership, validation, approval, usage, ongoing monitoring, and periodic review of the Firm’s Models. The framework is supported by a set of policies and procedures that articulate process requirements for the various elements of the model lifecycle, including monitoring of model risk with respect to the Firm’s appetite.

New models and material changes to approved models must be independently validated prior to official use. Thresholds to assess the materiality of model changes are defined in Model Risk Management’s procedures. During independent validation, validation teams analyze a number of factors to assess a model’s suitability, identify model limitations, and quantify the associated model risk, which is ultimately mitigated through the imposition of approval conditions, such as usage conditions, model reserves and capital adjustments. Approved models are subject to Model Risk Management’s annual re-approval process and ongoing performance monitoring to assess their continued suitability. Appropriately delegated Model Risk Management Committees provide oversight, challenge, governance, and ultimate approval of validated Models.

 

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(6) Liquidity and Capital Resources

Funding and Liquidity Management

Overview

We define liquidity risk as the risk of loss arising from difficulty in securing the necessary funding or from a significantly higher cost of funding than normal levels due to deterioration of the Nomura Group’s creditworthiness or deterioration in market conditions. This risk could arise from Nomura-specific or market-wide events such as inability to access the secured or unsecured debt markets, a deterioration in our credit ratings, a failure to manage unplanned changes in funding requirements, a failure to liquidate assets quickly and with minimal loss in value, or changes in regulatory capital restrictions which may prevent the free flow of funds between different group entities. Our global liquidity risk management policy is based on liquidity risk appetite formulated by the Executive Management Board (“EMB”). Nomura’s liquidity risk management, under market-wide stress and in addition, under Nomura-specific stress, seeks to ensure enough continuous liquidity to meet all funding requirements and unsecured debt obligations across one year and 30-day periods, respectively, without raising funds through unsecured funding or through the liquidation of assets. We are required to meet regulatory notice on the liquidity coverage ratio issued by the FSA.

We have in place a number of liquidity risk management frameworks that enable us to achieve our primary liquidity objective. These frameworks include (1) Centralized Control of Residual Cash and Maintenance of Liquidity Portfolio; (2) Utilization of Unencumbered Assets as Part of Our Liquidity Portfolio; (3) Appropriate Funding and Diversification of Funding Sources and Maturities Commensurate with the Composition of Assets; (4) Management of Credit Lines to Nomura Group Entities; (5) Implementation of Liquidity Stress Tests; and (6) Contingency Funding Plan.

Our EMB has the authority to make decisions concerning group liquidity management. The Chief Financial Officer (“CFO”) has the operational authority and responsibility over our liquidity management based on decisions made by the EMB.

 

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1. Centralized Control of Residual Cash and Maintenance of Liquidity Portfolio

We centrally control residual cash held at Nomura Group entities for effective liquidity utilization purposes. As for the usage of funds, the CFO decides the maximum amount of available funds, provided without posting any collateral, for allocation within Nomura and the EMB allocates the funds to each business division. Global Treasury monitors usage by businesses and reports to the EMB.

In order to enable us to transfer funds smoothly between group entities, we limit the issuance of securities by regulated broker-dealers or banking entities within the Nomura Group and seek to raise unsecured funding primarily through the Company or through unregulated subsidiaries. The primary benefits of this strategy include cost minimization, wider investor name recognition and greater flexibility in providing funding to various subsidiaries across the Nomura Group.

To meet any potential liquidity requirement, we maintain a liquidity portfolio, managed by Global Treasury apart from other assets, in the form of cash and highly liquid, unencumbered securities that may be sold or pledged to provide liquidity. As of September 30, 2020, our liquidity portfolio was ¥6,323.2 billion which sufficiently met liquidity requirements under the stress scenarios.

2. Utilization of Unencumbered Assets as Part of Our Liquidity Portfolio

In addition to our liquidity portfolio, we had unencumbered assets comprising mainly of unpledged trading assets that can be used as an additional source of secured funding. Global Treasury monitors other unencumbered assets and can, under a liquidity stress event when the contingency funding plan has been invoked, monetize and utilize the cash generated as a result. The aggregate of our liquidity portfolio and other unencumbered assets was sufficient against our total unsecured debt maturing within one year.

3. Appropriate Funding and Diversification of Funding Sources and Maturities Commensurate with the Composition of Assets

We seek to maintain a surplus of long-term debt and equity above the cash capital requirements of our assets. We also seek to achieve diversification of our funding by market, instrument type, investors, currency, and staggered maturities in order to reduce unsecured refinancing risk.

We diversify funding by issuing various types of debt instruments—these include both structured loans and structured notes with returns linked to interest rates, currencies, equities, commodities, or related indices. We issue structured loans and structured notes in order to increase the diversity of our debt instruments. We typically hedge the returns we are obliged to pay with derivatives and/or the underlying assets to obtain funding equivalent to our unsecured long-term debt.

3.1 Short-Term Unsecured Debt

Our short-term unsecured debt consists of short-term bank borrowings (including long-term bank borrowings maturing within one year), other loans, commercial paper, deposit at banking entities, certificates of deposit and debt securities maturing within one year. Deposits at banking entities and certificates of deposit comprise customer deposits and certificates of deposit of our banking subsidiaries. Short-term unsecured debt includes the current portion of long-term unsecured debt.

The following table presents an analysis of our short-term unsecured debt by type of financial liability as of March 31, 2020 and September 30, 2020.

 

     Billions of yen  
     March 31, 2020      September 30, 2020  

Short-term bank borrowings

   ¥ 572.1      ¥ 225.8  

Other loans

     154.3        149.5  

Commercial paper

     525.1        406.9  

Deposits at banking entities

     1,116.2        1,116.4  

Certificates of deposit

     12.1        54.6  

Debt securities maturing within one year

     692.5        837.0  
  

 

 

    

 

 

 

Total short-term unsecured debt

   ¥ 3,072.3      ¥ 2,790.2  
  

 

 

    

 

 

 

 

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3.2 Long-Term Unsecured Debt

We meet our long-term capital requirements and also achieve both cost-effective funding and an appropriate maturity profile by routinely funding through long-term debt and diversifying across various maturities and currencies.

Our long-term unsecured debt includes senior and subordinated debt issued through U.S. registered shelf offerings and our U.S. registered medium-term note programs, our Euro medium-term note programs, registered shelf offerings in Japan and various other debt programs.

As a globally competitive financial services group in Japan, we have access to multiple global markets and major funding centers. The Company, Nomura Securities Co. Ltd., Nomura Europe Finance N.V., Nomura Bank International plc, Nomura International Funding Pte. Ltd., and Nomura Global Finance Co., Ltd. are the main group entities that borrow externally, issue debt instruments and engage in other funding activities. By raising funds to match the currencies and liquidities of our assets or by using foreign exchange swaps as necessary, we pursue optimization of our funding structures.

We use a wide range of products and currencies to ensure that our funding is efficient and well diversified across markets and investor types. Our unsecured senior debt is mostly issued without financial covenants, such as covenants related to adverse changes in our credit ratings, cash flows, results of operations or financial ratios, which could trigger an increase in our cost of financing or accelerate repayment of the debt.

The following table presents an analysis of our long-term unsecured debt by type of financial liability as of March 31, 2020 and September 30, 2020.

 

     Billions of yen  
     March 31, 2020      September 30, 2020  

Long-term deposits at banking entities

   ¥ 147.9      ¥ 10.2  

Long-term bank borrowings

     2,591.5        2,685.4  

Other loans

     82.5        80.5  

Debt securities(1)

     3,522.1        3,929.2  
  

 

 

    

 

 

 

Total long-term unsecured debt

   ¥ 6,344.0      ¥ 6,705.3  
  

 

 

    

 

 

 

 

  (1)

Excludes long-term debt securities issued by consolidated special purpose entities and similar entities that meet the definition of variable interest entities under ASC 810 “Consolidation” and secured financing transactions recognized within Long-term borrowings as a result of transfers of financial assets that are accounted for as financings rather than sales in accordance with ASC 860 “Transfer and Servicing.

3.3 Maturity Profile

We also seek to maintain an average maturity for our plain vanilla debt securities and borrowings greater than or equal to three years. A significant amount of our structured loans and structured notes are linked to interest rates, currencies, equities, commodities, or related indices. These maturities are evaluated based on internal models and monitored by Global Treasury. Where there is a possibility that these may be called prior to their scheduled maturity date, maturities are based on our internal stress option adjusted model. The model values the embedded optionality under stress market conditions in order to determine when the debt securities or borrowings are likely to be called.

3.4 Secured Funding

We typically fund our trading activities through secured borrowings, repurchase agreements and Japanese “Gensaki Repo” transactions. We believe such funding activities in the secured markets are more cost-efficient and less credit-rating sensitive than financing in the unsecured market. Our secured funding capabilities depend on the quality of the underlying collateral and market conditions. While we have shorter term secured financing for highly liquid assets, we seek longer terms for less liquid assets. We also seek to lower the refinancing risks of secured funding by transacting with a diverse group of global counterparties and delivering various types of securities collateral. In addition, we reserve an appropriate level of liquidity portfolio for the refinancing risks of secured funding maturing in the short term for less liquid assets. For more detail of secured borrowings and repurchase agreements, see Note 5 “Collateralized transactions” in our consolidated financial statements.

 

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4. Management of Credit Lines to Nomura Group Entities

We maintain and expand credit lines to Nomura Group entities from other financial institutions to secure stable funding. We ensure that the maturity dates of borrowing agreements are distributed evenly throughout the year in order to prevent excessive maturities in any given period.

5. Implementation of Liquidity Stress Tests

We maintain our liquidity portfolio and monitor the sufficiency of our liquidity based on an internal model which simulates changes in cash outflow under specified stress scenarios to comply with our above mentioned liquidity management policy.

We assess the liquidity requirements of the Nomura Group under various stress scenarios with differing levels of severity over multiple time horizons. We evaluate these requirements under Nomura-specific and broad market-wide events, including potential credit rating downgrades at the Company and subsidiary levels. We call this risk analysis our Maximum Cumulative Outflow (“MCO”) framework.

The MCO framework is designed to incorporate the primary liquidity risks for Nomura and models the relevant future cash flows in the following two primary scenarios:

 

   

Stressed scenario—To maintain adequate liquidity during a severe market-wide liquidity event without raising funds through unsecured financing or through the liquidation of assets for a year; and

 

   

Acute stress scenario—To maintain adequate liquidity during a severe market-wide liquidity event coupled with credit concerns regarding Nomura’s liquidity position, without raising funds through unsecured funding or through the liquidation of assets for 30 days.

We assume that Nomura will not be able to liquidate assets or adjust its business model during the time horizons used in each of these scenarios. The MCO framework therefore defines the amount of liquidity required to be held in order to meet our expected liquidity needs in a stress event to a level we believe appropriate based on our liquidity risk appetite.

As of September 30, 2020, our liquidity portfolio exceeded net cash outflows under the stress scenarios described above.

We constantly evaluate and modify our liquidity risk assumptions based on regulatory and market changes. The model we use in order to simulate the impact of stress scenarios includes the following assumptions:

 

   

No liquidation of assets;

 

   

No ability to issue additional unsecured funding;

 

   

Upcoming maturities of unsecured debt (maturities less than one year);

 

   

Potential buybacks of our outstanding debt;

 

   

Loss of secured funding lines particularly for less liquid assets;

 

   

Fluctuation of funding needs under normal business circumstances;

 

   

Cash deposits and free collateral roll-off in a stress event;

 

   

Widening of haircuts on outstanding repo funding;

 

   

Additional collateralization requirements of clearing banks and depositories;

 

   

Drawdown on loan commitments;

 

   

Loss of liquidity from market losses;

 

   

Assuming a two-notch downgrade of our credit ratings, the aggregate fair value of assets that we would be required to post as additional collateral in connection with our derivative contracts; and

 

   

Legal and regulatory requirements that can restrict the flow of funds between entities in the Nomura Group.

 

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6. Contingency Funding Plan

We have developed a detailed contingency funding plan to integrate liquidity risk control into our comprehensive risk management strategy and to enhance the quantitative aspects of our liquidity risk control procedures. As a part of our Contingency Funding Plan (“CFP”), we have developed an approach for analyzing and quantifying the impact of any liquidity crisis. This allows us to estimate the likely impact of both Nomura-specific and market-wide events; and specifies the immediate action to be taken to mitigate any risk. The CFP lists details of key internal and external parties to be contacted and the processes by which information is to be disseminated. This has been developed at a legal entity level in order to capture specific cash requirements at the local level—it assumes that our parent company does not have access to cash that may be trapped at a subsidiary level due to regulatory, legal or tax constraints. We periodically test the effectiveness of our funding plans for different Nomura-specific and market-wide events. We also have access to central banks including, but not exclusively, the Bank of Japan, which provide financing against various types of securities. These operations are accessed in the normal course of business and are an important tool in mitigating contingent risk from market disruptions.

Liquidity Regulatory Framework

In 2008, the Basel Committee published “Principles for Sound Liquidity Risk Management and Supervision.” To complement these principles, the Committee has further strengthened its liquidity framework by developing two minimum standards for funding liquidity. These standards have been developed to achieve two separate but complementary objectives.

The first objective is to promote short-term resilience of a financial institution’s liquidity risk profile by ensuring that it has sufficient high-quality liquid assets to survive a significant stress scenario lasting for 30 days. The Committee developed the Liquidity Coverage Ratio (“LCR”) to achieve this objective.

