6-K 1 d244637d6k.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 February 2021

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 Nine Months Ended December 31, 2020.
2.    (English Translation) Confirmation Letter.

The registrant hereby incorporates Exhibits 1 and 2 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: February 25, 2021   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 Nine Months Ended December 31, 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

     4  

3. Significant Contracts

     20  

Item 3. Company Information

     21  

1. Share Capital Information

     21  

2. Directors and Executive Officers

  

Item 4. Financial Information

     23  

Preparation Method of Consolidated Financial Statements and Quarterly Review Certificate

     23  

1. Consolidated Financial Statements

     24  

(1) Consolidated Balance Sheets (UNAUDITED)

     24  

(2) Consolidated Statements of Income (UNAUDITED)

     27  

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

     29  

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

     30  

(5) Consolidated Statements of Cash Flows (UNAUDITED)

     32  

Notes to the Consolidated Financial Statements (UNAUDITED)

     34  

2. Other

     117  

Part II    Information on Guarantor of the Company

  

Quarterly Review Report of Independent Auditors

     118  

 

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


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Part I    Corporate Information

Item 1. Information on Company and Its Subsidiaries and Affiliates

1. Selected Financial Data

 

         Nine months
ended
December 31,
2019
    Nine months
ended
December 31,
2020
    Three months
ended
December 31,
2019
     Three months
ended
December 31,
2020
     Year ended
March 31,
2020
 

Total revenue

   (Mil yen)     1,582,733       1,389,263       497,450        455,872        1,952,482  

Net revenue

   (Mil yen)     1,050,359       1,231,837       334,978        402,092        1,287,829  

Income before income taxes

   (Mil yen)     272,979       396,771       69,687        131,333        248,261  

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

   (Mil yen)     251,473       308,524       57,066        98,366        216,998  

Comprehensive income attributable to NHI shareholders

   (Mil yen)     222,119       201,949       66,105        54,392        219,943  

Total equity

   (Mil yen)     2,789,623       2,853,392       —          —          2,731,264  

Total assets

   (Mil yen)     46,242,334       44,592,245       —          —          43,999,815  

Net income attributable to NHI shareholders per share
—basic

   (Yen)     77.36       101.03       18.07        32.16        67.76  

Net income attributable to NHI shareholders per share
—diluted

   (Yen)     75.65       98.30       17.63        31.16        66.20  

Total NHI shareholders’ equity as a percentage of total assets

   (%)     5.8       6.3       —          —          6.0  

Cash flows from operating activities

   (Mil yen)     419,277       667,296       —          —          (15,943

Cash flows from investing activities

   (Mil yen)     217,804       (72,848     —          —          216,336  

Cash flows from financing activities

   (Mil yen)     (159,920     (383,636     —          —          332,062  

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

   (Mil yen)     3,152,558       3,367,676       —          —          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 1,284 consolidated subsidiaries for the nine months ended December 31, 2020.

There were 13 affiliated companies which were accounted for by the equity method as of December 31, 2020.

 

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Item 2. Operating and Financial Review

1. Risk Factors

Significant changes in our Risk Factors which were described on the annual securities report are stated below. The titles below correspond to the titles of “Part I Corporate Information—Item 2. Operating and Financial Review—2. Risk Factors” in the annual securities report. The discussion below contains future matters that are based on the assessments made as of the date of submission of this report (February 15, 2021), unless noted separately.

Our business may be materially affected by financial markets, economic conditions and market fluctuations in Japan and elsewhere around the world

Brexit may adversely affect our business on various fronts

On January 31, 2020, the United Kingdom (“U.K.”) withdrew from the European Union (“EU”) under the Withdrawal Agreement between the U.K. and the EU (“Brexit”). On December 31, 2020, a transition period during which the rules and regulations of the EU continued to apply to the U.K expired. Although the U.K. and EU entered a trade and cooperation agreement governing their relationship prior to the expiration of the transition period, such agreement does not comprehensively address the financial industry, and there continues to be substantial uncertainty as to the consequences that Brexit have on our business. We conduct a substantial level of business throughout Europe, where London is our regional hub, and, accordingly, the outcome of the ongoing negotiations between U.K. and the EU on financial services following Brexit may adversely affect our business on various fronts. Following the end of the transition period, our regulated activities in the European region are carried out mainly through Nomura International plc (“NIP”), our broker-dealer arm established in London, and Nomura Financial Products Europe GmbH (“NFPE”), our licensed broker-dealer in the Federal Republic of Germany. Previously, NIP had provided the entire European Economic Area (“EEA”) cross-border services pursuant to “passporting rights” granted under the relevant EU single market legislation. Following the end of the transition period, NIP lost its EEA passporting rights, and NFPE serves all EEA clients, except where local exemptions exist that allow NIP to continue in certain countries. Should those exemptions lapse before we are able to find alternative arrangements, or clients not be willing to migrate to NFPE, our revenue and profitability from business in the European region may be adversely affected. This situation would also similarly apply to other group entities operating in the European region. Further potential risks are associated with timely migration of European clients to NFPE, which is continuing into 2021, and NFPE’s ability to provide clients the same level of service as NIP. Moreover, a lapse of existing exemptions and lack of further agreements between the U.K. and the EU on other areas of the financial services industry may adversely affect our business in the European region. In addition, as discussed below, a number of uncertainties affecting our business in the European region remain.

For example, as a result of continuing uncertainty, financial stability both in the U.K. and the wider European region may be adversely affected. Any market turmoil and increased volatility may adversely affect our business, with potential liquidity and operational pressures on our financial position, particularly in the short term. For example, market participants may postpone or cancel transactions or other activities that they would otherwise engage in, which may adversely affect our revenues and profitability.

Depending on the content of any future agreement between the U.K. and the EU, the wider financial system and regulatory and supervisory regime in the European region may also be substantially changed, which could adversely affect our business as well. Euro-denominated financial transactions in particular may be affected by any regulatory regime emerging going forward, in terms of the physical location for financial market infrastructure, liquidity provision and pricing. Operating conditions for financial institutions and financial market infrastructures may also become more stringent for all market participants depending on the content of any such new regulatory or supervisory regime.

These potential changes in the relevant regulatory or supervisory regimes in the wider financial system may accelerate fragmentation of the financial markets and, as a result, we may be adversely affected due to increasing operating costs, which could impact our profitability. Such increased operating costs may result from a number of factors, including the introduction or modification of regulatory requirements such as regulatory capital, liquidity, governance, risk management control and overall entity structure planning.

