6-K 1 d835070d6k.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 2020

NOMURA HOLDINGS, INC.

(Translation of registrant’s name into English)

9-1, 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, 2019.
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 20, 2020   By:  

/s/ Go Sugiyama

    Go Sugiyama
    Senior Managing Director


Table of Contents

Exhibit 1

Quarterly Securities Report Pursuant to the Financial Instruments and Exchange Act for the Nine Months Ended December 31, 2019

Items included in the Quarterly Securities Report

 

     Page  

Part I    Corporate Information

     1  

Item 1. Information on Company and Its Subsidiaries and Affiliates

     1  

1. Selected Financial Data

     1  

2. Business Overview

     1  

Item 2. Operating and Financial Review

     2  

1. Risk Factors

     2  

2. Operating, Financial and Cash Flow Analyses by Management

     2  

3. Significant Contracts

     17  

Item 3. Company Information

     18  

1. Share Capital Information

     18  

2. Directors and Executive Officers

  

Item 4. Financial Information

     20  

Preparation Method of Consolidated Financial Statements and Quarterly Review Certificate

     20  

1. Consolidated Financial Statements

     21  

(1) Consolidated Balance Sheets (UNAUDITED)

     21  

(2) Consolidated Statements of Income (UNAUDITED)

     24  

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

     26  

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

     27  

(5) Consolidated Statements of Cash Flows (UNAUDITED)

     29  

Notes to the Consolidated Financial Statements (UNAUDITED)

     31  

2. Other

     108  

Part II    Information on Guarantor of the Company

  

Quarterly Review Report of Independent Auditor

     109  

 

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,
2018
    Nine months
ended
December 31,
2019
    Three months
ended
December 31,
2018
    Three months
ended
December 31,
2019
    Year ended
March 31,
2019
 

Total revenue

  (Mil yen)     1,336,766       1,582,733       457,400       497,450       1,835,118  

Net revenue

  (Mil yen)     815,516       1,050,359       260,597       334,978       1,116,770  

Income (loss) before income taxes

  (Mil yen)     (62,054     272,979       (76,164     69,687       (37,701

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

  (Mil yen)     (101,286     251,473       (95,276     57,066       (100,442

Comprehensive income (loss) attributable to NHI shareholders

  (Mil yen)     (42,280     222,119       (101,999     66,105       (70,136

Total equity

  (Mil yen)     2,706,011       2,789,623       —         —         2,680,793  

Total assets

  (Mil yen)     45,113,023       46,242,334       —         —         40,969,439  

Net income (loss) attributable to NHI shareholders per share
—basic

  (Yen)     (30.01     77.36       (28.52     18.07       (29.90

Net income (loss) attributable to NHI shareholders per share
—diluted

  (Yen)     (30.03     75.65       (28.52     17.63       (29.92

Total NHI shareholders’ equity as a percentage of total assets

  (%)     5.9       5.8       —         —         6.4  

Cash flows from operating activities

  (Mil yen)     (440,760     419,277       —         —         (361,165

Cash flows from investing activities

  (Mil yen)     (2,872     217,804       —         —         (112,503

Cash flows from financing activities

  (Mil yen)     483,207       (159,920     —         —         761,191  

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

  (Mil yen)     2,439,146       3,152,558       —         —         2,687,132  

 

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 1,363 consolidated subsidiaries for the nine months ended December 31, 2019.

There were 14 affiliated companies which were accounted for by the equity method as of December 31, 2019.

 

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Item 2. Operating and Financial Review

1. Risk Factors

There is no significant change in our Risk Factors for the nine months ended December  31, 2019 and until the submission date of this report.

2. Operating, Financial and Cash Flow Analysis by Management

(1) Operating Results

Nomura reported net revenue of ¥1,050.4 billion, non-interest expenses of ¥777.4 billion, income before income taxes of ¥273.0 billion, and net income attributable to NHI shareholders of ¥251.5 billion for the nine months ended December 31, 2019.

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  
     2018     2019  

Commissions

   ¥ 226,954     ¥ 212,743  

Brokerage commissions

     159,971       141,703  

Commissions for distribution of investment trust

     44,906       48,036  

Other

     22,077       23,004  

Fees from investment banking

     76,207       76,379  

Underwriting and distribution

     46,246       35,067  

M&A / financial advisory fees

     20,219       29,467  

Other

     9,742       11,845  

Asset management and portfolio service fees

     186,312       180,909  

Asset management fees

     174,345       168,853  

Other

     11,967       12,056  

Net gain on trading

     244,586       327,700  

Gain (loss) on private equity investments

     1,335       3,275  

Net interest

     51,585       86,030  

Gain (loss) on investments in equity securities

     (8,864     1,488  

Other

     37,401       161,835  
  

 

 

   

 

 

 

Net revenue

   ¥     815,516     ¥  1,050,359  
  

 

 

   

 

 

 
     Millions of yen  
     Nine months ended December 31  
     2018     2019  

Compensation and benefits

   ¥ 372,428     ¥ 374,514  

Commissions and floor brokerage

     64,335       74,565  

Information processing and communications

     123,232       126,939  

Occupancy and related depreciation

     48,692       53,756  

Business development expenses

     27,354       24,243  

Other

     241,529       123,363  
  

 

 

   

 

 

 

Non-interest expenses

   ¥     877,570     ¥ 777,380  
  

 

 

   

 

 

 

 

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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 16. “Segment and geographic information.

Net revenue

 

     Millions of yen  
     Nine months ended December 31  
     2018     2019  

Retail

   ¥ 265,325     ¥ 247,565  

Asset Management

     66,948       85,581  

Wholesale

     413,148       502,711  

Other (Incl. elimination)

     79,117       219,279  
  

 

 

   

 

 

 

Total

   ¥     824,538     ¥ 1,055,136  
  

 

 

   

 

 

 
Non-interest expenses     
     Millions of yen  
     Nine months ended December 31  
     2018     2019  

Retail

   ¥ 219,136     ¥ 216,546  

Asset Management

     47,191       48,073  

Wholesale

     511,532       420,580  

Other (Incl. elimination)

     99,711       92,181  
  

 

 

   

 

 

 

Total

   ¥     877,570     ¥ 777,380  
  

 

 

   

 

 

 
Income (loss) before income taxes     
     Millions of yen  
     Nine months ended December 31  
     2018     2019  

Retail

   ¥ 46,189     ¥ 31,019  

Asset Management

     19,757       37,508  

Wholesale

     (98,384     82,131  

Other (Incl. elimination)

     (20,594     127,098  
  

 

 

   

 

 

 

Total

   ¥ (53,032   ¥ 277,756  
  

 

 

   

 

 

 

Retail

Net revenue was ¥247.6 billion, a decline from the same period in the relevant year primarily due to a decrease of sales of stocks and investment trusts although market confidence has been recovered lately. Non-interest expenses were ¥216.5 billion and income before income taxes was ¥31.0 billion. Retail client assets were ¥122.3 trillion as of December 31, 2019, a ¥7.6 trillion increase from March 31, 2019.