The second objective is to promote resilience over a longer time horizon by creating additional incentives for financial institutions to fund their activities with more stable sources of funding on an ongoing basis. The Net Stable Funding Ratio (“NSFR”) has a time horizon of one year and has been developed to provide a sustainable maturity structure of assets and liabilities.

These two standards are comprised mainly of specific parameters which are internationally “harmonized” with prescribed values. Certain parameters, however, contain elements of national discretion to reflect jurisdiction-specific conditions.

In Japan, the regulatory notice on the LCR, based on the international agreement issued by the Basel Committee with necessary national revisions, was published by the FSA. The notices have been implemented since the end of March 2015 with phased-in minimum standards. Average of Nomura’s LCRs for the three months ended September 30, 2020 was 248.4%, and Nomura was compliant with requirements of the above notices. As for the NSFR, it is not yet implemented in Japan.

Cash Flows

Cash, cash equivalents, restricted cash and restricted cash equivalents’ balance as of September 30, 2019 and as of September 30, 2020 were ¥2,824.6 billion and ¥3,941.9 billion, respectively. Cash flows from operating activities for the six months ended September 30, 2019 were outflows of ¥32.3 billion primarily due to an increase in Trading Investments and Private Equity Investments and the comparable period in 2020 were inflows of ¥823.0 billion primarily due to a decrease in Loans and receivables, net of allowance for doubtful accounts. Cash flows from investing activities for the six months ended September 30, 2019 were inflows of ¥227.5 billion primarily due to Decrease in loans receivable at banks, net and the comparable period in 2020 were outflows of ¥4.5 billion primarily due to Payments for purchases of office buildings, land, equipment and facilities. Cash flows from financing activities for the six months ended September 30, 2019 were outflows of ¥28.5 primarily due to a decrease in Deposits received at banks, net and the comparable period in 2020 were outflows of ¥48.6 billion primarily due to a decrease in Short-term borrowings.

Balance Sheet and Financial Leverage

Total assets as of September 30, 2020, were ¥42,684.4 billion, a decrease of ¥1,315.4 billion compared with ¥43,999.8 billion as of March 31, 2020, primarily due to a decrease in Loans receivable and Receivables from other than customers. Total liabilities as of September 30, 2020, were ¥39,898.4 billion, a decrease of ¥1,370.2 billion compared with ¥41,268.6 billion as of March 31, 2020, primarily due to a decrease in Securities sold under agreements to repurchase. NHI shareholders’ equity as of September 30, 2020, was ¥2,731.4 billion, an increase of ¥77.9 billion compared with ¥2,653.5 billion as of March 31, 2020, primarily due to an increase in Retained earnings.

We seek to maintain sufficient capital at all times to withstand losses due to extreme market movements. The EMB is responsible for implementing and enforcing capital policies. This includes the determination of our balance sheet size and required capital levels. We continuously review our equity capital base to ensure that it can support the economic risk inherent in our business. There are also regulatory requirements for minimum capital of entities that operate in regulated securities or banking businesses.

 

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As leverage ratios are commonly used by other financial institutions similar to us, we voluntarily provide a Leverage ratio and Adjusted leverage ratio primarily for benchmarking purposes so that users of our annual report can compare our leverage against other financial institutions. Adjusted leverage ratio is a non-GAAP financial measure that Nomura considers to be a useful supplemental measure of leverage.

The following table sets forth NHI shareholders’ equity, total assets, adjusted assets and leverage ratios:

 

                                         
     Billions of yen, except ratios  
     March 31, 2020     September 30, 2020  

NHI shareholders’ equity

   ¥ 2,653.5     ¥ 2,731.4  

Total assets

     43,999.8       42,684.4  

Adjusted assets(1)

     28,092.7       27,118.4  

Leverage ratio(2)

     16.6     15.6

Adjusted leverage ratio(3)

     10.6     9.9

 

(1)

Represents total assets less Securities purchased under agreements to resell and Securities borrowed. Adjusted assets is a non-GAAP financial measure and is calculated as follows:

 

                                         
     Billions of yen  
     March 31, 2020     September 30, 2020  

Total assets

   ¥ 43,999.8       ¥ 42,684.4  

Less:

    

Securities purchased under agreements to resell

     12,377.3         12,063.7    

Securities borrowed

     3,529.8       3,502.3  
  

 

 

   

 

 

 

Adjusted assets

   ¥ 28,092.7     ¥ 27,118.4  
  

 

 

   

 

 

 

 

(2)

Equals total assets divided by NHI shareholders’ equity.

(3)

Equals adjusted assets divided by NHI shareholders’ equity.

Total assets decreased by 3.0% reflecting primarily decreases in Loans receivable and Receivables from other than customers. NHI shareholders’ equity increased by 2.9% primarily due to an increase in Retained earnings. As a result, our leverage ratio declined from 16.6 times as of March 31, 2020 to 15.6 times as of September 30, 2020.

Adjusted assets decreased primarily due to a decrease in Loans receivable and Receivables from other than customers. As a result, our adjusted leverage ratio declined from 10.6 times as of March 31, 2020 to 9.9 times as of September 30, 2020.

 

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Consolidated Regulatory Capital Requirements

The FSA established the “Guideline for Financial Conglomerates Supervision” (“Financial Conglomerates Guideline”) in June 2005 and set out the rules on consolidated regulatory capital. We started monitoring our consolidated capital adequacy ratio in accordance with the Financial Conglomerates Guideline from April 2005.

The Company has been assigned by the FSA as a Final Designated Parent Company who must calculate a consolidated capital adequacy ratio according to the Capital Adequacy Notice on Final Designated Parent Company in April 2011. Since then, we have been calculating our consolidated capital adequacy ratio according to the Capital Adequacy Notice on Final Designated Parent Company. The Capital Adequacy Notice on Final Designated Parent Company has been revised to be in line with Basel 2.5 and Basel III since then. We have calculated a Basel III-based consolidated capital adequacy ratio from the end of March 2013. Basel 2.5 includes significant change in calculation method of market risk and Basel III includes redefinition of capital items for the purpose of requiring higher quality of capital and expansion of the scope of credit risk-weighted assets calculation.

In accordance with Article 2 of the Capital Adequacy Notice on Final Designated Parent Company, our consolidated capital adequacy ratio is currently calculated based on the amounts of common equity Tier 1 capital, Tier 1 capital (sum of common equity Tier 1 capital and additional Tier 1 capital), total capital (sum of Tier 1 capital and Tier 2 capital), credit risk-weighted assets, market risk and operational risk. As of September 30, 2020, our common equity Tier 1 capital ratio (common equity Tier 1 capital divided by risk-weighted assets) was 17.22%, Tier 1 capital ratio (Tier 1 capital divided by risk-weighted assets) was 19.38% and consolidated capital adequacy ratio (total capital divided by risk-weighted assets) was 19.59% and we were in compliance with the requirement for each ratio set out in the Capital Adequacy Notice on Final Designated Parent Company (required level as of September 30, 2020 was 7.51% for common equity Tier 1 capital ratio, 9.01% for Tier 1 capital ratio and 11.01% for consolidated capital adequacy ratio).

The following table presents the Company’s consolidated capital adequacy ratios as of September 30, 2020.

 

     Billions of yen, except ratios  
     September 30, 2020  

Common equity Tier 1 capital

   ¥ 2,538.0  

Tier 1 capital

     2,855.6  

Total capital

     2,886.6  

Risk-Weighted Assets

  

Credit risk-weighted assets

     7,885.6  

Market risk equivalent assets

     4,270.6  

Operational risk equivalent assets

     2,578.1  
  

 

 

 

Total risk-weighted assets

   ¥ 14,734.3  
  

 

 

 

Consolidated Capital Adequacy Ratios

  

Common equity Tier 1 capital ratio

     17.22

Tier 1 capital ratio

     19.38

Consolidated capital adequacy ratio

     19.59

 

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Consolidated Leverage Ratio Requirements

In March 2019, the FSA set out requirements for the calculation and disclosure and minimum requirement of 3% of a consolidated leverage ratio, and the publication of “Notice of the Establishment of Standards for Determining Whether the Adequacy of Leverage, the Supplementary Measure to the Adequacy of Equity Capital of a Final Designated Parent Company and its Subsidiary Corporations, etc. is Appropriate Compared to the Assets Held by the Final Designated Parent Company and its Subsidiary Corporations, etc., under Paragraph 1, Article 57-17 of the Financial Instruments and Exchange Act” (2019 FSA Regulatory Notice No. 13; “Notice on Consolidated Leverage Ratio”), through amendments to revising “Specification of items which a final designated parent company should disclose on documents to show the status of its sound management” (2010 FSA Regulatory Notice No. 132; “Notice on Pillar 3 Disclosure”). We started calculating and disclosing a consolidated leverage ratio from March 31, 2015 in accordance with the Notices. And we have started calculating a consolidated leverage ratio from March 31, 2019 in accordance with the Notice on Pillar 3 Disclosure, Notice on Consolidated Leverage Ratio and other related Notices. In June 2020, in coordination with the monetary policy of the Bank of Japan in response to the impact of coronavirus (“COVID-19”) pandemic, the FSA published amendments to the Notice on Consolidated Leverage Ratio. Under the amendments, amounts of deposits with the Bank of Japan are excluded from the total exposures of the leverage ratio during the period from June 30, 2020 to March 31, 2021. Management receives and reviews this consolidated leverage ratio on a regular basis. As of September 30, 2020, our consolidated leverage ratio was 5.85%.

Credit Ratings

On May 13, 2020, Fitch Ratings placed the bbb+ viability ratings of the Company and NSC on negative watch.

On July 28, 2020, Fitch Ratings changed the Outlook on Japan from Stable to Negative. Accordingly, on August 5, 2020, the Outlook of the A- Issuer Default Rating of the Company and NSC was changed from Stable to Negative.

On September 14, 2020, Moody’s Investors Service changed the Outlook of the Baa1 Long Term Issuer Rating of the Company and the A3 Long Term Issuer Rating of NSC from Negative to Stable.

On November 13, 2020, Fitch Ratings changed the Outlook of the A- Issuer Default Rating of the Company and NSC from Negative to Stable and removed the negative watch on the bbb+ viability ratings.

(7) Current Challenges

There is no significant change to our current challenges nor new challenges for the three months ended September 30, 2020 and until the submission date of this report.

 

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3. Significant Contracts

Not applicable.

 

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Item 3. Company Information

1. Share Capital Information

(1) Total Number of Shares

A. Number of Authorized Share Capital

 

Type

   Authorized Share Capital
(shares)
 

Common stock

     6,000,000,000  

Class 1 preferred stock

     200,000,000  

Class 2 preferred stock

     200,000,000  

Class 3 preferred stock

     200,000,000  

Class 4 preferred stock

     200,000,000  
  

 

 

 

Total

     6,000,000,000  
  

 

 

 

 

The “Authorized Share Capital” is stated by class and the total is the number of authorized share capital designated in the Articles of Incorporation.

B. Issued Shares

 

Type

   Number of
Issued Shares as of
September 30, 2020
     Number of
Issued Shares as of
November 16, 2020
     Trading Markets   Details  

Common stock

     3,493,562,601        3,493,562,601      Tokyo Stock Exchange(2)     1 unit is 100 shares  
         Nagoya Stock Exchange(2)  
         Singapore Exchange  
         New York Stock Exchange  
  

 

 

    

 

 

    

 

 

 

 

 

Total

     3,493,562,601        3,493,562,601      —       —    
  

 

 

    

 

 

    

 

 

 

 

 

 

(1)

Shares that may have increased from exercise of stock options between November 1, 2020 and November 16, 2020 are not included in the number of issued shares as of November 16, 2020.

(2)

Listed on the First Section of each stock exchange.

(2) Stock Acquisition Rights

A. Stock option

Not applicable in this quarter.

B. Other stock acquisition rights

Not applicable in this quarter.

(3) Exercise of Moving Strike Bonds with Subscription Warrant

None

(4) Changes in Issued Shares, Shareholders’ Equity, etc.

 

                   Millions of yen  

Date

   Increase/Decrease
of Issued Shares
     Total
Issued Shares
     Increase/Decrease
of Shareholders’
Equity—
Common stock
     Shareholders’
Equity—
Common stock
     Increase/Decrease of
Additional

capital reserve
     Additional
capital reserve
 

September 30, 2020

     —          3,493,562,601        —          594,493        —          559,676  

 

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(5) Major Shareholders

 

        As of September 30, 2020  

Name

 

Address

  Shares Held
(thousand
shares)
    Percentage of
Issued Shares
(%)
 

The Master Trust Bank of Japan, Ltd. (Trust Account)

  2-11-3, Hamamatsu-cho, Minato-Ku, Tokyo, Japan     229,825       7.51  

Custody Bank of Japan, Ltd. (Trust Account)

  1-8-12, Harumi, Chuo-Ku, Tokyo, Japan     157,207       5.14  

SMBC Nikko Securities Inc.