Overall, the final form that the U.K. – EU relationship will take poses a high level of potentially prolonged uncertainties both politically and economically. There may also be certain extraterritorial effects in markets outside of the region. These uncertainties, together with other potential developments such as rising trade tensions, may add further downward pressure to the world economic growth and global financial stability and, as a result, we may see lower liquidity in financial markets, an unexpected increase in volatility across various asset classes, higher funding costs, a trend towards increasing risk averseness in investment activities and negative business sentiment, all of which may adversely affect our business.

 

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Event risk may cause losses in our trading and investment assets as well as market and liquidity risk

Event risk refers to potential losses we may suffer through unpredictable events that cause large unexpected market price movements such as natural or man-made disasters, epidemics, acts of terrorism, armed conflicts or political instability, as well as adverse events specifically affecting our business activities or counterparties. These events include not only significant events such as the Great East Japan Earthquake in March 2011, the increasing tensions on Korean Peninsula following North Korean nuclear tests in 2017, sudden and unexpected developments in global trade or security policies such as tensions between the United States and China in 2018 and 2019, and the COVID-19 pandemic in 2020 but also more specifically the following types of events that could cause losses in our trading and investment assets:

 

   

sudden and significant reductions in credit ratings with regard to financial instruments held by our trading and investment businesses by major rating agencies,

 

   

sudden changes in trading, tax, accounting, regulatory requirements, laws and other related rules which may make our trading strategy obsolete, less competitive or no longer viable, or

 

   

an unexpected failure in a corporate transaction in which we participate resulting in our not receiving the consideration we should have received, as well as bankruptcy, deliberate acts of fraud, and administrative penalty with respect to the issuers of our trading and investment assets.

Furthermore, new policies or regulatory changes pursued or enacted by the new presidential administration in the United States and the effects of the introduction of the National Security Law enacted in Hong Kong in June 2020 could have a major impact on the overall situation in Asia or globally and our business and strategy.

 

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2. Operating, Financial and Cash Flow Analysis by Management

(1) Operating Results

Nomura reported net revenue of ¥1,231.8 billion, non-interest expenses of ¥835.1 billion, income before income taxes of ¥396.8 billion, and net income attributable to NHI shareholders of ¥308.5 billion for the nine months ended December 31, 2020.

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

 

     Millions of yen  
     Nine months ended December 31  
     2019     2020  

Commissions

   ¥ 212,743     ¥ 274,452  

Brokerage commissions

     141,703       200,101  

Commissions for distribution of investment trust

     48,036       51,442  

Other

     23,004       22,909  

Fees from investment banking

     76,379       73,997  

Underwriting and distribution

     35,067       41,523  

M&A / financial advisory fees

     29,467       25,120  

Other

     11,845       7,354  

Asset management and portfolio service fees

     180,909       169,712  

Asset management fees

     168,853       157,497  

Other

     12,056       12,215  

Net gain on trading

     327,700       406,954  

Gain (loss) on private equity and debt investments

     3,275       4,237  

Net interest

     86,030       121,213  

Gain (loss) on investments in equity securities

     1,488       8,936  

Other

     161,835       172,336  
  

 

 

   

 

 

 

Net revenue

   ¥ 1,050,359     ¥ 1,231,837  
  

 

 

   

 

 

 
     Millions of yen  
     Nine months ended December 31  
     2019     2020  

Compensation and benefits

   ¥ 374,514          ¥ 412,119  

Commissions and floor brokerage

     74,565       82,512  

Information processing and communications

     126,939       129,306  

Occupancy and related depreciation

     53,756       54,223  

Business development expenses

     24,243       9,852  

Other

     123,363       147,054  
  

 

 

   

 

 

 

Non-interest expenses

   ¥ 777,380     ¥ 835,066  
  

 

 

   

 

 

 

 

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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  
     Nine months ended December 31  
     2019     2020  

Retail

   ¥ 247,565     ¥ 272,028  

Asset Management

     85,581       98,181  

Wholesale

     502,711       692,113  

Other (Incl. elimination)

     219,279       162,614  
  

 

 

   

 

 

 

Total

   ¥ 1,055,136     ¥ 1,224,936  
  

 

 

   

 

 

 
Non-interest expenses     
     Millions of yen  
     Nine months ended December 31  
     2019     2020  

Retail

   ¥ 216,546     ¥ 205,819  

Asset Management

     48,073       45,300  

Wholesale

     420,580       461,896  

Other (Incl. elimination)

     92,181       122,051  
  

 

 

   

 

 

 

Total

   ¥ 777,380     ¥ 835,066  
  

 

 

   

 

 

 
Income (loss) before income taxes     
     Millions of yen  
     Nine months ended December 31  
     2019     2020  

Retail

   ¥ 31,019     ¥ 66,209  

Asset Management

     37,508       52,881  

Wholesale

     82,131            230,217  

Other (Incl. elimination)

     127,098       40,563  
  

 

 

   

 

 

 

Total

   ¥ 277,756     ¥ 389,870  
  

 

 

   

 

 

 

Retail

Net revenue was ¥272.0 billion primarily due to an increase in commissions from sales of stocks and investment trusts in the favorable market conditions. Non-interest expenses were ¥205.8 billion and income before income taxes was ¥66.2 billion. Retail client assets were ¥121.0 trillion as of December 31, 2020, a ¥17.0 trillion increase from March 31, 2020.

Asset Management

Net revenue was ¥98.2 billion. Non-interest expenses were ¥45.3 billion and income before income taxes was ¥52.9 billion. Assets under management were ¥61.2 trillion as of December 31, 2020, a ¥11.9 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 ¥692.1 billion. Non-interest expenses were ¥461.9 billion and income before income taxes was ¥230.2 billion.

The breakdown of net revenue for Wholesale is as follows:

 

     Millions of yen  
     Nine months ended December 31  
     2019     2020  

Global Markets

   ¥ 428,642     ¥ 612,368  

Investment Banking

     74,069            79,745  
  

 

 

   

 

 

 

Net revenue

   ¥    502,711     ¥    692,113  
  

 

 

   

 

 

 

Global Markets net revenue was ¥612.4 billion. Fixed Income net revenue increased from ¥259.4 billion as of December 31, 2019 to ¥357.6 billion as the rate products continued to perform well in the falling interest rate environment. Equities net revenue increased from ¥169.2 billion as of December 31, 2019 to ¥254.8 billion primarily due to robust derivatives businesses. Investment banking net revenue was ¥79.7 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 nine months ended December 31, 2020 include losses from changes in the fair value of derivative liabilities of ¥14.6 billion attributable to the change in its own creditworthiness and gains from changes in counterparty credit spread of ¥10.7 billion. Net revenue was ¥162.6 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 ¥122.1 billion and income before income taxes was ¥40.6 billion for the nine months ended December 31, 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 December 31, 2020.