Asset Management

Net revenue was ¥85.6 billion, an increase from the same period in the relevant year resulted from AuM increase. Non-interest expenses were ¥48.1 billion and income before income taxes was ¥37.5 billion. Assets under management were ¥55.6 trillion as of December 31, 2019, a ¥4.2 trillion increase from March 31, 2019, primarily due to decline in the market.

 

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Wholesale

Net revenue was ¥502.7 billion. Non-interest expenses were ¥420.6 billion and income before income taxes was ¥82.1 billion.

The breakdown of net revenue for Wholesale is as follows.

 

     Millions of yen  
     Nine months ended December 31  
     2018     2019  

Global Markets

   ¥     339,441     ¥ 428,642  

Investment Banking

     73,707        74,069  
  

 

 

   

 

 

 

Net revenue

   ¥ 413,148     ¥ 502,711  
  

 

 

   

 

 

 

Global Markets net revenue was ¥428.6 billion. Fixed Income net revenue decreased from ¥164.8 billion in the relevant year to ¥259.4 billion because of the high market volatility, which led to a favorable environment for the trading business. Equities net revenue slightly decreased from ¥174.7 billion in the relevant year to ¥169.2 billion due to lower performance in Asia. Investment banking net revenue was ¥74.1 billion.

Other Operating Results

Other operating results include net gain (loss) related to economic hedging transactions, realized gain (loss) on investments in equity securities held for operating purposes, equity in earnings of affiliates, corporate items, and other financial adjustments. Other operating results for the nine months ended December 31, 2019 include losses from changes in the fair value of derivative liabilities of ¥0.7 billion attributable to the change in Nomura’s own creditworthiness and gains from changes in counterparty credit spread of ¥2.7 billion. Net revenue was ¥219.3 billion, primarily due to the realized gain of ¥73,293 million by the partial sale of Nomura’s investment in ordinary shares of Nomura Research Institute, Ltd. Non-interest expenses were ¥92.2 billion and income before income taxes was ¥127.1 billion for the nine months ended December 31, 2019.

Cyber Security Incident

In June 2018, one of our foreign subsidiaries recently experienced a cyber incident that resulted in the unauthorized access to certain of its systems including client information. We may suffer financial loss through reputational damage, legal liability and enforcement actions against us, and expect to incur increased costs for our operations generally, resulting from and in connection with the remediation of this incident and to strengthen and enhance cyber security within other Nomura group companies.

Geographic Information

Please refer to Item 4. Financial Information, 1. Consolidated Financial Statements, Note 16. “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.”

(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.

 

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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 by geographic location of the target company as of December 31, 2019.

 

     Millions of yen  
     December 31, 2019  
     Funded      Unfunded      Total  

Europe

   ¥ 76,217      ¥ 255,041      ¥ 331,258  

Americas

     40,879        154,114        194,993  

Asia and Oceania

     268        42,467        42,735  
  

 

 

    

 

 

    

 

 

 

Total

   ¥ 117,364      ¥ 451,622      ¥ 568,986  
  

 

 

    

 

 

    

 

 

 

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.

Level 3 financial assets as a proportion of total financial assets, carried at fair value on a recurring basis was 5% as of December 31, 2019 as listed below:

 

     Billions of yen  
     December 31, 2019  
     Level 1      Level 2      Level 3      Counterparty
and
Cash Collateral
Netting
    Total  

Financial assets measured at fair value

(Excluding derivative assets)

   ¥ 8,017      ¥ 9,542      ¥ 759      ¥ —       ¥ 18,318  

Derivative assets

     19        13,937        130        (13,145     941  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 8,036      ¥ 23,479      ¥ 889      ¥ (13,145   ¥ 19,259  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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(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, 2019     December 31, 2019  

Equity

   ¥ 1.1     ¥ 1.4  

Interest rate

     2.8       4.8  

Foreign exchange

     1.9       2.5  
  

 

 

   

 

 

 

Subtotal

     5.8       8.7  

Diversification benefit

     (1.3     (2.3
  

 

 

   

 

 

 

VaR

   ¥ 4.5     ¥ 6.3  
  

 

 

   

 

 

 

 

     Billions of yen  
     Nine months ended December 31, 2019  
     Maximum(1)      Minimum(1)      Average(1)  

VaR

   ¥ 6.9      ¥ 3.6      ¥ 5.4  

 

(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, 2019.

 

     Millions of yen  
     December 31, 2019  

Deferred tax assets

  

Depreciation, amortization and valuation of fixed assets

   ¥ 17,447  

Investments in subsidiaries and affiliates

     2,768  

Valuation of financial instruments

     57,605  

Accrued pension and severance costs

     29,518  

Other accrued expenses and provisions

     50,190  

Operating losses

     343,102  

Lease liabilities

     49,001  

Other

     8,075  
  

 

 

 

Gross deferred tax assets

     557,706  

Less—Valuation allowance

     (414,716
  

 

 

 

Total deferred tax assets

     142,990  
  

 

 

 

Deferred tax liabilities

  

Investments in subsidiaries and affiliates

     86,931  

Valuation of financial instruments

     43,294  

Undistributed earnings of foreign subsidiaries

     2,376  

Valuation of fixed assets

     8,758  

Right-of-use assets

     48,817  

Other

     1,976  
  

 

 

 

Total deferred tax liabilities

     192,152  
  

 

 

 

Net deferred tax assets (liabilities)

   ¥ (49,162
  

 

 

 

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) business 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 financial resources, 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 loss arising from inadequate or failed internal processes, people, and systems or from external events. It excludes strategic risk (the risk of loss as a result of poor strategic business decisions), but includes the risk of breach of legal and regulatory requirements, and the risk of damage to Nomura’s reputation if caused by an operational risk.

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 Nomura’s operational risk framework and its implementation, and provides challenge to the 1st Line of Defence

 

  3)

3rd Line of Defence: Internal 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 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

Nomura uses risk models for regulatory and economic capital calculations and valuation models for pricing and sensitivity calculations of positions. Model risk is the risk of loss arising from model errors or incorrect or inappropriate model application with regard to valuation models and risk models. Errors can occur at any point from model assumptions through to implementation. In addition, the quality of model outputs depends on the quality of model parameters and any input data. Even a fundamentally sound model producing accurate outputs consistent with the design objective of the model may exhibit high model risk if it is misapplied or misused. To address these risks, Nomura has established its model risk appetite, which includes a qualitative statement and a quantitative measure. The qualitative statement for model risk specifies that it is expected that models are used correctly and appropriately. The quantitative risk appetite measure is based on Nomura’s assessment of the potential loss arising from model risk.

Nomura has documented policies and procedures in place, approved by the GIRMC and/or GRSC, which define the process and validation requirements for implementing changes to valuation and risk models. Before these models are put into official use, the Model Validation Group (“MVG”) is responsible for validating their integrity and comprehensiveness independently from those who design and build them. All models are also subject to an annual re-approval process by MVG to ensure they remain suitable.