  3-3-1, Marunouchi, Chiyoda-Ku, Tokyo, Japan     85,784       2.80  

Custody Bank of Japan, Ltd. (Trust Account 5)

  1-8-12, Harumi, Chuo-Ku, Tokyo, Japan     72,363       2.36  

JP Morgan Chase Bank 385781

  25 Bank Street Canary Wharf London E14 5JP, UK     49,189       1.60  

Northern Trust Co. (AVFC) Re Silchester International Investors International Value Equity Trust

  50 Bank Street Canary Wharf London E14 5NT, UK     45,253       1.47  

State Street Bank West Client-treaty 505234

  1776 Heritage Drive, North Quincy, MA 02171 U.S.A.     44,249       1.44  

Custody Bank of Japan, Ltd. (Trust Account 7)

  1-8-12, Harumi, Chuo-Ku, Tokyo, Japan     42,797       1.39  

Northern Trust Co. (AVFC) Re U. S. Tax Exempted Pension Funds

  50 Bank Street Canary Wharf London E14 5NT, UK     39,850       1.30  

Custody Bank of Japan, Ltd. (Trust Account 6)

  1-8-12, Harumi, Chuo-Ku, Tokyo, Japan     38,840       1.27  
   

 

 

   

 

 

 

Total

      805,361       26.33  
   

 

 

   

 

 

 

 

(1)

The Company has 435,408 thousand shares of treasury stock as of September 30, 2020 which is not included in the Major Shareholders list above.

(2)

For Shares Held in the above, amounts less than thousand shares are discarded.

(3)

According to a statement on Schedule 13G (Amendment No.5) filed by BlackRock, Inc. with the SEC on February 5, 2020, BlackRock, Inc. owned 201,152,010 shares, representing 5.80% of the issued shares of the Company’s common stock. However, the Company has not confirmed the status of these shareholdings as of September 30, 2020.

 

Name

 

Address

  As of December 31, 2019  
  Shares Held
(thousand
shares)
    Percentage of
Issued Shares
(%)
 

Black Rock, Inc.

  55 East 52nd Street New York, NY 10055     201,152       5.80  

 

(4)

According to a statement on Schedule 13G filed by Sumitomo Mitsui Trust Holdings, Inc. with the SEC on February 12, 2020, Sumitomo Mitsui Trust Holdings, Inc. owned 176,742,300 shares, representing 5.10% of the issued shares of the Company’s common stock. However, the Company has not confirmed the status of these shareholdings as of September 30, 2020.

 

Name

 

Address

  As of December 31, 2019  
  Shares Held
(thousand
shares)
    Percentage of
Issued Shares
(%)
 

Sumitomo Mitsui Trust Holdings, Inc.

  1-4-1, Marunouchi, Chiyoda-ku, Tokyo, Japan     176,742       5.10  

 

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(6) Voting Rights

A. Outstanding Shares

 

     As of September 30, 2020
     Number of Shares      Number of Votes      Description

Stock without voting right

        —          —        —  

Stock with limited voting right (Treasury stocks, etc.)

        —          —        —  

Stock with limited voting right (Others)

        —          —        —  

Stock with full voting right (Treasury stocks, etc.)

     Common stock        435,408,400        —        —  

Stock with full voting right (Others)

     Common stock        3,056,604,100        30,566,041      —  

Shares less than 1 unit

     Common stock        1,550,101        —        Shares less than 1 unit

(100 shares)

  

 

 

    

 

 

    

 

 

    

 

Total Shares Issued

        3,493,562,601        —        —  
  

 

 

    

 

 

    

 

 

    

 

Voting Rights of Total Shareholders

        —          30,566,041      —  
  

 

 

    

 

 

    

 

 

    

 

 

 

(1)

Stock with full voting right (Others) includes 2,000 shares held by Japan Securities Depository Center, Inc. Shares less than 1 unit includes 40 shares of treasury stock.

B. Treasury Stocks

 

          As of September 30, 2020  

Name

  

Address

   Directly
held
shares
     Indirectly
held
shares
     Total      Percentage of
Issued Shares
(%)
 

Nomura Holdings, Inc.

  

1-9-1, Nihonbashi, Chuo-ku,

Tokyo, Japan

     435,408,400        —          435,408,400        12.46  
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        435,408,400        —          435,408,400        12.46  
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The Company transferred its registered headquarters to 1-13-1, Nihonbashi, Chuo-ku, Tokyo, Japan as of October 1, 2020.

(2)

260,000,000 shares of treasury stock will be cancelled on December 1, 2020.

 

21


Table of Contents

Item 4. Financial Information

 

1

Preparation Method of Consolidated Financial Statements

 

  (1)

The consolidated financial statements have been prepared in accordance with accounting principles, procedures, and presentations which are required in order to issue American Depositary Shares, i.e., U.S. generally accepted accounting principles, pursuant to Article 95 of “Regulations Concerning the Terminology, Forms and Preparation Methods of Quarterly Consolidated Financial Statements” (Cabinet Office Ordinance No. 64, 2007).

 

  (2)

The consolidated financial statements have been prepared by making necessary adjustments to the financial statements of each consolidated company which were prepared in accordance with the accounting principles generally accepted in each country. Such adjustments have been made to comply with the principles noted in (1) above.

 

2

Quarterly Review Certificate

Under Article 193-2 Section 1 of the Financial Instruments and Exchange Act, Ernst & Young ShinNihon LLC performed a quarterly review of the consolidated financial statements for the six and three months ended September 30, 2020.

<Note>

Although Ernst & Young ShinNihon LLC reported that they applied limited procedures in accordance with professional standards in Japan on the interim consolidated financial statements, prepared in Japanese for the six and three months ended September 30, 2020, they have not performed any such limited procedures nor have they performed an audit on the English translated version of the consolidated financial statements for the above-mentioned periods which are included in this report on Form 6-K.

 

22


Table of Contents

1. Consolidated Financial Statements

(1) Consolidated Balance Sheets (UNAUDITED)

 

            Millions of yen  
     Notes      March 31,
2020
    September 30,
2020
 

ASSETS

       

Cash and cash deposits:

       

Cash and cash equivalents

                       ¥     3,191,889     ¥     3,941,802  

Time deposits

        309,373       191,277  

Deposits with stock exchanges and other segregated cash

        373,686       391,594  
     

 

 

   

 

 

 

Total cash and cash deposits

        3,874,948       4,524,673  
     

 

 

   

 

 

 

Loans and receivables:

       

Loans receivable (including ¥805,141 million and ¥804,315 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2, 7        2,857,405       2,344,080  

Receivables from customers (including ¥11 million and ¥92,193 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2, 4        541,284       514,711  

Receivables from other than customers

        1,731,236       877,751  

Allowance for doubtful accounts

     *7        (13,012     (11,356
     

 

 

   

 

 

 

Total loans and receivables

        5,116,913       3,725,186  
     

 

 

   

 

 

 

Collateralized agreements:

       

Securities purchased under agreements to resell (including ¥548,043 million and ¥320,679 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2        12,377,315       12,063,662  

Securities borrowed

        3,529,797       3,502,286  
     

 

 

   

 

 

 

Total collateralized agreements

        15,907,112       15,565,948  
     

 

 

   

 

 

 

Trading assets and private equity and debt investments:

       

Trading assets (including securities pledged as collateral of ¥5,332,640 million and ¥6,383,048 million as of March 31, 2020 and September 30, 2020, respectively; including ¥12,407 million and ¥8,531 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2, 3        16,853,822       16,515,538  

Private equity and debt investments (including ¥6,395 million and ¥7,514 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2        44,278       55,432  
     

 

 

   

 

 

 

Total trading assets and private equity and debt investments

        16,898,100       16,570,970  
     

 

 

   

 

 

 

Other assets:

       

Office buildings, land, equipment and facilities (net of accumulated depreciation and amortization of ¥397,114 million and ¥384,060 million as of March 31, 2020 and September 30, 2020, respectively)

        440,512       466,373  

Non-trading debt securities

     *2        455,392       411,980  

Investments in equity securities

     *2        112,175       112,880  

Investments in and advances to affiliated companies

        367,641       391,286  

Other (including ¥144,756 million and ¥137,413 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2, 10        827,022       915,141  
     

 

 

   

 

 

 

Total other assets

        2,202,742       2,297,660  
     

 

 

   

 

 

 

Total assets

      ¥ 43,999,815     ¥ 42,684,437  
     

 

 

   

 

 

 

 

23


Table of Contents

(1) Consolidated Balance Sheets—(Continued) (UNAUDITED)

 

     Notes      Millions of yen  
     March 31,
2020
    September 30,
2020
 

LIABILITIES AND EQUITY

                        

Short-term borrowings (including ¥376,910 million and ¥587,622 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2      ¥ 1,486,733     ¥ 1,346,414  

Payables and deposits:

       

Payables to customers

     *4        1,467,434       1,286,985  

Payables to other than customers

        1,653,495       1,281,977  

Deposits received at banks (including ¥14,392 million and ¥31,229 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2        1,276,153       1,181,169  
     

 

 

   

 

 

 

Total payables and deposits

            4,397,082           3,750,131  
     

 

 

   

 

 

 

Collateralized financing:

       

Securities sold under agreements to repurchase (including ¥111,609 million and ¥104,645 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2        16,349,182       15,427,476  

Securities loaned (including ¥105,968 million and ¥114,621 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2        961,446       1,119,095  

Other secured borrowings

        717,711       348,484  
     

 

 

   

 

 

 

Total collateralized financing

        18,028,339       16,895,055  
     

 

 

   

 

 

 

Trading liabilities

     *2, 3        8,546,284       8,789,496  

Other liabilities (including ¥9,183 million and ¥24,864 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2, 10        1,034,448       1,049,465  

Long-term borrowings (including ¥3,707,643 million and ¥4,030,791 million measured at fair value by applying the fair value option as of March 31, 2020 and September 30, 2020, respectively)

     *2        7,775,665       8,067,822  
     

 

 

   

 

 

 

Total liabilities

        41,268,551       39,898,383  
     

 

 

   

 

 

 

Commitments and contingencies

     *16       

Equity:

       

Nomura Holdings, Inc. (“NHI”) shareholders’ equity:

       

Common stock

       

No par value share

       

Authorized—6,000,000,000 shares as of March 31, 2020 and September 30, 2020

       

Issued—3,493,562,601 shares as of March 31, 2020 and September 30, 2020

       

Outstanding—3,038,587,493 shares as of March 31, 2020 and 3,057,804,161 shares as of September 30, 2020

        594,493       594,493  

Additional paid-in capital

        683,232       683,233  

Retained earnings

        1,645,451       1,775,691  

Accumulated other comprehensive income

     *15        (26,105     (88,706
     

 

 

   

 

 

 

Total NHI shareholders’ equity before treasury stock

        2,897,071       2,964,711  

Common stock held in treasury, at cost—454,975,108 shares as of March 31, 2020 and 435,758,440 shares as of September 30, 2020

        (243,604     (233,315
     

 

 

   

 

 

 

Total NHI shareholders’ equity

        2,653,467       2,731,396  
     

 

 

   

 

 

 

Noncontrolling interests

        77,797       54,658  

Total equity

        2,731,264       2,786,054  
     

 

 

   

 

 

 

Total liabilities and equity

      ¥ 43,999,815     ¥ 42,684,437  
     

 

 

   

 

 

 

 

24


Table of Contents

(1) Consolidated Balance Sheets—(Continued) (UNAUDITED)

The following table presents the classification of consolidated variable interest entities’ (“VIEs”) assets and liabilities included in the consolidated balance sheets above. The assets of a consolidated VIE may only be used to settle obligations of that VIE. Creditors do not typically have any recourse to Nomura beyond the assets held in the VIEs. See Note 6 “Securitizations and Variable Interest Entities” for further information.

 

            Billions of yen  
            March 31,
2020
    September 30,
2020
 

Cash and cash deposits

      ¥ 10     ¥ 8  

Trading assets and private equity and debt investments

        1,172       1,135    

Other assets

        39       56  
     

 

 

   

 

 

 

Total assets

      ¥            1,221       ¥            1,199  
     

 

 

   

 

 

 

Trading liabilities

      ¥ 19     ¥ 17  

Other liabilities

        4       2  

Borrowings

                         947       924  
     

 

 

   

 

 

 

Total liabilities

      ¥ 970     ¥ 943  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

25


Table of Contents

(2) Consolidated Statements of Income (UNAUDITED)

 

     Notes      Millions of yen  
     Six months ended September 30  
     2019     2020  

Revenue:

                      

Commissions

     *4      ¥        133,454     ¥        177,765  

Fees from investment banking

     *4        49,576       37,859  

Asset management and portfolio service fees

     *4        119,889       111,073  

Net gain on trading

     *2, 3        218,434       270,552  

Gain on private equity and debt investments

        1,772       2,875  

Interest and dividends

        415,354       189,037  

Gain (loss) on investments in equity securities

        (755     5,413  

Other

     *4        147,559       138,817  
     

 

 

   

 

 

 

Total revenue

        1,085,283       933,391  

Interest expense

        369,902       103,646  
     

 

 

   

 

 

 

Net revenue

        715,381       829,745  
     

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

        245,527       275,303  

Commissions and floor brokerage

        49,997       56,186  

Information processing and communications

        84,118       85,822  

Occupancy and related depreciation

        37,480       36,114  

Business development expenses

        15,734       6,464  

Other

        79,233       104,418  
     

 

 

   

 

 

 

Total non-interest expenses

        512,089       564,307  
     

 

 

   

 

 

 

Income before income taxes

        203,292       265,438  

Income tax expense

     *14        6,042       52,217  
     

 

 

   

 

 

 

Net income

      ¥ 197,250     ¥ 213,221  

Less: Net income attributable to noncontrolling interests

        2,843       3,063  
     

 

 

   

 

 

 

Net income attributable to NHI shareholders

      ¥ 194,407     ¥ 210,158  
     

 

 

   

 

 

 
     Notes      Yen  
     Six months ended September 30  
     2019     2020  

Per share of common stock:

     *11       

Basic—

       

Net income attributable to NHI shareholders per share

      ¥ 58.89     ¥ 68.87  

Diluted—

       

Net income attributable to NHI shareholders per share

      ¥ 57.66     ¥ 67.10  

The accompanying notes are an integral part of these consolidated financial statements.