 

     Millions of yen  
     December 31, 2020  
     Funded      Unfunded     Total  

Europe

   ¥ 2,858      ¥ 50,883     ¥ 53,741  

Americas

     4,211        79,769            83,980  

Asia and Oceania

     14,429        3,515       17,944  
  

 

 

    

 

 

   

 

 

 

Total

   ¥     21,498      ¥      134,167     ¥     155,665  
  

 

 

    

 

 

   

 

 

 

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 December 31, 2020 (5% as of March 31, 2020) as listed below:

 

     Billions of yen  
     December 31, 2020  
     Level 1      Level 2      Level 3      Counterparty
and
Cash Collateral
Netting
    Total  

Financial assets measured at fair value

(Excluding derivative assets)

   ¥ 9,315      ¥ 8,697      ¥ 604      ¥ —       ¥ 18,616  

Derivative assets

     32        17,008        171        (16,041     1,170  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 9,347      ¥ 25,705      ¥ 775      ¥ (16,041   ¥ 19,786  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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     December 31, 2020  

Equity

   ¥ 8.9     ¥ 3.1  

Interest rate

     22.3       8.5  

Foreign exchange

     5.1       4.2  
  

 

 

   

 

 

 

Subtotal

     36.3       15.8  

Diversification benefit

     (11.0     (6.5
  

 

 

   

 

 

 

VaR

   ¥ 25.3     ¥ 9.3  
  

 

 

   

 

 

 

 

     Billions of yen  
     Nine months ended December 31, 2020  
     Maximum(1)      Minimum(1)      Average(1)  

VaR

   ¥ 27.0      ¥ 7.0      ¥ 13.9  

 

(1)

Represents the maximum, average and minimum VaR based on all daily calculations over the nine-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 December 31, 2020.

 

     Millions of yen  
     December 31, 2020  

Deferred tax assets

  

Depreciation, amortization and valuation of fixed assets

   ¥ 20,584  

Investments in subsidiaries and affiliates

     2,078  

Valuation of financial instruments

     78,238  

Accrued pension and severance costs

     23,951  

Other accrued expenses and provisions

     62,748  

Operating losses

     276,270  

Lease liabilities

     54,455  

Other

     12,208  
  

 

 

 

Gross deferred tax assets

     530,532  

Less—Valuation allowance

     (361,315
  

 

 

 

Total deferred tax assets

     169,217  
  

 

 

 

Deferred tax liabilities

  

Investments in subsidiaries and affiliates

     96,080  

Valuation of financial instruments

     45,390  

Undistributed earnings of foreign subsidiaries

     2,533  

Valuation of fixed assets

     25,796  

Right-of-use assets

     54,020  

Other

     4,369  
  

 

 

 

Total deferred tax liabilities

     228,188  
  

 

 

 

Net deferred tax assets (liabilities)

   ¥ (58,971
  

 

 

 

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 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 of Japan (“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 December 31, 2020, our liquidity portfolio was ¥5,829.8 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 December 31, 2020.

 

     Billions of yen  
     March 31, 2020      December 31, 2020  

Short-term bank borrowings

   ¥ 572.1      ¥ 300.1  

Other loans

     154.3        136.6  

Commercial paper

     525.1        332.9  

Deposits at banking entities

     1,116.2        1,138.5  

Certificates of deposit

     12.1        52.9  

Debt securities maturing within one year

     692.5        831.7  
  

 

 

    

 

 

 

Total short-term unsecured debt

   ¥ 3,072.3      ¥ 2,792.7  
  

 

 

    

 

 

 

 

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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 December 31, 2020.

 

     Billions of yen  
     March 31, 2020      December 31, 2020  

Long-term deposits at banking entities

   ¥ 147.9      ¥ 8.7  

Long-term bank borrowings

     2,591.5        2,622.6  

Other loans

     82.5        79.7  

Debt securities(1)

     3,522.1        3,791.8  
  

 

 

    

 

 

 

Total long-term unsecured debt

   ¥ 6,344.0      ¥ 6,502.8  
  

 

 

    

 

 

 

 

  (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 December 31, 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 December 31, 2020 was 231.5%, 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 December 31, 2019 and as of December 31, 2020 were ¥3,152.6 billion and ¥3,367.7 billion, respectively. Cash flows from operating activities for the nine months ended December 31, 2019 were inflows of ¥419.3 billion due primarily due to an increase in Trading liabilities and the comparable period in 2020 were inflows of ¥667.3 billion primarily due to an increase in Trading liabilities. Cash flows from investing activities for the nine months ended December 31, 2019 were inflows of ¥217.8 billion primarily due to a decrease in Investments in affiliated companies, net and the comparable period in 2020 were outflows of ¥72.8 billion primarily due to an increase in Loans receivable at banks, net. Cash flows from financing activities for the nine months ended December 31, 2019 were outflows of ¥159.9 primarily due to a decrease in Deposits received at banks, net and the comparable period in 2020 were outflows of ¥383.6 billion primarily due to a decrease in Short-term borrowings.

Balance Sheet and Financial Leverage

Total assets as of December 31, 2020, were ¥44,592.2 billion, an increase of ¥592.4 billion compared with ¥43,999.8 billion as of March 31, 2020, primarily due to increases in Securities borrowed and Trading assets. Total liabilities as of December 31, 2020, were ¥41,738.9 billion, an increase of ¥470.3 billion compared with ¥41,268.6 billion as of March 31, 2020, primarily due to an increase in Trading liabilities. NHI shareholders’ equity as of December 31, 2020, was ¥2,793.6 billion, an increase of ¥140.2 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     December 31, 2020  

NHI shareholders’ equity

   ¥ 2,653.5     ¥ 2,793.6  

Total assets

     43,999.8       44,592.2  

Adjusted assets(1)

     28,092.7       27,639.9  

Leverage ratio(2)

     16.6     16.0

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:

(2)

Equals total assets divided by NHI shareholders’ equity.

(3)

Equals adjusted assets divided by NHI shareholders’ equity.

 

     Billions of yen  
     March 31, 2020     December 31, 2020  

Total assets

   ¥ 43,999.8       ¥ 44,592.2  

Less:

    

Securities purchased under agreements to resell

     12,377.3          12,522.3    

Securities borrowed

     3,529.8       4,430.0  
  

 

 

   

 

 

 

Adjusted assets

   ¥ 28,092.7     ¥ 27,639.9  
  

 

 

   

 

 

 

Total assets increased by 1.3% reflecting primarily increases in Securities borrowed and Trading assets. NHI shareholders’ equity increased by 5.3% 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 16.0 times as of December 31, 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 December 31, 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 December 31, 2020, our common equity Tier 1 capital ratio (common equity Tier 1 capital divided by risk-weighted assets) was 17.73%, Tier 1 capital ratio (Tier 1 capital divided by risk-weighted assets) was 19.86% and consolidated capital adequacy ratio (total capital divided by risk-weighted assets) was 19.92% 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 December 31, 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 December 31, 2020.