In addition, a Model Performance Monitoring process has been established to identify and assess specific events, that can indicate that a Model is not performing as it should or is potentially unsuitable and to determine what actions (for example, additional validation work) might be necessary. For changes with an impact above certain materiality thresholds, model approval is required.

 

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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.

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, 2019, our liquidity portfolio was ¥5,303.2 billion which sufficiently met liquidity requirements under the stress scenarios.

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

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

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

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

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

 

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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, 2019 and December 31, 2019.

 

     Billions of yen  
     March 31, 2019      December 31, 2019  

Short-term bank borrowings

   ¥ 107.0      ¥ 135.7  

Other loans

     231.4        158.5  

Commercial paper

     313.0        473.7  

Deposits at banking entities

     1,149.1        1,052.9  

Certificates of deposit

     11.1        7.1  

Debt securities maturing within one year

     707.2        967.2  
  

 

 

    

 

 

 

Total short-term unsecured debt

   ¥  2,518.8      ¥  2,795.1  
  

 

 

    

 

 

 

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, and Nomura International Funding Pte. 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, 2019 and December 31, 2019.

 

     Billions of yen  
     March 31, 2019      December 31, 2019  

Long-term deposits at banking entities

   ¥ 232.5      ¥ 177.1  

Long-term bank borrowings

     2,727.5        2,627.3  

Other loans

     87.9        82.9  

Debt securities(1)

     3,435.6        3,357.9  
  

 

 

    

 

 

 

Total long-term unsecured debt

   ¥  6,483.5      ¥  6,245.2  
  

 

 

    

 

 

 

 

  (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.

 

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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.

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, 2019, 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;

 

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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.

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 Financial Services Agency (on October 31, 2014). 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, 2019 was 192.3%, 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, 2018 and as of December 31, 2019 were ¥2,439.1 billion and ¥3,152.6 billion, respectively. Cash flows from operating activities for the nine months ended December 31, 2018 were outflows of ¥440.8 billion due primarily to an increase in Trading assets and private equity investments and for the comparable period in 2019 were inflows of ¥419.3 billion due primarily to an increase in Trading liabilities. Cash flows from investing activities for the nine months ended December 31, 2018 were outflows of ¥2.9 billion due primarily to Increase in loans receivable at banks, net and for the comparable period in 2019 were inflows of ¥217.8 billion due primarily to Decrease in investments in affiliated companies, net. Cash flows from financing activities for the nine months ended December 31, 2018 were inflows of ¥483.2 billion due primarily to an increase in Long-term borrowings and for the comparable period in 2019 were outflows of ¥159.9 billion due primarily to a decrease in Deposits received at banks, net.

 

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Balance Sheet and Financial Leverage

Total assets as of December 31, 2019, were ¥46,242.3 billion, an increase of ¥5,272.9 billion compared with ¥40,969.4 billion as of March 31, 2019, primarily due to an increase in Trading assets and Securities purchased under agreements to resell. Total liabilities as of December 31, 2019, were ¥43,452.7 billion, an increase of ¥5,164.1 billion compared with ¥38,288.6 billion as of March 31, 2019, primarily due to an increase in Securities sold under agreements to repurchase. NHI shareholders’ equity as of December 31, 2019, was ¥2,701.2 billion, an increase of ¥70.1 billion compared with ¥2,631.1 billion as of March 31, 2019, 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.

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, 2019     December 31, 2019  

NHI shareholders’ equity

   ¥ 2,631.1     ¥ 2,701.2  

Total assets

     40,969.4       46,242.3  

Adjusted assets(1)

     23,662.5       26,687.4  

Leverage ratio(2)

     15.6     17.1

Adjusted leverage ratio(3)

     9.0     9.9

 

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

 

    

     Billions of yen  
     March 31, 2019     December 31, 2019  

Total assets

   ¥  40,969.4       ¥  46,242.3  

Less:

    

Securities purchased under agreements to resell

     13,194.5         15,632.8    

Securities borrowed

     4,112.4       3,922.1  
  

 

 

   

 

 

 

Adjusted assets

   ¥ 23,662.5     ¥ 26,687.4  
  

 

 

   

 

 

 

 

(2)

Equals total assets divided by NHI shareholders’ equity.

(3)

Equals adjusted assets divided by NHI shareholders’ equity.

Total assets increased by 12.9%, primarily due to an increase in Trading assets and Securities purchased under agreements to resell. NHI shareholders’ equity increased by 2.7%, primarily due to an increase in Retained earnings. As a result, our leverage ratio rose from 15.6 times as of March 31, 2019 to 17.1 times as of December 31, 2019.

Adjusted assets increased primarily due to an increase in Trading assets. As a result, our adjusted leverage ratio rose from 9.0 times as of March 31, 2019 to 9.9 times as of December 31, 2019.

 

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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.

 

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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, 2019, our common equity Tier 1 capital ratio (common equity Tier 1 capital divided by risk-weighted assets) was 18.06%, Tier 1 capital ratio (Tier 1 capital divided by risk-weighted assets) was 19.25% and consolidated capital adequacy ratio (total capital divided by risk-weighted assets) was 19.58% 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, 2019 was 7.61% for common equity Tier 1 capital ratio, 9.11% for Tier 1 capital ratio and 11.11% for consolidated capital adequacy ratio).

The following table presents the Company’s consolidated capital adequacy ratios as of December 31, 2019.

 

     Billions of yen, except ratios  
     December 31, 2019  

Common equity Tier 1 capital

   ¥ 2,534.3  

Tier 1 capital

     2,701.1  

Total capital

     2,747.2  

Risk-Weighted Assets

  

Credit risk-weighted assets

     7,156.8  

Market risk equivalent assets

     4,305.6  

Operational risk equivalent assets

     2,565.7  
  

 

 

 

Total risk-weighted assets

   ¥  14,028.1  
  

 

 

 

Consolidated Capital Adequacy Ratios

  

Common equity Tier 1 capital ratio

     18.06

Tier 1 capital ratio

     19.25

Consolidated capital adequacy ratio

     19.58

Consolidated Leverage Ratio Requirements

In March 2019, the FSA set out requirements for the calculation and disclosure and minimum requirement of 3% of a consolidated leverage ratio, and the publication of “Notice of the Establishment of Standards for Determining Whether the Adequacy of Leverage, the Supplementary Measure to the Adequacy of Equity Capital of a Final Designated Parent Company and its Subsidiary Corporations, etc. is Appropriate Compared to the Assets Held by the Final Designated Parent Company and its Subsidiary Corporations, etc., under Paragraph 1, Article 57-17 of the Financial Instruments and Exchange Act” (2019 FSA Regulatory Notice No. 13; “Notice on Consolidated Leverage Ratio”), through amendments to revising “Specification of items which a final designated parent company should disclose on documents to show the status of its sound management” (2010 FSA Regulatory Notice No. 132; “Notice on Pillar 3 Disclosure”). We started calculating and disclosing a consolidated leverage ratio from March 31, 2015 in accordance with the Notices. And we have started calculating a consolidated leverage ratio from March 31, 2019 in accordance with the Notice on Pillar 3 Disclosure, Notice on Consolidated Leverage Ratio and other related Notices. Management receives and reviews this consolidated leverage ratio on a regular basis. As of December 31, 2019, our consolidated leverage ratio was 4.84%.