 

26


Table of Contents
     Notes      Millions of yen  
     Three months ended September 30  
     2019     2020  

Revenue:

                      

Commissions

     *4      ¥          65,254     ¥          92,253  

Fees from investment banking

     *4        22,265       27,031  

Asset management and portfolio service fees

     *4        59,926       57,417  

Net gain on trading

     *2, 3        105,609       131,463  

Gain on private equity and debt investments

        981       1,805  

Interest and dividends

        215,881       82,494  

Gain on investments in equity securities

        2,083       1,940  

Other

     *4        101,905       24,939  
     

 

 

   

 

 

 

Total revenue

        573,904       419,342  

Interest expense

        190,524       50,344  
     

 

 

   

 

 

 

Net revenue

        383,380       368,998  
     

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

        120,425       137,006  

Commissions and floor brokerage

        25,446       27,675  

Information processing and communications

        42,361       42,584  

Occupancy and related depreciation

        18,360       19,056  

Business development expenses

        7,906       3,632  

Other

        40,396       55,418  
     

 

 

   

 

 

 

Total non-interest expenses

        254,894       285,371  
     

 

 

   

 

 

 

Income before income taxes

        128,486       83,627  

Income tax expense (benefit)

     *14        (11,875     14,704  
     

 

 

   

 

 

 

Net income

      ¥ 140,361     ¥ 68,923  

Less: Net income attributable to noncontrolling interests

        1,787       1,281  
     

 

 

   

 

 

 

Net income attributable to NHI shareholders

      ¥ 138,574     ¥ 67,642  
     

 

 

   

 

 

 
     Notes      Yen  
     Three months ended September 30  
     2019     2020  

Per share of common stock:

     *11       

Basic—

                      

Net income attributable to NHI shareholders per share

      ¥ 42.11     ¥ 22.13  

Diluted—

       

Net income attributable to NHI shareholders per share

      ¥ 41.23     ¥ 21.52  

The accompanying notes are an integral part of these consolidated financial statements.

 

27


Table of Contents

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

 

            Millions of yen  
            Six months ended September 30  
            2019     2020  

Net income

      ¥ 197,250     ¥ 213,221  

Other comprehensive income (loss):

       

Cumulative translation adjustments:

       

Cumulative translation adjustments

                         (39,320     (19,837

Deferred income taxes

        245       (60
     

 

 

   

 

 

 

Total

        (39,075     (19,897

Defined benefit pension plans:

       

Pension liability adjustment

                 3,005       4,017  

Deferred income taxes

        912       (627
     

 

 

   

 

 

 

Total

        3,917       3,390  

Own credit adjustments:

       

Own credit adjustments

        (3,156     (53,351

Deferred income taxes

        (519     7,567  
     

 

 

   

 

 

 

Total

        (3,675     (45,784
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        (38,833     (62,291
     

 

 

   

 

 

 

Comprehensive income

      ¥ 158,417     ¥ 150,930  

Less: Comprehensive income attributable to noncontrolling interests

        2,403       3,373  
     

 

 

   

 

 

 

Comprehensive income attributable to NHI shareholders

      ¥ 156,014     ¥     147,557  
     

 

 

   

 

 

 
            Millions of yen  
            Three months ended September 30  
            2019     2020  

Net income

      ¥ 140,361     ¥ 68,923  

Other comprehensive income (loss):

       

Cumulative translation adjustments:

       

Cumulative translation adjustments

        (6,474     (19,742

Deferred income taxes

        (66     (46
     

 

 

   

 

 

 

Total

        (6,540     (19,788

Defined benefit pension plans:

       

Pension liability adjustment

        2,356       1,210  

Deferred income taxes

        (686     (128
     

 

 

   

 

 

 

Total

        1,670       1,082  

Own credit adjustments:

       

Own credit adjustments

        (1,430     (53,954

Deferred income taxes

        (269     9,662  
     

 

 

   

 

 

 

Total

        (1,699     (44,292
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        (6,569     (62,998
     

 

 

   

 

 

 

Comprehensive income

      ¥ 133,792     ¥ 5,925  

Less: Comprehensive income attributable to noncontrolling interests

        2,206       1,016  
     

 

 

   

 

 

 

Comprehensive income attributable to NHI shareholders

      ¥        131,586     ¥        4,909  
     

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

28


Table of Contents

(4) Consolidated Statements of Changes in Equity (UNAUDITED)

 

            Millions of yen  
            Six months ended September 30  
            2019     2020  

Common stock

       

Balance at beginning of year

      ¥ 594,493     ¥ 594,493  
     

 

 

   

 

 

 

Balance at end of period

                         594,493       594,493  
     

 

 

   

 

 

 

Additional paid-in capital

       

Balance at beginning of year

        687,761       683,232  

Gain on sales of treasury stock

        12       —    

Stock-based compensation awards

        (4,922     (1,117

Changes in an affiliated company’s interests in its subsidiary

        —         1,118  
     

 

 

   

 

 

 

Balance at end of period

        682,851       683,233  
     

 

 

   

 

 

 

Retained earnings

       

Balance at beginning of year

        1,486,825       1,645,451  

Cumulative effect of change in accounting principle (1)

        5,592       (18,200

Net income attributable to NHI shareholders

        194,407       210,158  

Cash dividends(2)

        (48,477     (61,156

Gain (loss) on sales of treasury stock

        —         (562
     

 

 

   

 

 

 

Balance at end of period

        1,638,347       1,775,691  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        17,833       (26,274

Net change during the period

        (38,635     (20,207
     

 

 

   

 

 

 

Balance at end of period

        (20,802     (46,481
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (71,107     (62,571

Pension liability adjustment

        3,917       3,390  
     

 

 

   

 

 

 

Balance at end of period

        (67,190     (59,181
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        24,224       62,740  

Own credit adjustments

        (3,675     (45,784
     

 

 

   

 

 

 

Balance at end of period

        20,549       16,956  
     

 

 

   

 

 

 

Balance at end of period

        (67,443     (88,706
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (108,968     (243,604

Repurchases of common stock

        (41,328     (3

Sales of common stock

        0       0  

Common stock issued to employees

        9,926       10,292  
     

 

 

   

 

 

 

Balance at end of period

        (140,370     (233,315
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,707,878       2,731,396  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        49,732       77,797  

Cash dividends

        (1,274     (723

Net income attributable to noncontrolling interests

        2,843       3,063  

Accumulated other comprehensive income (loss) attributable to noncontrolling interests

        (440     310  

Purchase / sale of subsidiary shares, net

        16,089       160  

Other net change in noncontrolling interests

        13,347       (25,949
     

 

 

   

 

 

 

Balance at end of period

        80,297       54,658  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥     2,788,175     ¥     2,786,054  
     

 

 

   

 

 

 

 

(1)    Represents the adjustments to initially apply Accounting Standards Update (“ASU”) 2016-02,Leases” and ASU 2016-13,Measurement of Credit Losses on Financial Instruments” for the six months ended September 30, 2019, and 2020, respectively.
(2)    Dividends per share            Six months ended September 30, 2019 ¥ 15.00            Six months ended September 30, 2020 ¥ 20.00

The accompanying notes are an integral part of these consolidated financial statements.

 

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            Millions of yen  
            Three months ended September 30  
            2019     2020  

Common stock

       

Balance at beginning of year

                       ¥ 594,493     ¥ 594,493  
     

 

 

   

 

 

 

Balance at end of period

        594,493       594,493  
     

 

 

   

 

 

 

Additional paid-in capital

       

Balance at beginning of year

        681,065       676,040  

Gain (loss) on sales of treasury stock

        (67     —    

Stock-based compensation awards

        1,853       7,197  

Changes in an affiliated company’s interests in its subsidiary

        —         (4
     

 

 

   

 

 

 

Balance at end of period

        682,851       683,233  
     

 

 

   

 

 

 

Retained earnings

       

Balance at beginning of year

        1,548,250       1,769,225  

Net income attributable to NHI shareholders

        138,574       67,642  

Cash dividends(1)

        (48,477     (61,156

Gain (loss) on sales of treasury stock

        —         (20
     

 

 

   

 

 

 

Balance at end of period

        1,638,347       1,775,691  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        (13,843     (26,958

Net change during the period

        (6,959     (19,523
     

 

 

   

 

 

 

Balance at end of period

        (20,802     (46,481
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (68,860     (60,263

Pension liability adjustment

        1,670       1,082  
     

 

 

   

 

 

 

Balance at end of period

        (67,190     (59,181
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        22,248       61,248  

Own credit adjustments

        (1,699     (44,292
     

 

 

   

 

 

 

Balance at end of period

        20,549       16,956  
     

 

 

   

 

 

 

Balance at end of period

        (67,443     (88,706
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (100,627     (234,282

Repurchases of common stock

        (41,327     (2

Sales of common stock

        0       0  

Common stock issued to employees

        1,584       969  
     

 

 

   

 

 

 

Balance at end of period

        (140,370     (233,315
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,707,878       2,731,396  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        64,142       51,140  

Cash dividends

        (305     267  

Net income attributable to noncontrolling interests

        1,787       1,281  

Accumulated other comprehensive income attributable to noncontrolling interests

        419       (265

Purchase / sale of subsidiary shares, net

        15,422       (370

Other net change in noncontrolling interests

        (1,168     2,605  
     

 

 

   

 

 

 

Balance at end of period

        80,297       54,658  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥     2,788,175     ¥     2,786,054  
     

 

 

   

 

 

 

 

(1)

  

Dividends per share

  

        Three months ended September 30, 2019  ¥ 15.00

  

        Three months ended September 30, 2020  ¥ 20.00

The accompanying notes are an integral part of these consolidated financial statements.

 

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(5) Consolidated Statements of Cash Flows (UNAUDITED)

 

                                                                          
            Millions of yen  
            Six months ended September 30  
            2019     2020  

Cash flows from operating activities:

       

Net income

                       ¥ 197,250     ¥ 213,221  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

       

Depreciation and amortization

        32,227       30,848  

(Gain) loss on investments in equity securities

        755       (5,413

Gain on investments in subsidiaries and affiliates

        (73,272     (2,440

Gain on disposal of office buildings, land, equipment and facilities(1)

        (5,427     (71,818

Deferred income taxes

        (16,854     13,429  

Changes in operating assets and liabilities:

       

Time deposits

        (6,185     121,608  

Deposits with stock exchanges and other segregated cash

        3,584       (21,109

Trading assets and private equity and debt investments

        (3,474,941     133,749  

Trading liabilities

        661,651       347,655  

Securities purchased under agreements to resell, net of securities sold under agreements to repurchase

        3,221,071       (458,341

Securities borrowed, net of securities loaned

        (152,421     160,407  

Other secured borrowings

        (95,701     (368,925

Loans and receivables, net of allowance for doubtful accounts

        (413,567     1,335,730  

Payables

        131,808       (568,245

Bonus accrual

        (32,577     (21,810

Accrued income taxes, net

        (20,395     19,934  

Other, net(1)

        10,658       (35,469
     

 

 

   

 

 

 

Net cash provided by (used in) operating activities

        (32,336     823,011  
     

 

 

   

 

 

 

Cash flows from investing activities:

       

Payments for purchases of office buildings, land, equipment and facilities

        (89,011     (51,805

Proceeds from sales of office buildings, land, equipment and facilities

        105,999       17,246  

Proceeds from sales of investments in equity securities

        1,749       4,743  

Decrease (increase) in loans receivable at banks, net

        61,263       (6,026

Decrease (increase) in non-trading debt securities, net

        (10,210     46,414  

Business acquisition

        —         (11,152

Decrease in investments in affiliated companies, net

        160,792       (9,651

Other, net

        (3,075     5,697  
     

 

 

   

 

 

 

Net cash provided by (used in) investing activities

        227,507       (4,534
     

 

 

   

 

 

 

Cash flows from financing activities:

       

Increase in long-term borrowings

        1,030,587       1,329,842  

Decrease in long-term borrowings

        (1,024,362     (1,006,945

Increase (decrease) in short-term borrowings, net

        118,633       (257,216

Decrease in deposits received at banks, net

        (117,824     (105,361

Proceeds from sales of common stock held in treasury

        140       4  

Payments for repurchases of common stock held in treasury

        (41,328     (3

Payments for cash dividends

        (9,930     (15,195

Contributinon from noncontrolling interests

        15,618       6,257  
     

 

 

   

 

 

 

Net cash used in financing activities

        (28,466     (48,617
     

 

 

   

 

 

 

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents

        (29,223     (20,229
     

 

 

   

 

 

 

Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents

        137,482       749,631  

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year

        2,687,132       3,192,310  
     

 

 

   

 

 

 

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period

      ¥     2,824,614     ¥     3,941,941  
     

 

 

   

 

 

 

Supplemental information:

       

Cash paid during the period for—

       

Interest

      ¥ 370,012     ¥ 111,043  

Income tax payments, net

      ¥ 43,291     ¥ 18,855  

 

(1)   Certain reclassifications of previously reported amounts have been made to conform to the current period presentation.