 

     Billions of yen, except ratios  
     December 31, 2020  

Common equity Tier 1 capital

   ¥ 2,636.2  

Tier 1 capital

     2,952.9  

Total capital

     2,961.2  

Risk-Weighted Assets

  

Credit risk-weighted assets

     8,059.0  

Market risk equivalent assets

     4,224.6  

Operational risk equivalent assets

     2,578.1  
  

 

 

 

Total risk-weighted assets

   ¥ 14,861.7  
  

 

 

 

Consolidated Capital Adequacy Ratios

  

Common equity Tier 1 capital ratio

     17.73

Tier 1 capital ratio

     19.86

Consolidated capital adequacy ratio

     19.92

 

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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 these Notices. We have also 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 these amendments, deposits with the Bank of Japan have been excluded from the total exposure measure used to calculate 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 December 31, 2020, our consolidated leverage ratio was 5.61%.

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 nine months ended December 31, 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
December 31, 2020
     Number of
Issued Shares as of
February 15, 2021
     Trading Markets   Details  

Common stock

     3,233,562,601        3,233,562,601      Tokyo Stock Exchange(2)     1 unit is 100 shares  
         Nagoya Stock Exchange(2)  
         Singapore Exchange  
         New York Stock Exchange  
  

 

 

    

 

 

    

 

 

 

 

 

Total

     3,233,562,601        3,233,562,601      —       —    
  

 

 

    

 

 

    

 

 

 

 

 

 

(1)

Shares that may have increased from exercise of stock options between February 1, 2021 and the submission date (February 15, 2021) are not included in the number of issued shares as of the submission date.

(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
 

December 1, 2020

     (260,000,000     3,233,562,601        —          594,493        —          559,676  

 

The decrease of issued shares is due to cancellation of treasury stock.

 

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Table of Contents

(5) Major Shareholders

Not applicable as this is the third quarter.

(6) Voting Rights

The “Voting Rights” as of the end of the current third quarter is presented as of September 30, 2020, the most recent cutoff date, because the number of beneficiary shareholders as of December 31, 2020, could not be ascertained.

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.

(2)

260,000,000 shares of treasury stock was cancelled on December 1, 2020. As a result of the cancellation, the total issued shares as of December 31, are 3,233,562,601.

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)

Number of treasury stock as of December 31, 2020 is 173,919,424 shares due mainly to cancellation of 260,000,000 shares of treasury stock conducted on December 1, 2020.

 

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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 nine and three months ended December 31, 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 nine and three months ended December 31, 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.

 

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Table of Contents

1. Consolidated Financial Statements

(1) Consolidated Balance Sheets (UNAUDITED)

 

            Millions of yen  
     Notes      March 31,
2020
    December 31,
2020
 

ASSETS

       

Cash and cash deposits:

       

Cash and cash equivalents

                       ¥     3,191,889     ¥     3,367,528  

Time deposits

        309,373       269,681  

Deposits with stock exchanges and other segregated cash

        373,686       289,866  
     

 

 

   

 

 

 

Total cash and cash deposits

        3,874,948       3,927,075  
     

 

 

   

 

 

 

Loans and receivables:

       

Loans receivable (including ¥805,141 million and ¥739,417 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2, 7        2,857,405       2,559,519  

Receivables from customers (including ¥11 million and ¥92,060 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2, 4        541,284       442,696  

Receivables from other than customers

        1,731,236       733,653  

Allowance for doubtful accounts

     *7        (13,012     (9,816
     

 

 

   

 

 

 

Total loans and receivables

        5,116,913       3,726,052  
     

 

 

   

 

 

 

Collateralized agreements:

       

Securities purchased under agreements to resell (including ¥548,043 million and ¥324,084 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2        12,377,315       12,522,320  

Securities borrowed

        3,529,797       4,430,006  
     

 

 

   

 

 

 

Total collateralized agreements

        15,907,112       16,952,326  
     

 

 

   

 

 

 

Trading assets and private equity and debt investments:

       

Trading assets (including securities pledged as collateral of ¥5,332,640 million and ¥6,775,495 million as of March 31, 2020 and December 31, 2020, respectively; including ¥12,407 million and ¥9,002 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2, 3        16,853,822       17,553,773  

Private equity and debt investments (including ¥6,395 million and ¥5,543 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2        44,278       56,518  
     

 

 

   

 

 

 

Total trading assets and private equity and debt investments

        16,898,100       17,610,291  
     

 

 

   

 

 

 

Other assets:

       

Office buildings, land, equipment and facilities (net of accumulated depreciation and amortization of ¥397,114 million and ¥372,912 million as of March 31, 2020 and December 31, 2020, respectively)

        440,512       458,602  

Non-trading debt securities

     *2        455,392       415,082  

Investments in equity securities

     *2        112,175       115,714  

Investments in and advances to affiliated companies

        367,641       398,075  

Other (including ¥144,756 million and ¥142,579 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2, 10        827,022       989,028  
     

 

 

   

 

 

 

Total other assets

        2,202,742       2,376,501  
     

 

 

   

 

 

 

Total assets

      ¥ 43,999,815     ¥ 44,592,245  
     

 

 

   

 

 

 

 

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Table of Contents

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

 

     Notes      Millions of yen  
     March 31,
2020
    December 31,
2020
 

LIABILITIES AND EQUITY

                        

Short-term borrowings (including ¥376,910 million and ¥630,363 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2      ¥ 1,486,733     ¥ 1,335,006  

Payables and deposits:

       

Payables to customers

     *4        1,467,434       1,349,856  

Payables to other than customers

        1,653,495       1,811,503  

Deposits received at banks (including ¥14,392 million and ¥37,831 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2        1,276,153       1,200,047  
     

 

 

   

 

 

 

Total payables and deposits

            4,397,082           4,361,406  
     

 

 

   

 

 

 

Collateralized financing:

       

Securities sold under agreements to repurchase (including ¥111,609 million and ¥122,618 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2        16,349,182       15,361,464  

Securities loaned (including ¥105,968 million and ¥129,144 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2        961,446       1,472,905  

Other secured borrowings

        717,711       394,182  
     

 

 

   

 

 

 