Credit Ratings

On August 2, 2019, S&P Global Ratings downgraded the long-term issuer credit rating of the Company to BBB+ from A-. S&P Global Ratings also downgraded the long-term issuer credit rating of Nomura Securities Co., Ltd. (“NSC”) to A- from A, and the short-term credit rating of NSC to A-2 from A-1.

(7) Current Challenges

The new challenges on operating and financing activities that arose during the nine months ended December 31, 2019 and until the submission date of this Quarterly Securities Report are as follows:

In March, 2019, an incident occurred whereby information related to the listing and delisting criteria for the upper market currently under review by the Tokyo Stock Exchange was handled improperly from the viewpoint of ensuring fair and sound markets in the course of communicating information at Nomura Securities Co., Ltd.

On May 28, 2019, the Financial Services Agency of Japan (“FSA”) issued a business improvement order against Nomura Holdings, Inc. and Nomura Securities Co., Ltd. as for management systems of information control.

 

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On May 24, 2019, senior management submitted a remediation action plan including the following three points to the Board of

Directors that was approved on this day and announced.

I. Embed a conduct risk mindset that fulfills the role the public expects financial institutions to play, and create an environment to maintain and improve self-discipline

II. Reorganize the Wholesale Equities business to ensure that our people are incentivized to contribute to the development of the capital markets

III. Establish a framework to tightly control not only corporate confidential information, but also non-public information that could materially affect investment decisions

On June 3, 2019, we submitted reports on our business improvement measures to the FSA.

As for the progress of this Remediation Action Plan, top management itself review about the progress of this Remediation Action Plan in the Executive Management Board and discuss the effectiveness to amend it if necessary. And the progress of this Remediation Action Plan has been periodically reported to the Board of Directors. On December 3 2019, we published the Nomura Group Code of Conduct, which sets out guidelines for Nomura Group directors, officers and employees to uphold the highest standards of ethics and integrity.

By fully implementing the remediation action plan, we will further strengthen our internal control framework and work together as one firm to regain the trust of our clients and all other concerned parties.

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 the type of stock and the “Total” is the number of authorized share capital as referred in the Articles of Incorporation.

B. Issued Shares

 

Type

   Number of
Issued Shares as of
December 31, 2019
     Number of
Issued Shares as of
February 14, 2020
     Trading Markets   Details  

Common stock

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

 

 

    

 

 

    

 

 

 

 

 

Total

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

 

 

    

 

 

    

 

 

 

 

 

 

(1)

Shares that may have increased from exercise of stock options between February 1, 2020 and the submission date (February 14, 2020) 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.

 

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(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 31, 2019

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

(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, 2019, the most recent cutoff date, because the number of beneficiary shareholders as of December 31, 2019, could not be ascertained.

A. Outstanding Shares

 

     As of September 30, 2019
     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.)

     (Treasury Stocks        
     Common stock       261,367,900        —        —  
     (Crossholding Stocks        
     Common stock       1,005,000        —        —  

Stock with full voting right (Others)

     Common stock       3,229,611,900        32,296,119      —  

Shares less than 1 unit

     Common stock       1,577,801        —        Shares less than 1 unit

(100 shares)

  

 

 

   

 

 

    

 

 

    

 

Total Shares Issued

       3,493,562,601        —        —  
  

 

 

   

 

 

    

 

 

    

 

Voting Rights of Total Shareholders

       —          32,296,119      —  
  

 

 

   

 

 

    

 

 

    

 

 

Stock with full voting right (Others) includes 2,000 shares held by Japan Securities Depository Center, Inc. Shares less than 1 unit includes 50 treasury stocks.

B. Treasury Stocks

 

        As of September 30, 2019  

Name

 

Address

  Directly
held
shares
    Indirectly
held
shares
    Total     Percentage of
Issued Shares

(%)
 

(Treasury Stocks)

         

Nomura Holdings, Inc.

  1-9-1, Nihonbashi, Chuo-ku, Tokyo, Japan     261,367,900       —         261,367,900       7.48  

(Crossholding Stocks)

         

Nomura Real Estate Development Co., Ltd.

  1-26-2, Nishishinjuku, Shinjuku-ku, Tokyo, Japan     1,000,000       —         1,000,000       0.03  

Nomura Japan Corporation.

  2-1-3, Nihonbashihoridomecho, Chuo-ku, Tokyo, Japan     5,000       —         5,000       0.00  
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      262,372,900       —         262,372,900       7.51  
   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 2019.

<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, 2019, 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,
2019
    December 31,
2019
 

ASSETS

       

Cash and cash deposits:

       

Cash and cash equivalents

                       ¥     2,686,659     ¥     3,152,017  

Time deposits

        289,753       266,708  

Deposits with stock exchanges and other segregated cash

        285,457       316,822  
     

 

 

   

 

 

 

Total cash and cash deposits

        3,261,869       3,735,547  
     

 

 

   

 

 

 

Loans and receivables:

       

Loans receivable (including ¥664,585 million and ¥814,580 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2, 7        2,544,218       2,943,499  

Receivables from customers (including ¥8,318 million and ¥4,191 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2, 4        449,706       406,029  

Receivables from other than customers

        892,283       513,962  

Allowance for doubtful accounts

     *7        (4,169     (6,069
     

 

 

   

 

 

 

Total loans and receivables

        3,882,038       3,857,421  
     

 

 

   

 

 

 

Collateralized agreements:

       

Securities purchased under agreements to resell (including ¥647,545 million and ¥542,587 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2        13,194,543       15,632,816  

Securities borrowed

        4,112,416       3,922,106  
     

 

 

   

 

 

 

Total collateralized agreements

        17,306,959       19,554,922  
     

 

 

   

 

 

 

Trading assets and private equity investments:

       

Trading assets (including securities pledged as collateral of ¥5,200,360 million and ¥5,242,264 million as of March 31, 2019 and December 31, 2019, respectively; including ¥10,273 million and ¥10,844 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2, 3        14,355,712       16,672,458  

Private equity investments (including ¥4,047 million and ¥5,873 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2        30,077       39,112  
     

 

 

   

 

 

 

Total trading assets and private equity investments

        14,385,789       16,711,570  
     

 

 

   

 

 

 

Other assets:

       

Office buildings, land, equipment and facilities (net of accumulated depreciation and amortization of ¥416,052 million and ¥417,071 million as of March 31, 2019 and December 31, 2019, respectively)