 

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The following table presents a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents as reported within the consolidated balance sheets to the total of the same such amounts shown in the statements of cash flows above. Restricted cash and restricted cash equivalents are amounts where access, withdrawal or usage by Nomura is substantively prohibited by a third party entity outside of the Nomura group.

 

                                                                          
            Millions of yen  
            Six months ended September 30  
            2019     2020  

Cash and cash equivalents reported in Cash and cash equivalents

                       ¥ 2,824,181       ¥ 3,941,802   

Restricted cash and restricted cash equivalents reported in Deposits with stock exchanges and other segregated cash

      ¥ 433     ¥ 139  
     

 

 

   

 

 

 

Total cash, cash equivalent, restricted cash and restricted cash equivalents

      ¥     2,824,614     ¥     3,941,941  
     

 

 

   

 

 

 

Non-cash—

Total amount of Right- of use assets recognized during the six months ended September 30, 2019 and September 30, 2020 were ¥11,236 million and ¥45,445 million, respectively.

The accompanying notes are an integral part of these consolidated financial statements.

 

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Notes to the Consolidated Financial Statements (UNAUDITED)

1. Basis of accounting:

In December 2001, Nomura Holdings, Inc. (“the Company”) filed a registration statement, in accordance with the Securities Exchange Act of 1934, with the United States Securities and Exchange Commission (“SEC”) in order to list its American Depositary Shares (“ADS”) on the New York Stock Exchange. Since then, the Company has had an obligation to file an annual report on Form 20-F with the SEC in accordance with the Securities Exchange Act of 1934.

Therefore, the Company and other entities in which it has a controlling financial interest (collectively “Nomura”) prepares consolidated financial statements in accordance with the accounting principles, procedures and presentations which are required in order to issue ADS, i.e., U.S. generally accepted accounting principles (“U.S. GAAP”), pursuant to Article 95 of “Regulations Concerning the Terminology, Forms and Preparation Methods of Quarterly Consolidated Financial Statements” (Cabinet Office Ordinance No. 64, 2007).

The following paragraphs describe the major differences between U.S. GAAP applied by Nomura and accounting principles generally accepted in Japan (“Japanese GAAP”) for the six and three months ended September 30, 2020. Where the effect of these major differences are significant to Income before income taxes, Nomura discloses as (higher) or (lower) below the amount by which Income before income taxes based on U.S. GAAP was higher or lower than Japanese GAAP, respectively.

Scope of consolidation—

Under U.S. GAAP, the scope of consolidation is mainly determined by the ownership of a majority of the voting interests in an entity or by identifying the primary beneficiary of variable interest entities. Under Japanese GAAP, the scope of consolidation is determined by a “financial controlling model”, which takes into account the ownership level of voting interests in an entity and other factors.

Unrealized gains and losses on investments in equity securities—

Under U.S. GAAP applicable to broker-dealers, minority investments in equity securities with readily determinable fair values are measured at fair value with changes in fair value recognized in earnings. Under Japanese GAAP, these investments are also measured at fair value, but unrealized gains and losses, net of applicable income taxes, are reported in other comprehensive income. Income before income taxes prepared under U.S. GAAP, therefore, was ¥1,469 million (lower) and ¥1,992 million (higher) for the six months ended September 30, 2019 and 2020, respectively and ¥890 million (higher) and ¥868 million (lower) for the three months ended September 30, 2019 and 2020, respectively.

Unrealized gains and losses on non-trading debt and equity securities—

Under U.S. GAAP applicable to broker-dealers, non-trading securities are measured at fair value with changes in fair value recognized in earnings. Under Japanese GAAP, these securities are also measured at fair value, but unrealized gains and losses, net of applicable income taxes, are reported in other comprehensive income. Income(loss) before income taxes prepared under U.S. GAAP, therefore, was ¥2,399 million (higher) and ¥947 million (higher) for the six months ended September 30, 2019 and 2020, respectively, and ¥810 million (higher) and ¥236 million (lower) for the three months ended September 30, 2019 and 2020, respectively for non-trading debt securities. Income before income taxes prepared under U.S. GAAP was ¥294 million (lower) and ¥1,003 million (lower) for the six months ended September 30, 2019 and 2020, respectively, and ¥136 million (higher) and ¥157 million (lower) for the three months ended September 30, 2019 and 2020, respectively for non-trading equity securities.

Retirement and severance benefits—

Under U.S. GAAP, gains or losses resulting from either experience that is different from an actuarial assumption or a change in assumption is amortized over the average remaining service period of employees when a net gain or loss at the beginning of the year exceeds the “Corridor” which is defined as 10% of the larger of projected benefit obligation or the fair value of plan assets. Under Japanese GAAP, these gains or losses are amortized over a certain period regardless of the Corridor.

 

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Amortization of goodwill and equity method goodwill—

Under U.S. GAAP, goodwill is not amortized and is tested for impairment periodically. Under Japanese GAAP, goodwill is amortized over a certain periods of less than 20 years using the straight-line method. Therefore, under U.S. GAAP, Income (loss) before income taxes was ¥2,014 million (higher) and ¥1,938 million (higher) for the six months ended September 30, 2019 and 2020, respectively, and ¥1,039 million (higher) and ¥967 million (higher) for the three months ended September 30, 2019 and 2020, respectively.

Changes in the fair value of derivative contracts—

Under U.S. GAAP, all derivative contracts, including derivative contracts that have been designated as hedges of specific assets or specific liabilities, are carried at fair value, with changes in fair value recognized either in earnings or other comprehensive income. Under Japanese GAAP, derivative contracts that have been entered into for hedging purposes are carried at fair value with changes in fair value, net of applicable income taxes, recognized generally in other comprehensive income.

Fair value for financial assets and financial liabilities—

Under U.S. GAAP, the fair value option may be elected for eligible financial assets and financial liabilities which would otherwise be carried on a basis other than fair value (“the fair value option”). Where the fair value option is elected, the financial asset or liability is carried at fair value with changes in fair value are recognized in earnings. Under Japanese GAAP, the fair value option is not permitted. Therefore, under U.S. GAAP, Income before income taxes was ¥8,552 million (higher) and ¥25,572 million (higher) for the six months ended September 30, 2019 and 2020, respectively and ¥414 million (lower) and ¥4,501 million (higher) for the three months ended September 30, 2019 and 2020, respectively. In addition, non-marketable equity securities which are carried at fair value under U.S. GAAP applicable to broker-dealers are carried at cost less impairment loss under Japanese GAAP.

Offsetting of amounts related to certain contracts—

Under U.S. GAAP, an entity that is party to a master netting arrangement is permitted to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement. Under Japanese GAAP, offsetting of such amounts is not permitted.

Stock issuance costs—

Under U.S. GAAP, stock issuance costs are deducted from capital. Under Japanese GAAP, stock issuance costs are either immediately expensed or capitalized as a deferred asset and amortized over periods of up to three years using the straight-line method.

Accounting for change in controlling interest in a consolidated subsidiary’s shares—

Under U.S. GAAP, when a parent’s ownership interest decreases as a result of sales of a subsidiary’s common shares by the parent and the subsidiary becomes an equity method investee, the parent’s remaining investment in the former subsidiary is measured at fair value as of the date of loss of a controlling interest and a related valuation gain or loss is recognized in earnings. Under Japanese GAAP, the remaining investment on the parent’s consolidated balance sheet is calculated as the sum of the carrying amount of investment in the equity method investee recorded in the parent’s stand-alone balance sheet as adjusted for the share of net income or losses and other adjustments from initial acquisition through to the date of loss of a controlling interest multiplied by the ratio of the remaining shareholding percentage against the holding percentage prior to loss of control.

Stock-based and other compensation awards—

Under U.S.GAAP, Restricted Stock Units (“RSUs”) are classified as equity awards, and the total compensation cost is measured based on the fair value of the Company’s common stock on the grant date. Under Japanese GAAP, the total compensation cost of RSUs is measured by the amount of monetary compensation liabilities which is granted to management and employees. Therefore, under U.S. GAAP, Income (loss) before income taxes was ¥704 million (lower) and ¥333million (lower) for the six months ended September 30, 2019 and 2020, respectively and ¥56 million (higher) and ¥255million (higher) for the three months ended September 30, 2019 and 2020, respectively.

Use of estimates—

While the COVID-19 pandemic impacted some of the critical accounting estimates and underlying assumptions used in the consolidated financial statements during the year ended March 31, 2020, no significant further adverse changes in such estimates as a result of the COVID-19 pandemic occurred during the six months ended September 30, 2020.

When evaluating equity method investments, certain share price was below book value. However considering the period, extent, and performance and financial condition of the equity method company, the Company determined that there were no other-than-temporary impairments requiring the recognition of impairment losses.

 

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New accounting pronouncements recently adopted—

No new accounting pronouncements relevant to Nomura were adopted during the three months ended September 30, 2020.

The following table presents a summary of major new accounting pronouncements relevant to Nomura which have been adopted during the three months ended June 30, 2020:

 

Pronouncement

  

Summary of new guidance

  

Adoption

date and method

of adoption

  

Effect on these

consolidated

statements

ASU 2016-13,

Measurement of Credit Losses on Financial Instruments(1)

  

• Introduces a new model for recognition and measurement of credit losses against certain financial instruments such as loans, debt securities and receivables which are not carried at fair value with changes in fair value recognized through earnings. The model also applies to off balance sheet credit exposures such as written loan commitments, standby letters of credit and issued financial guarantees not accounted for as insurance, which are not carried at fair value through earnings.

 

• The new model based on lifetime current expected credit losses (CECL) measurement, to be recognized at the time an in-scope instrument is originated, acquired or issued.

 

• Replaces existing incurred credit losses model under current GAAP.

 

• Permits electing the fair value option for certain financial instruments on adoption date.

 

• Requires enhanced qualitative and quantitative disclosures around credit risk, the methodology used to estimate and monitor expected credit losses and changes in estimates of expected credit losses.

   Modified retrospective adoption from April 1, 2020.   

For financial instruments subject to CECL, ¥1,972 million increase in Allowance for doubtful accounts, ¥638 million increase in Other liabilities, ¥72 million increase of Deferred tax assets and cumulative effect adjustment to decrease Retained earnings, net of tax, of ¥2,538 million as of April 1, 2020.

 

For financial instruments elected for the FVO, ¥9,774 million decrease in Loans receivable, ¥5,888 million increase in Other liabilities and cumulative effect adjustment to decrease Retained earnings, net of tax, of ¥15,662 million as of April 1, 2020.

 

Allowances for credit losses as determined on adoption date under the new model increased as a result of the COVID-19 pandemic because of the increased credit risk caused by the impact of the pandemic on borrowers. Fair value measurements used on adoption date were also lower because of increased credit risk and impact on financial markets caused by the pandemic.

 

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ASU 2019-12,

“Simplifying the Accounting for Income Taxes”

  

• Simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740”Income Taxes”, such as the exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment and the exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary.

 

• Requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income –based tax.

 

• Makes other minor amendments for simplification and clarification of income taxes accounting.

 

   Modified retrospective adoption from April 1, 2020.    No material impact on adoption and no material impact expected in future reporting periods.

ASU 2017- 04

“Goodwill”

  

• Simplifies the test for goodwill impairment by eliminating the existing requirement to measure an impairment loss by comparing the implied fair value of goodwill in a reporting unit to the actual carrying value of goodwill.

 

• An impairment loss will be recognized if the carrying value of the reporting unit exceeds the estimated fair value of the reporting unit.

 

• Requires to consider income tax effects from any tax deductible goodwill on the carrying value of the reporting unit when measuring an impairment loss.

 

• Does not impact when goodwill is tested for impairment or level at which goodwill is tested.

 

   Prospective adoption to goodwill tests performed from April 1, 2020.    No material impact expected for future goodwill impairment tests.

 

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ASU 2020-04

“Reference rate reform”

  

• Provides temporary optional expedients and exceptions to the application of generally accepted accounting principles to certain contract and hedge relationships affected by reference rate reform.

 

• Contract modifications solely related to the replacement of reference rate are eligible for relief from modification accounting requirements and accounted for as a continuation of the existing contract.

 

• Allows various optional expedients and elections to allow hedging relationships affected by reference rate reform would continue uninterrupted during the reference rate transition if certain criteria are met.

   The expedients and exceptions provided by the ASU are permitted to be adopted any time until December 31, 2022.   

No material expedients have been applied during the six months ended September 30, 2020.

 

Nomura plans to apply certain of the optional expedients to relevant contract modification and hedge accounting relationships during the reference rate transition period and does not expect a material impact in future reporting periods.

 

(1)

As subsequently amended by ASU 2018-19Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, ASU 2019-04Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”, ASU 2019-05Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief”, ASU 2019-09“Codification Improvements to Topic326, Financial Instruments—Credit Losses and ASU 2019-10Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.

 

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Future accounting developments—

There is no new authoritative accounting pronouncements relevant to Nomura which will be adopted on or after April 1, 2021 which may have a material impact on these financial statements.