Total collateralized financing

        18,028,339       17,228,551  
     

 

 

   

 

 

 

Trading liabilities

     *2, 3        8,546,284       9,767,775  

Other liabilities (including ¥9,183 million and ¥37,813 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2, 10        1,034,448       1,181,101  

Long-term borrowings (including ¥3,707,643 million and ¥4,019,255 million measured at fair value by applying the fair value option as of March 31, 2020 and December 31, 2020, respectively)

     *2        7,775,665       7,865,014  
     

 

 

   

 

 

 

Total liabilities

        41,268,551       41,738,853  
     

 

 

   

 

 

 

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 December 31, 2020

       

Issued—3,493,562,601 shares as of March 31, 2020 and 3,233,562,601 shares as of December 31, 2020

       

Outstanding–3,038,587,493 shares as of March 31, 2020 and 3,059,293,177 shares as of December 31, 2020

        594,493       594,493  

Additional paid-in capital

        683,232       690,208  

Retained earnings

        1,645,451       1,734,915  

Accumulated other comprehensive income

     *15        (26,105     (132,680
     

 

 

   

 

 

 

Total NHI shareholders’ equity before treasury stock

        2,897,071       2,886,936  

Common stock held in treasury, at cost—454,975,108 shares as of March 31, 2020 and 174,269,424 shares as of December 31, 2020

        (243,604     (93,313
     

 

 

   

 

 

 

Total NHI shareholders’ equity

        2,653,467       2,793,623  
     

 

 

   

 

 

 

Total NHI shareholders’ equity

        77,797       59,769  

Total equity

        2,731,264       2,853,392  
     

 

 

   

 

 

 

Total liabilities and equity

      ¥ 43,999,815     ¥ 44,592,245  
     

 

 

   

 

 

 

 

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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
     December 31,
2020
 

Cash and cash deposits

      ¥ 10      ¥ 14  

Trading assets and private equity and debt investments

                     1,172        1,091  

Other assets

        39        63  
     

 

 

    

 

 

 

Total assets

      ¥            1,221      ¥            1,168  
     

 

 

    

 

 

 

Trading liabilities

      ¥ 19      ¥ 19  

Other liabilities

        4        2  

Borrowings

        947        884  
     

 

 

    

 

 

 

Total liabilities

      ¥ 970      ¥ 905  
     

 

 

    

 

 

 

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

 

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Table of Contents

(2) Consolidated Statements of Income (UNAUDITED)

 

     Notes      Millions of yen  
     Nine months ended December 31  
     2019      2020  

Revenue:

                       

Commissions

     *4      ¥        212,743      ¥        274,452  

Fees from investment banking

     *4        76,379        73,997  

Asset management and portfolio service fees

     *4        180,909        169,712  

Net gain on trading

     *2, 3        327,700        406,954  

Gain on private equity and debt investments

        3,275        4,237  

Interest and dividends

        618,404        278,639  

Gain on investments in equity securities

        1,488        8,936  

Other

     *4        161,835        172,336  
     

 

 

    

 

 

 

Total revenue

        1,582,733        1,389,263  

Interest expense

        532,374        157,426  
     

 

 

    

 

 

 

Net revenue

        1,050,359        1,231,837  
     

 

 

    

 

 

 

Non-interest expenses:

        

Compensation and benefits

        374,514        412,119  

Commissions and floor brokerage

        74,565        82,512  

Information processing and communications

        126,939        129,306  

Occupancy and related depreciation

        53,756        54,223  

Business development expenses

        24,243        9,852  

Other

        123,363        147,054  
     

 

 

    

 

 

 

Total non-interest expenses

        777,380        835,066  
     

 

 

    

 

 

 

Income before income taxes

        272,979        396,771  

Income tax expense

     *14        16,379        83,127  
     

 

 

    

 

 

 

Net income

      ¥ 256,600      ¥ 313,644  

Less: Net income attributable to noncontrolling interests

        5,127        5,120  
     

 

 

    

 

 

 

Net income attributable to NHI shareholders

      ¥ 251,473      ¥ 308,524  
     

 

 

    

 

 

 
     Notes      Yen  
     Nine months ended December 31  
     2019      2020  

Per share of common stock:

     *11        

Basic—

        

Net income attributable to NHI shareholders per share

      ¥ 77.36      ¥ 101.03  

Diluted—

        

Net income attributable to NHI shareholders per share

      ¥ 75.65      ¥ 98.30  

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

 

27


Table of Contents
     Notes      Millions of yen  
     Three months ended December 31  
     2019      2020  

Revenue:

                       

Commissions

     *4      ¥          79,289      ¥          96,687  

Fees from investment banking

     *4        26,803        36,138  

Asset management and portfolio service fees

     *4        61,020        58,639  

Net gain on trading

     *2, 3        109,266        136,402  

Gain on private equity and debt investments

        1,503        1,362  

Interest and dividends

        203,050        89,602  

Gain on investments in equity securities

        2,243        3,523  

Other

     *4        14,276        33,519  
     

 

 

    

 

 

 

Total revenue

        497,450        455,872  

Interest expense

        162,472        53,780  
     

 

 

    

 

 

 

Net revenue

        334,978        402,092  
     

 

 

    

 

 

 

Non-interest expenses:

        

Compensation and benefits

        128,987        136,816  

Commissions and floor brokerage

        24,568        26,326  

Information processing and communications

        42,821        43,484  

Occupancy and related depreciation

        16,276        18,109  

Business development expenses

        8,509        3,388  

Other

        44,130        42,636  
     

 

 

    

 

 

 

Total non-interest expenses

        265,291        270,759  
     

 

 

    

 

 

 

Income before income taxes

        69,687        131,333  

Income tax expense

     *14        10,337        30,910  
     

 

 

    

 

 

 

Net income

      ¥ 59,350      ¥ 100,423  

Less: Net income attributable to noncontrolling interests

        2,284        2,057  
     

 

 

    

 

 

 

Net income attributable to NHI shareholders

      ¥ 57,066      ¥ 98,366  
     

 

 

    

 

 

 
     Notes      Yen  
     Three months ended December 31  
     2019      2020  

Per share of common stock:

     *11        

Basic—

                       

Net income attributable to NHI shareholders per share

      ¥ 18.07      ¥ 32.16  

Diluted—

        

Net income attributable to NHI shareholders per share

      ¥ 17.63      ¥ 31.16  

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

 

28


Table of Contents

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

 

            Millions of yen  
            Nine months ended December 31  
            2019     2020  

Net income

      ¥ 256,600     ¥ 313,644  

Other comprehensive income (loss):

       

Cumulative translation adjustments:

       

Cumulative translation adjustments

                         (16,837     (33,700

Deferred income taxes

        67       76  
     

 

 

   

 

 

 

Total

        (16,770     (33,624

Defined benefit pension plans:

       

Pension liability adjustment

                 4,167       4,911  

Deferred income taxes

        625       (658
     

 

 

   

 

 

 

Total

        4,792       4,253  

Own credit adjustments:

       

Own credit adjustments

        (19,640     (92,912

Deferred income taxes

        2,256       15,532  
     

 

 

   

 

 

 

Total

        (17,384     (77,380
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        (29,362     (106,751
     

 

 

   

 

 

 

Comprehensive income

      ¥ 227,238     ¥ 206,893  

Less: Comprehensive income attributable to noncontrolling interests

        5,119       4,944  
     

 

 

   

 

 

 

Comprehensive income attributable to NHI shareholders

      ¥ 222,119     ¥     201,949  
     

 

 

   

 

 

 
            Millions of yen  
            Three months ended December 31  
            2019     2020  

Net income

      ¥ 59,350     ¥ 100,423  

Other comprehensive income (loss):

       

Cumulative translation adjustments:

       

Cumulative translation adjustments

        22,483       (13,863

Deferred income taxes

        (178     136  
     

 

 

   

 

 

 

Total

        22,305       (13,727

Defined benefit pension plans:

       

Pension liability adjustment

        1,162       894  

Deferred income taxes

        (287     (31
     

 

 

   

 

 

 

Total

        875       863  

Own credit adjustments:

       

Own credit adjustments

        (16,484     (39,561

Deferred income taxes

        2,775       7,965  
     

 

 

   

 

 

 

Total

        (13,709     (31,596
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        9,471       (44,460
     

 

 

   

 

 

 

Comprehensive income

      ¥ 68,821     ¥ 55,963  

Less: Comprehensive income attributable to noncontrolling interests

        2,716       1,571  
     

 

 

   

 

 

 

Comprehensive income attributable to NHI shareholders

      ¥        66,105     ¥        54,392  
     

 

 

   

 

 

 

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

 

29


Table of Contents

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

 

            Millions of yen  
            Nine months ended December 31  
            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  

Stock-based compensation awards

        (4,457     5,860  

Changes in an affiliated company’s interests in its subsidiary

        —         1,116  
     

 

 

   

 

 

 

Balance at end of period

        683,304       690,208  
     

 

 

   

 

 

 

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

        251,473       308,524  

Cash dividends(2)

        (48,477     (61,156

Gain (loss) on sales of treasury stock

        (231     (500

Cancellation of treasury stock

        —         (139,204
     

 

 

   

 

 

 

Balance at end of period

        1,695,182       1,734,915  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        17,833       (26,274

Net change during the period

        (16,762     (33,448
     

 

 

   

 

 

 

Balance at end of period

        1,071       (59,722
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (71,107     (62,571

Pension liability adjustment

        4,792       4,253  
     

 

 

   

 

 

 

Balance at end of period

        (66,315     (58,318
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        24,224       62,740  

Own credit adjustments

        (17,384     (77,380
     

 

 

   

 

 

 

Balance at end of period

        6,840       (14,640
     

 

 

   

 

 

 

Balance at end of period

        (58,404     (132,680
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (108,968     (243,604

Repurchases of common stock

        (117,720     (7

Sales of common stock

        0       0  

Common stock issued to employees

        13,280       11,094  

Cancellation of common stock

        —         139,204  
     

 

 

   

 

 

 

Balance at end of period

        (213,408     (93,313
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,701,167       2,793,623  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        49,732       77,797  

Cash dividends

        (1,483     (989

Net income attributable to noncontrolling interests

        5,127       5,120  

Accumulated other comprehensive income (loss) attributable to noncontrolling interests

        (8     (176

Purchase / sale of subsidiary shares, net

        16,090       450  

Other net change in noncontrolling interests

        18,998       (22,433
     

 

 

   

 

 

 

Balance at end of period

        88,456       59,769  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥     2,789,623     ¥     2,853,392  
     

 

 

   

 

 

 

 

(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 nine months ended December 31, 2020, respectively.

(2)

Dividends per share         Nine months ended December 31, 2019 ¥15.00         Nine months ended December 31, 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 December 31  
          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

        682,851       683,233  

Gain (loss) on sales of treasury stock

        (12     —    

Stock-based compensation awards

        465       6,977  

Changes in an affiliated company’s interests in its subsidiary

        —         (2
     

 

 

   

 

 

 

Balance at end of period

        683,304       690,208  
     

 

 

   

 

 

 

Retained earnings

       

Balance at beginning of year

        1,638,347       1,775,691  

Net income attributable to NHI shareholders

        57,066       98,366  

Cash dividends(1)

        (231     62  

Gain (loss) on sales of treasury stock

        —         (139,204
     

 

 

   

 

 

 

Balance at end of period

        1,695,182       1,734,915  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        (20,802     (46,481

Net change during the period

        21,873       (13,241
     

 

 

   

 

 

 

Balance at end of period

        1,071       (59,722
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (67,190     (59,181

Pension liability adjustment

        875       863  
     

 

 

   

 

 

 

Balance at end of period

        (66,315     (58,318
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        20,549       16,956  

Own credit adjustments

        (13,709     (31,596
     

 

 

   

 

 

 

Balance at end of period

        6,840       (14,640
     

 

 

   

 

 

 

Balance at end of period

        (58,404     (132,680
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (140,370     (233,315

Repurchases of common stock

        (76,392     (4

Sales of common stock

        0       0  

Common stock issued to employees

        3,354       802  

Cancellation of common stock

        —         139,204  
     

 

 

   

 

 

 

Balance at end of period

        (213,408     (93,313
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,701,167       2,793,623  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        80,297       54,658  

Cash dividends

        (209     (266

Net income attributable to noncontrolling interests

        2,284       2,057  

Accumulated other comprehensive income attributable to noncontrolling interests

        432       (486

Purchase / sale of subsidiary shares, net

        1       290  

Other net change in noncontrolling interests

        5,651       3,516  
     

 

 

   

 

 

 

Balance at end of period

        88,456       59,769  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥          2,789,623     ¥          2,853,392  
     

 

 

   

 

 

 

 

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  
            Nine months ended December 31  
            2019     2020  

Cash flows from operating activities:

       

Net income

                       ¥ 256,600     ¥ 313,644  

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

       

Depreciation and amortization

        47,029       45,966  

Gain on investments in equity securities

        (1,488     (8,936

Gain on investments in subsidiaries and affiliates

        (73,271     (2,575

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

        (1,162     (71,847

Deferred income taxes

        (16,684     20,191  

Changes in operating assets and liabilities:

       

Time deposits

        16,944       47,919  

Deposits with stock exchanges and other segregated cash

        (34,402     76,883  

Trading assets and private equity and debt investments

        (2,418,152     (1,071,889

Trading liabilities

        465,826       1,430,593  

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

        1,947,599       (846,176

Securities borrowed, net of securities loaned

        210,646       (430,484

Other secured borrowings

        (100,735     (323,056

Loans and receivables, net of allowance for doubtful accounts

        (69,371     1,327,201  

Payables

        120,614       106,485  

Bonus accrual

        4,001       21,459  

Accrued income taxes, net

        (21,401     31,753  

Other, net (1)

        86,684       165  
     

 

 

   

 

 

 

Net cash provided by (used in) operating activities

        419,277       667,296  
     

 

 

   

 

 

 

Cash flows from investing activities:

       

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

        (182,729     (77,791

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

        175,170       33,044  

Proceeds from sales of investments in equity securities

        12,253       6,029  

Decrease (increase) in loans receivable at banks, net

        61,768       (46,292

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

        (6,855     41,825  

Business acquisition

        —         (11,152

Decrease (increase) in investments in affiliated companies, net

        159,792       (8,883

Other, net

        (1,594     (9,628
     

 

 

   

 

 

 

Net cash provided by (used in) investing activities

        217,804       (72,848
     

 

 

   

 

 

 

Cash flows from financing activities:

       

Increase in long-term borrowings

        1,525,873       1,704,043  

Decrease in long-term borrowings

        (1,606,841     (1,671,455

Increase (decrease) in short-term borrowings, net

        229,670       (253,364

Decrease in deposits received at banks, net

        (148,385     (92,758

Proceeds from sales of common stock held in treasury

        281       6  

Payments for repurchases of common stock held in treasury

        (117,720     (7

Payments for cash dividends

        (58,416     (76,358

Contributinon from noncontrolling interests

        15,618       6,257  
     

 

 

   

 

 

 

Net cash used in financing activities

        (159,920     (383,636
     

 

 

   

 

 

 

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

        (11,735     (35,446
     

 

 

   

 

 

 

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

        465,426       175,366  

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

      ¥          3,152,558     ¥          3,367,676  
     

 

 

   

 

 

 

Supplemental information:

       

Cash paid during the period for—

       

Interest

      ¥ 536,782     ¥ 160,156  

Income tax payments, net

      ¥ 54,465     ¥ 31,182  

 

(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  
            Nine months ended December 31  
            2019      2020  

Cash and cash equivalents reported in Cash and cash equivalents

                       ¥ 3,152,017      ¥ 3,367,528  

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

      ¥ 541      ¥ 148  
     

 

 

    

 

 

 

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

      ¥          3,152,558      ¥          3,367,676  
     

 

 

    

 

 

 

Non-cash—

Total amount of Right- of use assets recognized during the nine months ended December 31, 2019 and December 31, 2020 were ¥13,267 million and ¥53,347 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 nine and three months ended December 31, 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 (loss) before income taxes prepared under U.S. GAAP, therefore, was ¥3,662 million (lower) and ¥4,773 million (higher) for the nine months ended December 31, 2019 and 2020, respectively and ¥2,193 million (lower) and ¥2,781 million (higher) for the three months ended December 31, 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 ¥233 million (higher) and ¥885 million (higher) for the nine months ended December 31, 2019 and 2020, respectively, and ¥2,166 million (lower) and ¥62 million (lower) for the three months ended December 31, 2019 and 2020, respectively for non-trading debt securities. Income (loss) before income taxes prepared under U.S. GAAP was ¥567 million (lower) and ¥1,898 million (higher) for the nine months ended December 31, 2019 and 2020, respectively, and ¥273 million (lower) and ¥2,901 million (higher) for the three months ended December 31, 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 certain periods of less than 20 years using the straight-line method. Therefore, under U.S. GAAP, Income (loss) before income taxes was ¥2,620 million (higher) and ¥2,906 million (higher) for the nine months ended December 31, 2019 and 2020, respectively, and ¥607 million (higher) and ¥968 million (higher) for the three months ended December 31, 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 financial 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 (loss) before income taxes was ¥1,889 million (higher) and ¥29,656 million (higher) for the nine months ended December 31, 2019 and 2020, respectively and ¥6,663 million (lower) and ¥4,085 million (higher) for the three months ended December 31, 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 computed 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 ¥562 million (lower) and ¥119 million (lower) for the nine months ended December 31, 2019 and 2020, respectively and ¥143 million (higher) and ¥214 million (higher) for the three months ended December 31, 2019 and 2020, respectively.

Use of estimates—

The Company tests for other than temporary impairment on its equity method investments on a quarterly basis. At December 31, 2020, there is an equity method investment where the share price is lower than the carrying value. The carrying value of the equity method investment is ¥215,026 million at December 31, 2020. Based on the quoted share price, the fair value at December 31, 2020 is below the Company’s carrying value by 31.2%.

Considering the financial condition and performance as well as the period and extent to which the share price was below carrying value, the Company determined the impairment was not other-than-temporary and therefore no impairment loss were recognized through earnings during the period. The Company will continue to evaluate this investment and may subsequently conclude the reduction in fair value is other-than-temporary and impair our investment if market conditions do not sustainably improve in the near future.

 

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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 and December 31, 2020.

The following table presents a summary of 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 on 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 nine months ended December 31, 2020.

 

Nomura plans to apply certain of the optional expedients to relevant contract modification and hedge accounting relationship 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 are 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 consolidated 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 December 31, 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  
     December 31, 2020  
     Level 1      Level 2      Level 3      Counterparty
and Cash
Collateral
Netting(1)
    Balance as of
December 31,
2020
 

Assets:

             

Trading assets and private equity and debt investments(2)

             

Equities(3)

   ¥ 2,435      ¥ 955      ¥ 12      ¥ —       ¥ 3,402  

Private equity and debt investments(4)

     —          —          50        —         50  

Japanese government securities

     2,330        —          —          —         2,330  

Japanese agency and municipal securities

     —          81        2        —         83  

Foreign government, agency and municipal securities

     3,648        2,253        14        —         5,915  

Bank and corporate debt securities and loans for trading purposes

     —          1,236        117        —         1,353  

Commercial mortgage-backed securities (“CMBS”)

     —          1        7        —         8  

Residential mortgage-backed securities (“RMBS”)