        349,365       460,101  

Non-trading debt securities

     *2        460,661       465,999  

Investments in equity securities

     *2        138,447       129,940  

Investments in and advances to affiliated companies

        436,220       362,406  

Other (including ¥151,233 million and ¥146,553 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2, 9        748,091       964,428  
     

 

 

   

 

 

 

Total other assets

        2,132,784       2,382,874  
     

 

 

   

 

 

 

Total assets

      ¥ 40,969,439     ¥ 46,242,334  
     

 

 

   

 

 

 

 

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Table of Contents

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

 

     Notes      Millions of yen  
     March 31,
2019
    December 31,
2019
 

LIABILITIES AND EQUITY

                        

Short-term borrowings (including ¥362,612 million and ¥419,068 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2      ¥ 841,758     ¥ 1,067,890  

Payables and deposits:

       

Payables to customers

     *4        1,229,083       1,174,953  

Payables to other than customers

        1,146,336       1,292,192  

Deposits received at banks (including ¥—million and ¥10,737 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2        1,392,619       1,237,028  
     

 

 

   

 

 

 

Total payables and deposits

            3,768,038           3,704,173  
     

 

 

   

 

 

 

Collateralized financing:

       

Securities sold under agreements to repurchase (including ¥159,430 million and ¥112,009 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2        15,036,503       19,387,218  

Securities loaned (including ¥131,677 million and ¥137,231 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2        1,229,595       1,266,228  

Other secured borrowings

        418,305       317,138  
     

 

 

   

 

 

 

Total collateralized financing

        16,684,403       20,970,584  
     

 

 

   

 

 

 

Trading liabilities

     *2, 3        8,219,811       8,626,238  

Other liabilities (including ¥15,011 million and ¥14,540 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2, 9        858,867       1,172,645  

Long-term borrowings (including ¥3,576,293 million and ¥3,916,212 million measured at fair value by applying the fair value option as of March 31, 2019 and December 31, 2019, respectively)

     *2        7,915,769       7,911,181  
     

 

 

   

 

 

 

Total liabilities

        38,288,646       43,452,711  
     

 

 

   

 

 

 

Commitments and contingencies

     *15       

Equity:

       

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

       

Common stock

       

No par value share

       

Authorized—6,000,000,000 shares as of March 31, 2019 and December 31, 2019

       

Issued—3,493,562,601 shares as of March 31, 2019 and December 31, 2019

       

Outstanding—3,310,800,799 shares as of March 31, 2019 and 3,091,699,199 shares as of December 31, 2019

        594,493       594,493  

Additional paid-in capital

        687,761       683,304  

Retained earnings

        1,486,825       1,695,182  

Accumulated other comprehensive income

     *14        (29,050     (58,404
     

 

 

   

 

 

 

Total NHI shareholders’ equity before treasury stock

        2,740,029       2,914,575  

Common stock held in treasury, at cost—182,761,802 shares as of March 31, 2019 and 401,863,402 shares as of December 31, 2019

        (108,968     (213,408
     

 

 

   

 

 

 

Total NHI shareholders’ equity

        2,631,061       2,701,167  
     

 

 

   

 

 

 

Noncontrolling interests

        49,732       88,456  

Total equity

        2,680,793       2,789,623  
     

 

 

   

 

 

 

Total liabilities and equity

      ¥ 40,969,439     ¥ 46,242,334  
     

 

 

   

 

 

 

 

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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,
2019
    December 31,
2019
 

Cash and cash deposits

                       ¥ 20     ¥ 15  

Trading assets and private equity investments

             1,273             1,282   

Other assets

        126       50  
     

 

 

   

 

 

 

Total assets

      ¥            1,419     ¥            1,347  
     

 

 

   

 

 

 

Trading liabilities

      ¥ 23     ¥ 19  

Other liabilities

        3       3  

Borrowings

        1,035       1,007  
     

 

 

   

 

 

 

Total liabilities

      ¥ 1,061     ¥ 1,029  
     

 

 

   

 

 

 

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  
     2018     2019  

Revenue:

                      

Commissions

     *4      ¥        226,954     ¥        212,743  

Fees from investment banking

     *4        76,207       76,379  

Asset management and portfolio service fees

     *4        186,312       180,909  

Net gain on trading

     *2, 3        244,586       327,700  

Gain on private equity investments

        1,335       3,275  

Interest and dividends

        572,835       618,404  

Gain (loss) on investments in equity securities

        (8,864     1,488  

Other

     *4        37,401       161,835  
     

 

 

   

 

 

 

Total revenue

        1,336,766       1,582,733  

Interest expense

        521,250       532,374  
     

 

 

   

 

 

 

Net revenue

        815,516       1,050,359  
     

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

        372,428       374,514  

Commissions and floor brokerage

        64,335       74,565  

Information processing and communications

        123,232       126,939  

Occupancy and related depreciation

        48,692       53,756  

Business development expenses

        27,354       24,243  

Other

     *9        241,529       123,363  
     

 

 

   

 

 

 

Total non-interest expenses

        877,570       777,380  
     

 

 

   

 

 

 

Income (loss) before income taxes

        (62,054     272,979  

Income tax expense

     *13        36,331       16,379  
     

 

 

   

 

 

 

Net income (loss)

      ¥ (98,385   ¥ 256,600  

Less: Net income attributable to noncontrolling interests

        2,901       5,127  
     

 

 

   

 

 

 

Net income (loss) attributable to NHI shareholders

      ¥ (101,286   ¥ 251,473  
     

 

 

   

 

 

 
     Notes      Yen  
     Nine months ended December 31  
     2018     2019  

Per share of common stock:

     *10       

Basic—

       

Net income (loss) attributable to NHI shareholders per share

      ¥ (30.01   ¥ 77.36  

Diluted—

       

Net income (loss) attributable to NHI shareholders per share

      ¥ (30.03   ¥ 75.65  

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

 

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Table of Contents
     Notes      Millions of yen  
     Three months ended December 31  
     2018     2019  

Revenue:

                      

Commissions

     *4      ¥          72,715     ¥          79,289  

Fees from investment banking

     *4        33,129       26,803  

Asset management and portfolio service fees

     *4        60,591       61,020  

Net gain on trading

     *2, 3        96,947       109,266  

Gain on private equity investments

        461       1,503  

Interest and dividends

        214,542       203,050  

Gain (loss) on investments in equity securities

        (9,852     2,243  

Other

     *4        (11,133     14,276  
     

 

 

   

 

 

 

Total revenue

        457,400       497,450  

Interest expense

        196,803       162,472  
     

 

 

   

 

 

 

Net revenue

        260,597       334,978  
     

 

 

   

 

 

 

Non-interest expenses:

       

Compensation and benefits

        118,928       128,987  

Commissions and floor brokerage

        23,821       24,568  

Information processing and communications

        41,756       42,821  

Occupancy and related depreciation

        15,852       16,276  

Business development expenses

        9,121       8,509  

Other

     *9        127,283       44,130  
     

 