 

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2. Fair value measurements:

The fair value of financial instruments

A significant amount of Nomura’s financial instruments are measured at fair value. Financial assets measured at fair value on a recurring basis are reported in the consolidated balance sheets within Trading assets and private equity and debt investments, Loans and receivables, Collateralized agreements and Other assets. Financial liabilities measured at fair value on a recurring basis are reported within Trading liabilities, Short-term borrowings, Payables and deposits, Collateralized financing, Long-term borrowings and Other liabilities.

Other financial assets and financial liabilities are measured at fair value on a nonrecurring basis, where the primary measurement basis is not fair value but where fair value is used in specific circumstances after initial recognition, such as to measure impairment.

In all cases, fair value is determined in accordance with ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value as the amount that would be exchanged to sell a financial asset or transfer a financial liability in an orderly transaction between market participants at the measurement date. It assumes that the transaction occurs in the principal market for the relevant financial assets or financial liabilities, or in the absence of a principal market, the most advantageous market.

Fair value is usually determined on an individual financial instrument basis consistent with the unit of account of the financial instrument. However, certain financial instruments managed on a portfolio basis are valued as a portfolio, namely based on the price that would be received to sell a net long position (i.e., a net financial asset) or transfer a net short position (i.e., a net financial liability) consistent with how market participants would price the net risk exposure at the measurement date.

Financial assets measured at fair value also include investments in certain funds where, as a practical expedient, fair value is determined on the basis of net asset value per share (“NAV per share”) if the NAV per share is calculated in accordance with certain industry standard principles.

Increases and decreases in the fair value of assets and liabilities will significantly impact Nomura’s position, performance, liquidity and capital resources. As explained below, valuation techniques applied contain inherent uncertainties and Nomura is unable to predict the accurate impact of future developments in the market. The valuation of financial instruments is more difficult during periods of market stress as a result of greater volatility and reduced price transparency, which has been the case during the COVID-19 pandemic in 2020, and may therefore require the greater use of judgement in the determination of fair value. Where appropriate, Nomura uses economic hedging strategies to mitigate its risk, although these hedges are also subject to unpredictable movements in the market.

Valuation methodology for financial instruments carried at fair value on a recurring basis

The fair value of financial instruments is based on quoted market prices including market indices, broker or dealer quotations or an estimation by management of the expected exit price under current market conditions. Various financial instruments, including cash instruments and over-the-counter (“OTC”) contracts, have bid and offer prices that are observable in the market. These are measured at the point within the bid-offer range which best represents Nomura’s estimate of fair value. Where quoted market prices or broker or dealer quotations are not available, prices for similar instruments or valuation pricing models are considered in the determination of fair value.

Where quoted prices are available in active markets, no valuation adjustments are taken to modify the fair value of assets or liabilities marked using such prices. Other instruments may be measured using valuation techniques, such as valuation pricing models incorporating observable valuation inputs, unobservable parameters or a combination of both. Valuation pricing models use valuation inputs which would be considered by market participants in valuing similar financial instruments.

Valuation pricing models and their underlying assumptions impact the amount and timing of unrealized and realized gains and losses recognized, and the use of different valuation pricing models or underlying assumptions could produce different financial results. Valuation uncertainty results from a variety of factors, including the valuation technique or model selected, the quantitative assumptions used within the valuation model, the inputs into the model, as well as other factors. Valuation adjustments are used to reflect the assessment of this uncertainty. Common valuation adjustments include model reserves, credit adjustments, close-out adjustments, and other appropriate instrument-specific adjustments, such as those to reflect transfer or sale restrictions.

 

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The level of adjustments is largely judgmental and is based on an assessment of the factors that management believe other market participants would use in determining the fair value of similar financial instruments. The type of adjustments taken, the methodology for the calculation of these adjustments, and the valuation inputs for these calculations are reassessed periodically to reflect current market practice and the availability of new information.

For example, the fair value of certain financial instruments includes adjustments for credit risk; both with regards to counterparty credit risk on positions held and Nomura’s own creditworthiness on positions issued. Credit risk on financial assets is significantly mitigated by credit enhancements such as collateral and netting arrangements. Any net credit exposure is measured using available and applicable valuation inputs for the relevant counterparty. The same approach is used to measure the credit exposure on Nomura’s financial liabilities as is used to measure counterparty credit risk on Nomura’s financial assets.

Such valuation pricing models are calibrated to the market on a regular basis and inputs used are adjusted for current market conditions and risks. The Valuation Model Validation Group (“VMVG”) within Nomura’s Risk Management Department reviews pricing models and assesses model appropriateness and consistency independently of the front office. The model reviews consider a number of factors about a model’s suitability for valuation and sensitivity of a particular product. Valuation models are calibrated to the market on a periodic basis by comparison to observable market pricing, comparison with alternative models and analysis of risk profiles.

As explained above, any changes in fixed income, equity, foreign exchange and commodity markets can impact Nomura’s estimates of fair value in the future, potentially affecting trading gains and losses. Where financial contracts have longer maturity dates, Nomura’s estimates of fair value may involve greater subjectivity due to the lack of transparent market data.

Fair value hierarchy

All financial instruments measured at fair value, including those measured at fair value using the fair value option, have been categorized into a three-level hierarchy (“fair value hierarchy”) based on the transparency of valuation inputs used by Nomura to estimate fair value. A financial instrument is classified in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of the financial instrument. The three levels of the fair value hierarchy are defined as follows, with Level 1 representing the most transparent inputs and Level 3 representing the least transparent inputs:

Level 1:

Observable valuation inputs that reflect quoted prices (unadjusted) for identical financial instruments traded in active markets at the measurement date.

Level 2:

Valuation inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the financial instrument.

Level 3:

Unobservable valuation inputs which reflect Nomura assumptions and specific data.

The availability of valuation inputs observable in the market varies by product and can be affected by a variety of factors. Significant factors include, but are not restricted to the prevalence of similar products in the market, especially for customized products, how established the product is in the market, for example, whether it is a new product or is relatively mature, and the reliability of information provided in the market which would depend, for example, on the frequency and volume of current data. A period of significant change in the market may reduce the availability of observable data. Under such circumstances, financial instruments may be reclassified into a lower level in the fair value hierarchy.

Significant judgments used in determining the classification of financial instruments include the nature of the market in which the product would be traded, the underlying risks, the type and liquidity of market data inputs and the nature of observed transactions for similar instruments.

Where valuation models include the use of valuation inputs which are less observable or unobservable in the market, significant management judgment is used in establishing fair value. The valuations for Level 3 financial instruments, therefore, involve a greater degree of judgment than those valuations for Level 1 or Level 2 financial instruments and has become more prevalent during the COVID-19 pandemic.

Certain criteria management use to determine whether a market is active or inactive include the number of transactions, the frequency that pricing is updated by other market participants, the variability of price quotes among market participants, and the amount of publicly available information.

 

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The following tables present the amounts of Nomura’s financial instruments measured at fair value on a recurring basis as of March 31, 2020 and September 30, 2020 within the fair value hierarchy.

 

     Billions of yen  
   March 31, 2020  
   Level 1      Level 2      Level 3      Counterparty
and Cash
Collateral
Netting(1)
    Balance as of
March 31,
2020
 

Assets:

             

Trading assets and private equity and debt investments(2)

             

Equities(3)

   ¥ 1,193      ¥ 908      ¥ 14      ¥ —       ¥ 2,115  

Private equity and debt investments(4)

     —          7        31        —         38  

Japanese government securities

     1,826        —          —          —         1,826  

Japanese agency and municipal securities

     —          106        2        —         108  

Foreign government, agency and municipal securities

     3,257        2,000        8        —         5,265  

Bank and corporate debt securities and loans for trading purposes

     —          1,266        228        —         1,494  

Commercial mortgage-backed securities (“CMBS”)

     —          0        1        —         1  

Residential mortgage-backed securities (“RMBS”)

     —          3,626        62        —         3,688  

Issued/Guaranteed by government sponsored entity

     —          3,602        14        —         3,616  

Other

     —          24        48        —         72  

Real estate-backed securities

     —          —          94        —         94  

Collateralized debt obligations (“CDOs”) and other(5)

     —          21        32        —         53  

Investment trust funds and other

     204        44        0        —         248  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading assets and private equity and debt investments

     6,480        7,978        472        —         14,930  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative assets(6)

             

Equity contracts

     4        1,869        48        —         1,921  

Interest rate contracts

     55        13,551        23        —         13,629  

Credit contracts

     3        318        86        —         407  

Foreign exchange contracts

     0        5,183        41        —         5,224  

Commodity contracts

     9        0        —          —         9  

Netting

     —          —          —          (19,248     (19,248
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative assets

     71        20,921        198        (19,248     1,942  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 6,551      ¥ 28,899      ¥ 670      ¥ (19,248   ¥ 16,872  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans and receivables(7)

     —          709        96        —         805  

Collateralized agreements(8)

     —          534        15        —         549  

Other assets

             

Non-trading debt securities

     123        332        —          —         455  

Other(2)(3)

     252        146        168        —         566  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 6,926      ¥ 30,620      ¥ 949      ¥ (19,248   ¥ 19,247  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Trading liabilities

             

Equities

   ¥ 1,412      ¥ 152      ¥ 0      ¥ —       ¥ 1,564  

Japanese government securities

     1,108        —          —          —         1,108  

Japanese agency and municipal securities

     —          0        —          —         0  

Foreign government, agency and municipal securities

     2,116        1,114        0        —         3,230  

Bank and corporate debt securities

     —          272        1        —         273  

Residential mortgage-backed securities (“RMBS”)

     —          3        —          —         3  

Collateralized debt obligations (“CDOs”) and other(5)

     —          1        1        —         2  

Investment trust funds and other

     409        148        0        —         557  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading liabilities

     5,045        1,690        2        —         6,737  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities(6)

             

Equity contracts

     7        1,972        29        —         2,008  

Interest rate contracts

     18        13,125        77        —         13,220  

Credit contracts

     14        356        87        —         457  

Foreign exchange contracts

     0        5,071        34        —         5,105  

Commodity contracts

     5        1        —          —         6  

Netting

     —          —          —          (18,987     (18,987
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative liabilities

     44        20,525        227        (18,987     1,809  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 5,089      ¥ 22,215      ¥ 229      ¥ (18,987   ¥ 8,546  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Short-term borrowings(9)

   ¥ —        ¥ 348      ¥ 29      ¥ —       ¥ 377  

Payables and deposits(10)

     —          14        1        —         15  

Collateralized financing(8)

     —          247        —          —         247  

Long-term borrowings(9)(11)(12)

     2        3,291        409        —         3,702  

Other liabilities(13)

     170        129        0        —         299  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 5,261      ¥ 26,244      ¥ 668      ¥ (18,987   ¥ 13,186  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Billions of yen  
     September 30, 2020  
     Level 1      Level 2      Level 3      Counterparty
and Cash
Collateral
Netting(1)
    Balance as of
September 30,
2020
 

Assets:

             

Trading assets and private equity and debt investments(2)

             

Equities(3)

   ¥ 1,800      ¥ 836      ¥ 10      ¥ —       ¥ 2,646  

Private equity and debt investments(4)

     —          —          49        —         49  

Japanese government securities

     2,043        —          —          —         2,043  

Japanese agency and municipal securities

     —          77        2        —         79  

Foreign government, agency and municipal securities

     3,660        2,237        13        —         5,910  

Bank and corporate debt securities and loans for trading purposes

     —          1,134        129        —         1,263  

Commercial mortgage-backed securities (“CMBS”)

     —          0        2        —         2  

Residential mortgage-backed securities (“RMBS”)

     —          3,004        20        —         3,024  

Issued/Guaranteed by government sponsored entity

     —          2,946        —          —         2,946  

Other

     —          58        20        —         78  

Real estate-backed securities

     —          0        62        —         62  

Collateralized debt obligations (“CDOs”) and other(5)

     —          28        11        —         39  

Investment trust funds and other

     319        24        0        —         343  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading assets and private equity and debt investments

     7,822        7,340        298        —         15,460  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative assets(6)

             

Equity contracts

     0        1,179        54        —         1,233  

Interest rate contracts

     31        11,879        28        —         11,938  

Credit contracts

     0        322        51        —         373  

Foreign exchange contracts

     0        3,511        31        —         3,542  

Commodity contracts

     1        0        —          —         1  

Netting

     —          —          —          (15,997     (15,997
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative assets

     32        16,891        164        (15,997     1,090  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 7,854      ¥ 24,231      ¥ 462      ¥ (15,997   ¥ 16,550  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans and receivables(7)

     —          809        88        —         897  

Collateralized agreements(8)

     —          303        18        —         321  

Other assets

             

Non-trading debt securities

     105        307        —          —         412  

Other(2)(3)

     303        126        150        —         579  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 8,262      ¥ 25,776      ¥ 718      ¥ (15,997   ¥ 18,759  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Trading liabilities

             

Equities

   ¥ 1,746      ¥ 175      ¥ 0      ¥ —       ¥ 1,921  

Japanese government securities

     935        —          —          —         935  

Japanese agency and municipal securities

     —          0        —          —         0  

Foreign government, agency and municipal securities

     3,138        1,135        0        —         4,273  

Bank and corporate debt securities

     —          198        2        —         200  

Residential mortgage-backed securities (“RMBS”)

     —          5        —          —         5  

Collateralized debt obligations (“CDOs”) and other(5)

     —          0        3        —         3  

Investment trust funds and other

     129        —          0        —         129  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading liabilities

     5,948        1,513        5        —         7,466  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities(6)

             

Equity contracts

     1        1,631        73        —         1,705  

Interest rate contracts

     13        11,442        86        —         11,541  

Credit contracts

     1        365        66        —         432  

Foreign exchange contracts

     0        3,469        31        —         3,500  

Commodity contracts

     8        0        —          —         8  

Netting

     —          —          —          (15,863     (15,863
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative liabilities

     23        16,907        256        (15,863     1,323  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 5,971      ¥ 18,420      ¥ 261      ¥ (15,863   ¥ 8,789  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Short-term borrowings(9)

     —          514        74        —         588  

Payables and deposits(10)

     —          31        1        —         32  

Collateralized financing(8)

     —          219        —          —         219  

Long-term borrowings(9)(11)(12)

     4        3,566        459        —         4,029  

Other liabilities(13)

     219        109        13        —         341  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 6,194      ¥ 22,859      ¥ 808      ¥ (15,863   ¥ 13,998  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

 

(1)

Represents the amount offset under counterparty netting of derivative assets and liabilities as well as cash collateral netting against net derivatives.