     —          2,642        5        —         2,647  

Issued/Guaranteed by government sponsored entity

     —          2,585        —          —         2,585  

Other

     —          57        5        —         62  

Real estate-backed securities

     —          0        99        —         99  

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

     —          31        22        —         53  

Investment trust funds and other

     458        20        0        —         478  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading assets and private equity and debt investments

     8,871        7,219        328        —         16,418  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative assets(6)

             

Equity contracts

     3        1,289        69        —         1,361  

Interest rate contracts

     26        11,017        27        —         11,070  

Credit contracts

     1        374        40        —         415  

Foreign exchange contracts

     1        4,328        35        —         4,364  

Commodity contracts

     1        0        —          —         1  

Netting

     —          —          —          (16,041     (16,041
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative assets

     32        17,008        171        (16,041     1,170  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 8,903      ¥ 24,227      ¥ 499      ¥ (16,041   ¥ 17,588  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans and receivables(7)

     —          733        98        —         831  

Collateralized agreements(8)

     —          306        18        —         324  

Other assets

             

Non-trading debt securities

     113        302        —          —         415  

Other(2)(3)

     331        137        160        —         628  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 9,347      ¥ 25,705      ¥ 775      ¥ (16,041   ¥ 19,786  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Trading liabilities

             

Equities

   ¥ 2,204      ¥ 15      ¥ 1      ¥ —       ¥ 2,220  

Japanese government securities

     1,066        —          —          —         1,066  

Japanese agency and municipal securities

     —          0        —          —         0  

Foreign government, agency and municipal securities

     3,323        1,208        0        —         4,531  

Bank and corporate debt securities

     —          175        2        —         177  

Residential mortgage-backed securities (“RMBS”)

     —          0        —          —         0  

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

     —          0        1        —         1  

Investment trust funds and other

     323        —          0        —         323  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading liabilities

     6,916        1,398        4        —         8,318  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities(6)

             

Equity contracts

     1        1,677        100        —         1,778  

Interest rate contracts

     10        10,592        89        —         10,691  

Credit contracts

     2        392        63        —         457  

Foreign exchange contracts

     0        4,168        31        —         4,199  

Commodity contracts

     1        0        —          —         1  

Netting

     —          —          —          (15,676     (15,676
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative liabilities

     14        16,829        283        (15,676     1,450  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 6,930      ¥ 18,227      ¥ 287      ¥ (15,676   ¥ 9,768  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Short-term borrowings(9)

     —          560        70        —         630  

Payables and deposits(10)

     —          36        2        —         38  

Collateralized financing(8)

     —          251        0        —         251  

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

     4        3,535        480        —         4,019  

Other liabilities(13)

     246        122        28        —         396  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 7,180      ¥ 22,731      ¥ 867      ¥ (15,676   ¥ 15,102  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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 December 31, 2020, the fair values of these investments which are included in Trading assets and private equity and debt investments were ¥26 billion and ¥22 billion, respectively. As of March 31, 2020 and December 31, 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 December 31, 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 December 31, 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
    December 31, 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

  ¥       12     DCF   Liquidity discounts   75.0%   75.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Private equity and debt investments

    50     DCF  

WACC

Growth rates

Credit spreads

Liquidity discounts

 

6.8 – 12.7%

0.0 – 1.0%

7.6 – 8.8%

5.0 – 30.0%

 

10.5%

0.3%

8.1%

13.4%

 

Lower fair value

Higher fair value

Lower fair value

Lower fair value

  No predictable interrelationship
   

 

 

 

 

 

 

 

 

 

 

 

    Market multiples  

EV/EBITDA ratios

PE Ratios

Liquidity discounts

 

1.0 – 10.7 x

11.0 x

5.0 – 30.0%

 

6.2 x

11.0 x

16.7%

 

Higher fair value

Higher fair value

Lower fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government,

agency and

municipal securities

    14     DCF  

Credit spreads

Recovery rates

 

0.0 – 1.7%

9.2 – 29.0%

 

0.5%

12.3%

 

Lower fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt

securities and loans for

trading purposes

    117     DCF  

Credit spreads

Recovery rates

 

0.4 – 18.5%

0.0 – 97.0%

 

5.3%

54.7%

 

Lower fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage-

backed securities (“CMBS”)

    7     DCF  

Yields

Loss severities

 

4.2 – 9.5%

69.5%

 

4.8%

69.5%

 

Lower fair value

Lower fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities (“RMBS”)

    5     DCF  

Yields

Prepayment rates

Loss severities

 

0.0 – 65.8%

6.2 – 15.0%

0.8 – 96.1%

 

7.1%

7.1%

6.9%

 

Lower fair value

Lower fair value

Lower fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed

securities

    99     DCF   Loss severities   0.0 – 16.4%   2.4%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt

obligations (“CDOs”) and

other

        22     DCF  

Yields

Prepayment rates

Default probabilities

Loss severities

 

1.5 – 40.0%

20.0%

2.0%

92.0 – 100.0%

 

12.1%

20.0%

2.0%

96.6%

 

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
    December 31, 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

  ¥ (31   Option models  

Dividend yield

Volatilities

Correlations

 

0.0 – 13.9%

3.9 – 99.1%

(0.80) – 0.98

 

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

    (62  

DCF/

Option

models

 

Interest rates

Volatilities

Volatilities

Correlations

 

(0.2) – 1.5%

8.6 – 13.7%

26.2 – 73.3 bp

(1.00) – 0.98

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

    (23  

DCF/

Option

models

 

Credit spreads

Recovery rates

Volatilities

Correlations

 

0.0 – 18.9%

0.0 – 100.5%

50.0 – 71.5%

0.32 – 0.72

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

    4     Option models  

Interest rates

Volatilities

Volatilities

Correlations

 

(0.2) – 1.3%

2.7 – 24.9%

16.1 – 22.8 bp

(0.25) – 0.80

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value

Higher fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Loans and receivables

    98     DCF  

Credit spreads

Recovery rates

 

0.0 – 13.8%

40.0 – 57.5%

 

6.1%

56.0%

 

Lower fair value

Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized agreements

    18     DCF   Repo rate   3.8 – 5.8%   4.8%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Other assets

             

Other(6)

    160     DCF  

WACC

Growth rates

Liquidity discounts

 

9.1%

2.0%

10.0%

 

9.1%

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

 

5.2 – 6.6 x

4.7 – 32.0 x

0.3 – 1.5 x

10.0 – 40.0%

 

6.3 x

13.8 x

0.9 x

30.4%

 

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:

             

Trading Liabilities

             
Bank and corporate debt sec.     2     DCF   Recovery rates   3.4 – 3.5%   3.4%   Higher fair value   Not Applicable