 

   

 

 

 

Total non-interest expenses

        336,761       265,291  
     

 

 

   

 

 

 

Income (loss) before income taxes

        (76,164     69,687  

Income tax expense

     *13        19,698       10,337  
     

 

 

   

 

 

 

Net income (loss)

      ¥ (95,862   ¥ 59,350  

Less: Net income (loss) attributable to noncontrolling interests

        (586     2,284  
     

 

 

   

 

 

 

Net income (loss) attributable to NHI shareholders

      ¥ (95,276   ¥ 57,066  
     

 

 

   

 

 

 
     Notes      Yen  
     Three months ended December 31  
     2018     2019  

Per share of common stock:

     *10       

Basic—

                      

Net income (loss) attributable to NHI shareholders per share

      ¥ (28.52   ¥ 18.07  

Diluted—

       

Net income (loss) attributable to NHI shareholders per share

      ¥ (28.52   ¥ 17.63  

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

 

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Table of Contents

(3) Consolidated Statements of Comprehensive Income (UNAUDITED)

 

            Millions of yen  
            Nine months ended December 31  
            2018     2019  

Net income (loss)

      ¥ (98,385   ¥ 256,600  

Other comprehensive income (loss):

                        

Cumulative translation adjustments:

       

Cumulative translation adjustments

               35,040       (16,837

Deferred income taxes

        (1,702     67  
     

 

 

   

 

 

 

Total

        33,338       (16,770

Defined benefit pension plans:

       

Pension liability adjustment

        2,039       4,167  

Deferred income taxes

        (995     625  
     

 

 

   

 

 

 

Total

        1,044       4,792  

Own credit adjustments:

       

Own credit adjustments:

        31,350       (19,640

Deferred income taxes

        (5,982     2,256  
     

 

 

   

 

 

 

Total

        25,368       (17,384
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        59,750       (29,362
     

 

 

   

 

 

 

Comprehensive income (loss)

      ¥ (38,635   ¥ 227,238  

Less: Comprehensive income attributable to noncontrolling interests

        3,645       5,119  
     

 

 

   

 

 

 

Comprehensive income (loss) attributable to NHI shareholders

      ¥ (42,280   ¥     222,119  
     

 

 

   

 

 

 
            Millions of yen  
            Three months ended December 31  
            2018     2019  

Net income (loss)

      ¥ (95,862   ¥ 59,350  

Other comprehensive income (loss):

                        

Cumulative translation adjustments:

       

Cumulative translation adjustments

               (29,257     22,483  

Deferred income taxes

        264       (178
     

 

 

   

 

 

 

Total

        (28,993     22,305  

Defined benefit pension plans:

       

Pension liability adjustment

        (25     1,162  

Deferred income taxes

        (188     (287
     

 

 

   

 

 

 

Total

        (213     875  

Own credit adjustments:

       

Own credit adjustments:

        26,630       (16,484

Deferred income taxes

        (4,602     2,775  
     

 

 

   

 

 

 

Total

        22,028       (13,709
     

 

 

   

 

 

 

Total other comprehensive income (loss)

        (7,178     9,471  
     

 

 

   

 

 

 

Comprehensive income (loss)

      ¥ (103,040   ¥ 68,821  

Less: Comprehensive income (loss) attributable to noncontrolling interests

        (1,041     2,716  
     

 

 

   

 

 

 

Comprehensive income (loss) attributable to NHI shareholders

      ¥      (101,999   ¥        66,105  
     

 

 

   

 

 

 

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

 

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Table of Contents

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

 

                                                  
          Millions of yen  
          Nine months ended December 31  
          2018     2019  

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

        675,280       687,761  

Stock-based compensation awards

        8,245       (4,457
     

 

 

   

 

 

 

Balance at end of period

        683,525       683,304  
     

 

 

   

 

 

 

Retained earnings

       

Balance at beginning of year

        1,696,890       1,486,825  

Cumulative effect of change in accounting principle(1)

        1,564       5,592  

Net income (loss) attributable to NHI shareholders

        (101,286     251,473  

Cash dividends(2)

        (10,147     (48,477

Gain (loss) on sales of treasury stock

        (1,020     (231

Cancellation of treasury stock

        (89,916     —    
     

 

 

   

 

 

 

Balance at end of period

            1,496,085       1,695,182  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        (15,596     17,833  

Net change during the period

        32,594       (16,762
     

 

 

   

 

 

 

Balance at end of period

        16,998       1,071  
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (47,837     (71,107

Pension liability adjustment

        1,044       4,792  
     

 

 

   

 

 

 

Balance at end of period

        (46,793     (66,315
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        4,077       24,224  

Own credit adjustments

        25,368       (17,384
     

 

 

   

 

 

 

Balance at end of period

        29,445       6,840  
     

 

 

   

 

 

 

Balance at end of period

        (350     (58,404
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (157,987     (108,968

Repurchases of common stock

        (51,711     (117,720

Sales of common stock

        0       0  

Common stock issued to employees

        8,972       13,280  

Cancellation of common stock

        89,916       —    
     

 

 

   

 

 

 

Balance at end of period

        (110,810     (213,408
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,662,943       2,701,167  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        50,504       49,732  

Cash dividends

        (2,457     (1,483

Net income attributable to noncontrolling interests

        2,901       5,127  

Accumulated other comprehensive income (loss) attributable to noncontrolling interests

        744       (8

Purchase / sale of subsidiary shares, net

        415       16,090  

Other net change in noncontrolling interests

        (9,039     18,998  
     

 

 

   

 

 

 

Balance at end of period

        43,068       88,456  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥    2,706,011     ¥     2,789,623  
     

 

 

   

 

 

 

 

(1)

   Represents the adjustments to initially apply Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers” for the nine months ended December 31, 2018 and ASU 2016-02,Leases” for the nine months ended December 31, 2019.

(2)

   Dividends per share               Nine months ended December 31, 2018 ¥ 3.00            Nine months ended December 31, 2019 ¥ 15.00

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

 

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Table of Contents
            Millions of yen  
            Three months ended December 31  
            2018     2019  

Common stock

                        

Balance at beginning of year

      ¥ 594,493     ¥ 594,493  
     

 

 

   

 

 

 

Balance at end of period

        594,493       594,493  
     

 

 

   

 

 

 

Additional paid-in capital

       

Balance at beginning of year

        681,058       682,851  

Gain (loss) on sales of treasury stock

        —         (12

Stock-based compensation awards

        2,467       465  
     

 

 

   

 

 

 

Balance at end of period

        683,525       683,304  
     

 

 

   

 

 

 

Retained earnings

       

Balance at beginning of year

        1,681,445       1,638,347  

Net income (loss) attributable to NHI shareholders

        (95,276     57,066  

Gain (loss) on sales of treasury stock

        (168     (231

Cancellation of treasury stock

        (89,916     —    
     

 

 

   

 

 

 