(2)

Certain investments that are measured at fair value using net asset value per share as a practical expedient have not been classified in the fair value hierarchy. As of March 31, 2020 and September 30, 2020, the fair values of these investments which are included in Trading assets and private equity and debt investments were ¥26 billion and ¥21 billion, respectively. As of March 31, 2020 and September 30, 2020, the fair values of these investments which are included in Other assets—Others were ¥6 billion and ¥5 billion, respectively.

(3)

Includes equity investments that would have been accounted for under the equity method had Nomura not chosen to elect the fair value option.

(4)

Private equity and debt investments are typically private non-traded financial instruments including ownership or other forms of junior capital (such as mezzanine loan). Includes equity investments that would have been accounted for under the equity method had Nomura not chosen to elect the fair value option.

(5)

Includes collateralized loan obligations (“CLOs”) and asset-backed securities (“ABS”) such as those secured on credit card loans, auto loans and student loans.

(6)

Each derivative classification includes derivatives with multiple risk underlyings. For example, interest rate contracts include complex derivatives referencing interest rate risk as well as foreign exchange risk or other factors such as prepayment rates. Credit contracts include credit default swaps as well as derivatives referencing corporate and government debt securities.

(7)

Includes loans for which the fair value option has been elected.

(8)

Includes collateralized agreements or collateralized financing for which the fair value option has been elected.

(9)

Includes structured notes for which the fair value option has been elected.

(10)

Includes embedded derivatives bifurcated from deposits received at banks. If unrealized gains are greater than unrealized losses, deposits are reduced by the excess amount.

(11)

Includes embedded derivatives bifurcated from issued structured notes. If unrealized gains are greater than unrealized losses, borrowings are reduced by the excess amount.

(12)

Includes liabilities recognized from secured financing transactions that are accounted for as financings rather than sales. Nomura elected the fair value option for these liabilities.

(13)

Includes loan commitments for which the fair value option has been elected.

 

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Table of Contents

Valuation techniques by major class of financial instrument

The valuation techniques used by Nomura to estimate fair value for major classes of financial instruments, together with the significant inputs which determine classification in the fair value hierarchy, are as follows.

Equities and equity securities reported within Other assets—Equities and equity securities reported within Other assets include direct holdings of both listed and unlisted equity securities, and fund investments. The fair value of listed equity securities is determined using quoted prices for identical securities from active markets where available. These valuations should be in line with market practice and therefore can be based on bid prices or mid-market prices. Nomura determines whether the market is active depending on the sufficiency and frequency of trading activity. Where these securities are classified in Level 1 of the fair value hierarchy, no valuation adjustments are made to fair value. Listed equity securities traded in inactive markets are also generally valued using the exchange price and are classified in Level 2. Whilst rare in practice, Nomura may apply a discount or liquidity adjustment to the exchange price of a listed equity security traded in an inactive market if the exchange price is not considered to be an appropriate representation of fair value. These adjustments are determined by individual security and are not determined or influenced by the size of holding. The amount of such adjustments made to listed equity securities traded in inactive markets was ¥nil as of March 31, 2020 and September 30, 2020, respectively. The fair value of unlisted equity securities is determined using the same methodology as private equity and debt investments described below and are usually classified in Level 3 because significant valuation inputs such as liquidity discounts and credit spreads are unobservable.

Private equity and debt investments—The determination of fair value of unlisted private equity and debt investments requires significant management judgment because the investments, by their nature, have little or no price transparency. Private equity and debt investments are initially carried at cost as an approximation of fair value. Adjustments to carrying value are made if there is third-party evidence of a change in value. Adjustments are also made, in the absence of third-party transactions, if it is determined that the expected exit price of the investment is different from carrying value. In reaching that determination, Nomura primarily uses either a discounted cash flow (“DCF”) or market multiple valuation technique. A DCF valuation technique incorporates estimated future cash flows to be generated from the underlying investee, as adjusted for an appropriate growth rate discounted at a weighted average cost of capital (“WACC”). Market multiple valuation techniques include comparables such as Enterprise Value/earnings before interest, taxes, depreciation and amortization (“EV/EBITDA”) ratios, Price/Earnings (“PE”) ratios, Price/Book ratios, Price/Embedded Value ratios and other multiples based on relationships between numbers reported in the financial statements of the investee and the price of comparable companies. A liquidity discount may also be applied to either a DCF or market multiple valuation to reflect the specific characteristics of the investee. The liquidity discount includes considerations for various uncertainties in the model and inputs to valuation. Where possible these valuations are compared with the operating cash flows and financial performance of the investee or properties relative to budgets or projections, price/earnings data for similar quoted companies, trends within sectors and/or regions and any specific rights or terms associated with the investment, such as conversion features and liquidation preferences. Private equity and debt investments are generally classified in Level 3 since the valuation inputs such as those mentioned above are usually unobservable.

Government, agency and municipal securities—The fair value of Japanese and other G7 government securities is primarily determined using quoted market prices, executable broker or dealer quotations, or alternative pricing sources. These securities are traded in active markets and therefore are classified within Level 1 of the fair value hierarchy. Non-G7 government securities, agency securities and municipal securities are valued using similar pricing sources but are generally classified in Level 2 as they are traded in inactive markets. Certain non-G7 securities may be classified in Level 1 because they are traded in active markets. Certain securities may be classified in Level 3 because they are traded infrequently and there is not sufficient information from comparable securities to classify them in Level 2. These are valued using DCF valuation techniques which include significant unobservable inputs such as credit spreads of the issuer.

 

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Table of Contents

Bank and corporate debt securities—The fair value of bank and corporate debt securities is primarily determined using DCF valuation techniques but also using broker or dealer quotations and recent market transactions of identical or similar debt securities, if available. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. The significant valuation inputs used for DCF valuations are yield curves, asset swap spreads, recovery rates and credit spreads of the issuer. Bank and corporate debt securities are generally classified in Level 2 of the fair value hierarchy because these valuation inputs are usually observable or market-corroborated. Certain bank and corporate debt securities will be classified in Level 3 because they are traded infrequently and there is insufficient information from comparable securities to classify them in Level 2, or credit spreads or recovery rates of the issuer used in DCF valuations are unobservable.

Commercial mortgage-backed securities (“CMBS”) and Residential mortgage-backed securities (“RMBS”)—The fair value of CMBS and RMBS are primarily determined using DCF valuation techniques but also using broker or dealer quotations and recent market transactions of identical or similar securities, if available. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. The significant valuation inputs include yields, prepayment rates, default probabilities and loss severities. CMBS and RMBS securities are generally classified in Level 2 because these valuation inputs are observable or market-corroborated. Certain CMBS and RMBS positions will be classified in Level 3 because they are traded infrequently and there is insufficient information from comparable securities to classify them in Level 2, or one or more of the significant valuation inputs used in DCF valuations are unobservable.

Real estate-backed securities—The fair value of real estate-backed securities is determined using broker or dealer quotations, recent market transactions or by reference to a comparable market index. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. Where all significant inputs are observable, the securities will be classified in Level 2. For certain securities, no direct pricing sources or comparable securities or indices may be available. These securities are valued using DCF or valuation techniques and are classified in Level 3 as the valuation includes significant unobservable valuation inputs such as yields or loss severities.

Collateralized debt obligations (“CDOs”) and other—The fair value of CDOs is primarily determined using DCF valuation techniques but also using broker or dealer quotations and recent market transactions of identical or similar securities, if available. Consideration is given to the nature of the broker and dealer quotations, namely whether these are indicative or executable, the number of available quotations and how these quotations compare to any available recent market activity or alternative pricing sources. The significant valuation inputs used include market spread data for each credit rating, yields, prepayment rates, default probabilities and loss severities. CDOs are generally classified in Level 2 of the fair value hierarchy because these valuation inputs are observable or market-corroborated. CDOs will be classified in Level 3 where one or more of the significant valuation inputs used in the DCF valuations are unobservable.

Investment trust funds and other—The fair value of investment trust funds is primarily determined using NAV per share. Publicly traded funds which are valued using a daily NAV per share are classified in Level 1 of the fair value hierarchy. For funds that are not publicly traded but Nomura has the ability to redeem its investment with the investee at NAV per share on the balance sheet date or within the near term, the investments are classified in Level 2. Investments where Nomura does not have the ability to redeem in the near term or does not know when it can redeem are classified in Level 3. The fair value of certain other investments reported within Investment trust funds and other is determined using DCF valuation techniques. These investments are classified in Level 3 as the valuation includes significant unobservable valuation inputs such as credit spreads of issuer and correlation.

Derivatives—Equity contracts—Nomura enters into both exchange-traded and OTC equity derivative transactions such as index and equity options, equity basket options and index and equity swaps. Where these derivatives are traded in active markets and the exchange price is representative of fair value, the fair value of exchange-traded equity derivatives is determined using an unadjusted exchange price and classified in Level 1 of the fair value hierarchy. The fair value of exchange-traded equity derivatives which are traded in inactive markets or where the exchange price is not representative of fair value is determined using a model price and are classified in Level 2. The fair value of OTC equity derivatives is determined through option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include equity prices, dividend yields, volatilities and correlations. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura‘s own creditworthiness on derivative liabilities. OTC equity derivatives are generally classified in Level 2 because all significant valuation inputs and adjustments are observable or market-corroborated. Certain less liquid vanilla or more complex equity derivatives are classified in Level 3 where dividend yield, volatility or correlation valuation inputs are significant and unobservable.

 

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Table of Contents

Derivatives—Interest rate contracts—Nomura enters into both exchange-traded and OTC interest rate derivative transactions such as interest rate swaps, currency swaps, interest rate options, forward rate agreements, swaptions, caps and floors. Where these derivatives are traded in active markets and the exchange price is representative of fair value, the fair value of exchange-traded interest rate derivatives is determined using an unadjusted exchange price and classified in Level 1 of the fair value hierarchy. The fair value of exchange-traded interest rate derivatives which are traded in inactive markets or where the exchange price is not representative of fair value is determined using a model price and are classified in Level 2. The fair value of OTC interest rate derivatives is determined through DCF valuation techniques as well as option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include interest rates, forward foreign exchange (“FX”) rates, volatilities and correlations. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura‘s own creditworthiness on derivative liabilities. OTC interest rate derivatives are generally classified in Level 2 because all significant valuation inputs and adjustments are observable or market-corroborated. Certain less liquid vanilla or more complex OTC interest rate derivatives are classified in Level 3 where interest rate, volatility or correlation valuation inputs are significant and unobservable.

Derivatives—Credit contracts—Nomura enters into OTC credit derivative transactions such as credit default swaps and credit options on single names, indices or baskets of assets. The fair value of OTC credit derivatives is determined through DCF valuation techniques as well as option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include interest rates, credit spreads, recovery rates, default probabilities, volatilities and correlations. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura’s own creditworthiness on derivative liabilities. OTC credit derivatives are generally classified in Level 2 of the fair value hierarchy because all significant valuation inputs and adjustments are observable or market-corroborated. Certain less liquid vanilla or more complex OTC credit derivatives are classified in Level 3 where credit spread, recovery rate, volatility or correlation valuation inputs are significant and unobservable.

Derivatives—Foreign exchange contracts—Nomura enters into both exchange-traded and OTC foreign exchange derivative transactions such as foreign exchange forwards and currency options. The fair value of exchange-traded foreign exchange derivatives which are traded in inactive markets or where the exchange price is not representative of fair value is determined using a model price and are classified in Level 2. The fair value of OTC foreign exchange derivatives is determined through DCF valuation techniques as well as option models such as Black-Scholes and Monte Carlo simulation. The significant valuation inputs used include interest rates, forward FX rates, spot FX rates and volatilities. Valuation adjustments are also made to model valuations in order to reflect counterparty credit risk on derivative assets and Nomura’s own creditworthiness on derivative liabilities. OTC foreign exchange derivatives are generally classified in Level 2 because all significant valuation inputs and adjustments are observable or market-corroborated. Certain foreign exchange derivatives are classified in Level 3 where interest rates, volatility or correlation valuation inputs are significant and unobservable.

Nomura includes valuation adjustments in its estimation of fair value of certain OTC derivatives relating to funding costs associated with these transactions to be consistent with how market participants in the principal market for these derivatives would determine fair value.