Balance at end of period

        1,496,085       1,695,182  
     

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

       

Cumulative translation adjustments

       

Balance at beginning of year

        45,536       (20,802

Net change during the period

        (28,538     21,873  
     

 

 

   

 

 

 

Balance at end of period

        16,998       1,071  
     

 

 

   

 

 

 

Defined benefit pension plans

       

Balance at beginning of year

        (46,580     (67,190

Pension liability adjustment

        (213     875  
     

 

 

   

 

 

 

Balance at end of period

        (46,793     (66,315
     

 

 

   

 

 

 

Own credit adjustments

       

Balance at beginning of year

        7,417       20,549  

Own credit adjustments

        22,028       (13,709
     

 

 

   

 

 

 

Balance at end of period

        29,445       6,840  
     

 

 

   

 

 

 

Balance at end of period

        (350     (58,404
     

 

 

   

 

 

 

Common stock held in treasury

       

Balance at beginning of year

        (162,592     (140,370

Repurchases of common stock

        (41,778     (76,392

Sales of common stock

        0       0  

Common stock issued to employees

        3,644       3,354  

Cancellation of common stock

        89,916       —    
     

 

 

   

 

 

 

Balance at end of period

        (110,810     (213,408
     

 

 

   

 

 

 

Total NHI shareholders’ equity

       
     

 

 

   

 

 

 

Balance at end of period

        2,662,943       2,701,167  
     

 

 

   

 

 

 

Noncontrolling interests

       

Balance at beginning of year

        45,233       80,297  

Cash dividends

        (222     (209

Net income (loss) attributable to noncontrolling interests

        (586     2,284  

Accumulated other comprehensive income (loss) attributable to noncontrolling interests

        (455     432  

Purchase / sale of subsidiary shares, net

        —         1  

Other net change in noncontrolling interests

        (902     5,651  
     

 

 

   

 

 

 

Balance at end of period

        43,068       88,456  
     

 

 

   

 

 

 

Total equity

       

Balance at end of period

      ¥     2,706,011     ¥     2,789,623  
     

 

 

   

 

 

 

 

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  
            2018     2019  

Cash flows from operating activities:

                        

Net income (loss)

      ¥ (98,385   ¥ 256,600  

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

       

Depreciation and amortization

        43,356       47,029  

Impairment of goodwill

        81,372       —    

(Gain) loss on investments in equity securities

        8,864       (1,488

(Gain) loss on investments in subsidiaries and affiliates(1)

        6,887       (73,271

Deferred income taxes

        7,265       (16,684

Changes in operating assets and liabilities:

       

Time deposits

        (33,083     16,944  

Deposits with stock exchanges and other segregated cash

        4,006       (34,402

Trading assets and private equity investments

        (2,254,436     (2,418,152

Trading liabilities

        (667,780     465,826  

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

        337,656       1,947,599  

Securities borrowed, net of securities loaned

        2,091,175       210,646  

Other secured borrowings

        15,315       (100,735

Loans and receivables, net of allowance for doubtful accounts

        106,354       (69,371

Payables

        12,950       120,614  

Bonus accrual

        (60,892     4,001  

Accrued income taxes, net

        3,645       (21,401

Other, net(1)

        (45,029     85,522  
     

 

 

   

 

 

 

Net cash provided by (used in) operating activities

        (440,760     419,277  
     

 

 

   

 

 

 

Cash flows from investing activities:

       

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

        (193,569     (182,729

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

        182,661       175,170  

Proceeds from sales of investments in equity securities

        321       12,253  

Decrease (increase) in loans receivable at banks, net

        (21,167     61,768  

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

        29,983       (6,855

Decrease (increase) in affiliated companies, net(1)

        (1,101     159,792  

Other, net(1)

        —         (1,594
     

 

 

   

 

 

 

Net cash provided by (used in) investing activities

        (2,872     217,804  
     

 

 

   

 

 

 

Cash flows from financing activities:

       

Increase in long-term borrowings

        1,593,679       1,525,873  

Decrease in long-term borrowings

        (1,200,563     (1,606,841

Increase in short-term borrowings, net

        52,728       229,670  

Increase (decrease) in deposits received at banks, net

        136,246       (148,385

Proceeds from sales of common stock held in treasury

        303       281  

Payments for repurchases of common stock held in treasury

        (51,711     (117,720

Payments for cash dividends

        (47,475     (58,416

Contribution from noncontrolling interests

        —         15,618  
     

 

 

   

 

 

 

Net cash provided by (used in) financing activities

        483,207       (159,920
     

 

 

   

 

 

 

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

        44,703       (11,735
     

 

 

   

 

 

 

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

        84,278       465,426  

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

        2,354,868       2,687,132  
     

 

 

   

 

 

 

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

      ¥     2,439,146     ¥     3,152,558  
     

 

 

   

 

 

 

Supplemental information:

       

Cash paid during the period for—

       

Interest

      ¥ 508,850     ¥ 536,782  

Income tax payments, net

      ¥ 25,422     ¥ 54,465  

 

(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  
     2018      2019  

Cash and cash equivalents reported in Cash and cash equivalents

   ¥ 2,438,649      ¥ 3,152,017  

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

   ¥ 497      ¥ 541  
  

 

 

    

 

 

 

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

   ¥ 2,439,146      ¥ 3,152,558  
  

 

 

    

 

 

 

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, 2019. 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 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 ¥9,008 million (lower) and ¥3,662 million (lower) for the nine months ended December 31, 2018 and 2019, respectively and ¥9,944 million (lower) and ¥2,193 million (lower) for the three months ended December 31, 2018 and 2019, 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 ¥875 million (lower) and ¥233 million (higher) for the nine months ended December 31, 2018 and 2019, respectively, and ¥1,233 million (higher) and ¥2,166 million (lower) for the three months ended December 31, 2018 and 2019, respectively for non-trading debt securities. Income (loss) before income taxes prepared under U.S. GAAP was ¥3,085 million (lower) and ¥567 million (lower) for the nine months ended December 31, 2018 and 2019, respectively, and ¥2,498 million (lower) and ¥273 million (lower) for the three months ended December 31, 2018 and 2019, 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 ¥35,486 million (lower) and ¥2,620 million (higher) for the nine months ended December 31, 2018 and 2019, respectively, and ¥38,951 million (lower) and ¥607 million (higher) for the three months ended December 31, 2018 and 2019, 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 ¥30,881 million (lower) and ¥1,889 million (higher) for the nine months ended December 31, 2018 and 2019, respectively and ¥29,780 million (lower) and ¥6,663 million (lower) for the three months ended December 31, 2018 and 2019, 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 ¥2,224 million (higher) and ¥562 million (lower) for the nine months ended December 31, 2018 and 2019, respectively and ¥872 million (higher) and ¥143 million (higher) for the three months ended December 31, 2018 and 2019, respectively.

 

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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, 2019 and December 31, 2019.