Loans—The fair value of loans carried at fair value either as trading assets or through election of the fair value option is primarily determined using DCF valuation techniques as quoted prices are typically not available. The significant valuation inputs used are similar to those used in the valuation of corporate debt securities described above. Loans are generally classified in Level 2 of the fair value hierarchy because all significant valuation inputs are observable. Certain loans, however, are classified in Level 3 because they are traded infrequently and there is not sufficient information from comparable securities to classify them in Level 2 or credit spreads of the issuer used in DCF valuations are significant and unobservable.

Collateralized agreements and Collateralized financing—The primary types of collateralized agreement and financing transactions carried at fair value are reverse repurchase and repurchase agreements elected for the fair value option. The fair value of these financial instruments is primarily determined using DCF valuation techniques. The significant valuation inputs used include interest rates and collateral funding spreads such as general collateral or special rates. Reverse repurchase and repurchase agreements are generally classified in Level 2 of the fair value hierarchy because these valuation inputs are usually observable.

 

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Table of Contents

Non-trading debt securities—These are debt securities held by certain non-trading subsidiaries in the group and are valued and classified in the fair value hierarchy using the same valuation techniques used for other debt securities classified as Government, agency and municipal securities and Bank and corporate debt securities described above.

Short-term and long-term borrowings (“Structured notes”)—Structured notes are debt securities issued by Nomura or by consolidated variable interest entities (“VIEs”) which contain embedded features that alter the return to the investor from simply receiving a fixed or floating rate of interest to a return that depends upon some other variables, such as an equity or equity index, commodity price, foreign exchange rate, credit rating of a third party or a more complex interest rate (i.e., an embedded derivative).

The fair value of structured notes is determined using a quoted price in an active market for the identical liability if available, and where not available, using a mixture of valuation techniques that use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, similar liabilities when traded as assets, or an internal model which combines DCF valuation techniques and option pricing models, depending on the nature of the embedded features within the structured note. Where an internal model is used, Nomura estimates the fair value of both the underlying debt instrument and the embedded derivative components. The significant valuation inputs used to estimate the fair value of the debt instrument component include yield curves, prepayment rates, default probabilities and loss severities. The significant valuation inputs used to estimate the fair value of the embedded derivative component are the same as those used for the relevant type of freestanding OTC derivative discussed above. A valuation adjustment is also made to the entire structured note in order to reflect Nomura’s own creditworthiness. This adjustment is determined based on recent observable secondary market transactions and executable broker quotes involving Nomura debt instruments and is therefore typically treated as a Level 2 valuation input. Structured notes are generally classified in Level 2 of the fair value hierarchy as all significant valuation inputs and adjustments are observable. Where any unobservable inputs are significant, such as yields, prepayment rates, default probabilities, loss severities, volatilities and correlations used to estimate the fair value of the embedded derivative component, structured notes are classified in Level 3.

Long-term borrowings (“Secured financing transactions”)—Secured financing transactions are liabilities recognized when a transfer of a financial asset does not meet the criteria for sales accounting under ASC 860 “Transfer and Servicing (“ASC 860”) and therefore the transaction is accounted for as a secured borrowing. These liabilities are valued using the same valuation techniques that are applied to the transferred financial assets which remain on the consolidated balance sheets and are therefore classified in the same level in the fair value hierarchy as the transferred financial assets. These liabilities do not provide general recourse to Nomura and therefore no adjustment is made to reflect Nomura’s own creditworthiness.

 

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Table of Contents

Level 3 financial instruments

The valuation of Level 3 financial assets and liabilities is dependent on certain significant valuation inputs which are unobservable. Common characteristics of an inactive market include a low number of transactions of the financial instrument, stale or non-current price quotes, price quotes that vary substantially either over time or among market makers, non-executable broker quotes or little publicly released information.

If corroborative evidence is not available to value Level 3 financial instruments, fair value may be measured using other equivalent products in the market. The level of correlation between the specific Level 3 financial instrument and the available benchmark instrument is considered as an unobservable valuation input. Other techniques for determining an appropriate value for unobservable input may consider information such as consensus pricing data among certain market participants, historical trends, extrapolation from observable market data and other information Nomura would expect market participants to use in valuing similar instruments.

Use of reasonably possible alternative valuation input assumptions to value Level 3 financial instruments will significantly influence fair value determination. Ultimately, the uncertainties described above about input assumptions imply that the fair value of Level 3 financial instruments is a judgmental estimate. The specific valuation for each instrument is based on management’s judgment of prevailing market conditions, in accordance with Nomura’s established valuation policies and procedures.

 

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Table of Contents

Quantitative and qualitative information regarding significant unobservable inputs

The following tables present quantitative and qualitative information about the significant unobservable valuation inputs used by Nomura to measure the fair value of financial instruments classified in Level 3 as of March 31, 2020 and September 30, 2020. These financial instruments will also typically include observable valuation inputs (i.e. Level 1 or Level 2 valuation inputs) which are not included in the table and are also often hedged using financial instruments which are classified in Level 1 or Level 2 of the fair value hierarchy. Changes in each of these significant unobservable valuation inputs used by Nomura will impact upon the fair value measurement of the financial instrument. The following tables also therefore qualitatively summarize how an increase in those significant unobservable valuation inputs to a different amount might result in a higher or lower fair value measurement at the reporting date and summarize the interrelationship between significant unobservable valuation inputs where more than one is used to measure fair value. The impact of the COVID-19 pandemic on financial markets has been considered in determining which valuation inputs are used to measure fair value.

 

    March 31, 2020

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable
valuation input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of

increases in

significant

unobservable

valuation

inputs(3)(4)

 

Interrelationships

between valuation

inputs(5)

Assets:

             

Trading assets and private equity and debt investments

             

Equities

  ¥       14     DCF   Liquidity discounts   75.0%   75.0%   Lower fair value   Not applicable
   

 

 

 

 

 

 

 

 

 

 

 

   

Market

multiples

  Liquidity discounts   20.0%   20.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Private equity and debt investments

    31     DCF  

WACC

Growth rates

Liquidity discounts

 

7.0 – 13.5%

0.0 – 1.0%

5.0 – 30.0%

 

10.0%

0.6%

9.9%

 

Lower fair value

Higher fair value

Lower fair value

 

No predictable

interrelationship

   

 

 

 

 

 

 

 

 

 

 

 

   

Market multiples

 

EV/EBITDA ratios

PE Ratios

Liquidity discounts

 

1.0 – 11.0 x

9.6 x

5.0 – 30.0%

 

8.9 x

9.6 x

9.8%

 

Higher fair value

Higher fair value

Lower fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government, agency and municipal securities

    8     DCF  

Credit spreads

Recovery rates

 

0.0 – 1.4%

4.0 – 18.0%

 

0.5%

10.8%

 

Lower fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt securities and loans for trading purposes

    228     DCF  

Credit spreads

Recovery rates

 

0.0 – 17.9%

0.0 – 80.7%

 

5.8%

43.8%

 

Lower fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities (“RMBS”)

    62     DCF  

Yields

Prepayment rates

Loss severities

 

0.0 – 30.8%

7.1 – 15.0%

0.0 – 100.0%

 

6.7%

8.9%

40.6%

 

Lower fair value

Lower fair value

Lower fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed securities

    94     DCF   Loss severities   0.0 – 8.1%   3.4%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDOs”) and other

    32     DCF  

Yields

Prepayment rates

Default probabilities

Loss severities

 

6.4 – 56.8%

20.0%

2.0%

0.0 – 100.0%

 

21.6%

20.0%

2.0%

73.0%

 

Lower fair value

Lower fair value

Lower fair value

Lower fair value

 

Change in default

probabilities typically accompanied by directionally similar change in loss severities and opposite change in prepayment rates

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
   

March 31, 2020

Financial Instrument

 

Fair

value in

billions

of yen

 

Valuation

technique

 

Significant

unobservable
valuation input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of

increases in

significant

unobservable

valuation

inputs(3)(4)

 

Interrelationships

between valuation

inputs(5)

Derivatives, net:

             

Equity contracts

  ¥      19   Option models  

Dividend yield

Volatilities

Correlations

 

0.0 – 18.7%

12.2 – 144.7%

(0.85) – 0.97

 

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

  (54)  

DCF/

Option models

 

Interest rates

Volatilities

Volatilities

Correlations

 

(0.1) – 2.0%

8.8 – 13.8%

24.6 – 119.4 bp

(1.00) – 0.98

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

  (1)  

DCF/

Option models

 

Credit spreads

Recovery rates

Volatilities

Correlations

 

0.1 – 28.4%

0.0 – 105.4%

50.0 – 83.0%

0.16 – 0.82

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

  7   Option models  

Interest rates

Volatilities

Volatilities

Correlations

 

(0.1) – 0.8%

2.0 – 23.9%

19.2 – 50.7 bp

(0.25) – 0.80

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and receivables

  96   DCF  

Credit spreads

Recovery rates

 

0.0 – 20.5%

57.5 – 98.0%

 

4.2%

85.0%

 

Lower fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized agreements

  15   DCF   Repo rate   3.8 – 5.6%   4.9%   Lower fair value   Not applicable
 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

             

Other(6)

  168   DCF  

WACC

Growth rates

Liquidity discounts

 

10.1%

2.0%

10.0%

 

10.1%

2.0%

10.0%

 

Lower fair value

Higher fair value

Lower fair value

 

No predictable

interrelationship

   

 

 

 

 

 

 

 

 

 

 

 

    Market multiples  

EV/EBITDA ratios

PE Ratios

Price/Book ratios

Liquidity discounts

 

3.9 – 10.3 x

6.3 – 20.7 x

0.3 – 1.3 x

10.0 – 40.0%

 

4.6 x

11.4 x

0.8 x

28.6%

 

Higher fair value

Higher fair value

Higher fair value

Lower fair value

 

Generally changes in

multiples result in a

corresponding similar

directional change in a

fair value measurement,

assuming earnings levels remain constant.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

             

Short-term borrowings

  29  

DCF/

Option models

 

Volatilities

Correlations

 

12.6 – 76.4%

(0.72) – 0.94

 

—  

—  

 

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

  409  

DCF/

Option models

 

Volatilities

Volatilities

Correlations

 

8.6 – 76.4%

30.0 – 103.2 bp

(1.00) – 0.98

 

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    September 30, 2020

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of
increases in
significant
unobservable
valuation

inputs(3)(4)

 

Interrelationships
between valuation

inputs(5)

Assets:

             

Trading assets and private equity and debt investments

             

Equities

  ¥       10     DCF   Liquidity discounts   75.0%   75.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Private equity and debt investments

    49     DCF  

WACC

Growth rates

Liquidity discounts

 

6.6 – 12.6%

0.0 – 1.0%

5.0 – 30.0%

 

10.2%

0.4%

13.4%

 

Lower fair value

Higher fair value

Lower fair value

 

No predictable

interrelationship

   

 

 

 

 

 

 

 

 

 

 

 

    Market multiples  

EV/EBITDA ratios

PE Ratios

Liquidity discounts

 

(0.4) – 10.6 x

10.5 x

5.0 – 30.0%

 

5.6 x

10.5 x

16.4%

 

Higher fair value

Higher fair value

Lower fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government, agency and municipal securities

    13     DCF  

Credit spreads

Recovery rates

 

0.0 – 1.7%

5.8 – 30.0%

 

0.5%

10.2%

 

Lower fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt securities and loans for trading purposes

    129     DCF   Credit spreads Recovery rates  

0.0 – 15.0%

0.0 – 97.0%

 

5.0%

77.8%

 

Lower fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities (“RMBS”)

    20     DCF  

Yields

Prepayment rates

Loss severities

 

0.0 – 40.5%

6.1 – 15.0%

0.0 – 96.8%

 

5.4%

7.7%

19.6%

 

Lower fair value

Lower fair value

Lower fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed securities

    62     DCF   Loss severities   0.0 – 15.0%   3.9%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDOs”) and other

        11     DCF  

Yields

Prepayment rates

Default probabilities

Loss severities

 

9.2 – 47.9%

20.0%

2.0%

90.9 – 100.0%

 

20.3%

20.0%

2.0%

95.0%

 

Lower fair value

Lower fair value

Lower fair value

Lower fair value

  Change in default probabilities typically accompanied by directionally similar change in loss severities and opposite change in prepayment rates
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents
    September 30, 2020

Financial Instrument

  Fair
value in
billions
of yen
   

Valuation

technique

 

Significant

unobservable input

 

Range of

valuation inputs(1)

 

Weighted

Average(2)

 

Impact of
increases in
significant
unobservable
valuation

inputs(3)(4)

 

Interrelationships
between valuation

inputs(5)

Derivatives, net:

             

Equity contracts

  ¥ (19   Option models  

Dividend yield

Volatilities

Correlations

 

0.0 – 21.0%

4.0 – 90.1%

(0.85) – 0.98

 

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

    (58  

DCF/

Option

models

 

Interest rates

Volatilities

Volatilities

Correlations

 

(0.3) – 1.2%

8.6 – 13.7%

27.0 – 93.3 bp

(1.00) – 0.98

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

    (15  

DCF/

Option

models

 

Credit spreads

Recovery rates

Volatilities

Correlations

 

0.0 – 25.8%

0.0 – 100.3%

50.0 – 83.0%

0.07 – 0.74

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

 

No predictable

interrelationship

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

    0     Option models  

Interest rates

Volatilities

Volatilities

Correlations

 

(0.3) – 1.0%

2.6 – 28.9%

17.4 – 28.0 bp

(0.25) – 0.80