The following table presents a summary of new accounting pronouncements relevant to Nomura which have been adopted during the three months ended June 30, 2019.

 

Pronouncement

  

Summary of new guidance

  

Expected adoption
date and method
of adoption

  

Effect on these

consolidated

statements

ASU 2016-02,
Leases(1)
  

• Replaces ASC 840 “Leases”, the current guidance on lease accounting, and revised the definition of a lease.

 

• Requires all lessees to recognize a right of use asset and corresponding lease liability on balance sheet.

 

• Lessor accounting is largely unchanged from current guidance.

 

• Simplifies the accounting for sale leaseback and “build-to-suit” leases.

 

• Requires extensive new qualitative and quantitative footnote disclosures on lease arrangements.

   Modified retrospective adoption from April 1, 2019.(2)   

¥169,277 million increase in Other Asset—Office buildings, land, equipment, and facilities, and ¥163,685 million increase in Other liabilities as a result of recognizing operating leases on the consolidated balance sheet as of April 1, 2019.

¥5,592 million increase in Retained earnings as of April 1, 2019 mainly due to changes in certain lease classifications.

 

(1)

As subsequently amended by ASU 2018-01Land Easement Practical Expedient for Transition to Topic 842”, ASU 2018-10Codification Improvements to Topic 842, Leases”, ASU 2018-11Leases (Topic 842): Targeted Improvements”, ASU 2018-20Leases (Topic 842): Narrow-Scope Improvements for Lessors”, and ASU 2019-01Leases (Topic 842): Codification Improvements.

(2)

Nomura used certain practical expedients permitted by ASC 842 including adopting the new requirements through a cumulative-effect adjustment to retained earnings on adoption date.

 

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Table of Contents

Future accounting developments—

The following table presents a summary of new authoritative accounting pronouncements relevant to Nomura which will be adopted on or after April 1, 2020 and which may have a material impact on these financial statements:

 

Pronouncement

  

Summary of new guidance

  

Expected 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.

 

• 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.   

•   An increase in allowances for expected credit losses will impact group shareholders equity on adoption date and impact earnings in subsequent reporting periods.

 

•   Currently finalizing implementation but do not expect a material impact on the consolidated financial statements.

 

•   Impact is primarily in respect of loans and loan commitments originated by the Wholesale Division.

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.

  

Effective from April 1, 2021.(2)

 

• Modified retrospective adoption for the amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries.

 

• Full or modified retrospective adoption for the amendments related to franchise taxes that are partially based on income.

 

• Prospective adoption for all other amendments.

   Currently evaluating the potential impact.

 

(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 2019-10Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates” and ASU 2019-11Codification Improvements to Topic 326, Financial Instruments—Credit Losses

(2)

Unless Nomura early adopts which is under evaluation.

 

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2. Fair value measurements:

The fair value of financial instruments

A significant amount of Nomura’s financial instruments is 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 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. 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 Global Model Validation Group (“MVG”) 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.

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, 2019 and December 31, 2019 within the fair value hierarchy.

 

     Billions of yen  
     March 31, 2019  
     Level 1      Level 2      Level 3      Counterparty
and Cash
Collateral
Netting(1)
    Balance as of 
March 31,
2019
 

Assets:

             

Trading assets and private equity investments(2)

             

Equities(3)

   ¥ 1,392      ¥ 1,065      ¥ 13      ¥ —       ¥ 2,470  

Private equity investments(3)

     —          —          26        —         26  

Japanese government securities

     1,987        —          —          —         1,987  

Japanese agency and municipal securities

     —          214        1        —         215  

Foreign government, agency and municipal securities

     2,650        1,544        5        —         4,199  

Bank and corporate debt securities and loans for trading purposes

     —          1,128        160        —         1,288  

Commercial mortgage-backed securities (“CMBS”)

     —          1        2        —         3  

Residential mortgage-backed securities (“RMBS”)

     —          2,761        3        —         2,764  

Real estate-backed securities

     —          —          69        —         69  

Collateralized debt obligations (“CDOs”) and other(4)

     —          55        19        —         74  

Investment trust funds and other

     349        53        1        —         403  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading assets and private equity investments

     6,378        6,821        299        —         13,498  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative assets(5)

             

Equity contracts

     1        806        44        —         851  

Interest rate contracts

     12        8,610        10        —         8,632  

Credit contracts

     2        500        31        —         533  

Foreign exchange contracts

     0        4,870        42        —         4,912  

Commodity contracts

     1        0        —          —         1  

Netting

     —          —          —          (14,077     (14,077
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative assets

     16        14,786        127        (14,077     852  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 6,394      ¥ 21,607      ¥ 426      ¥ (14,077   ¥ 14,350  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans and receivables(6)

     —          544        129        —         673  

Collateralized agreements(7)

     —          615        33        —         648  

Other assets

             

Non-trading debt securities

     138        323        —          —         461  

Other(2)(3)

     416        10        166        —         592  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 6,948      ¥ 23,099      ¥ 754      ¥ (14,077   ¥ 16,724  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Trading liabilities

             

Equities

   ¥ 1,622      ¥ 198      ¥ 0      ¥ —       ¥ 1,820  

Japanese government securities

     1,264        —          —          —         1,264  

Japanese agency and municipal securities

     —          3        —          —         3  

Foreign government, agency and municipal securities

     2,906        927        0        —         3,833  

Bank and corporate debt securities

     —          319        0        —         319  

Residential mortgage-backed securities (“RMBS”)

     —          0        —          —         0  

Collateralized debt obligations (“CDOs”) and other(4)

     —          3        —          —         3  

Investment trust funds and other

     121        42        —          —         163  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading liabilities

     5,913        1,492        0        —         7,405  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities(5)

             

Equity contracts

     1        867        52        —         920  

Interest rate contracts

     6        8,228        64        —         8,298  

Credit contracts

     3        422        39        —         464  

Foreign exchange contracts

     —          4,820        22        —         4,842  

Commodity contracts

     1        0        0        —         1  

Netting

     —          —          —          (13,710     (13,710
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative liabilities

     11        14,337        177        (13,710     815  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 5,924      ¥ 15,829      ¥ 177      ¥ (13,710   ¥ 8,220  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Short-term borrowings(8)

     —          332        31        —         363  

Payables and deposits(9)

     —          0        0        —         0  

Collateralized financing(7)

     —          291        —          —         291  

Long-term borrowings(8)(10)(11)

     11        3,024        535        —         3,570  

Other liabilities(12)

     276        22        0        —         298  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 6,211      ¥ 19,498      ¥ 743      ¥ (13,710   ¥ 12,742  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Billions of yen  
     December 31, 2019  
     Level 1      Level 2      Level 3      Counterparty
and Cash
Collateral
Netting(1)
    Balance as of
December 31,
2019
 

Assets:

             

Trading assets and private equity investments(2)

             

Equities(3)

   ¥ 1,760      ¥ 992      ¥ 15      ¥ —       ¥ 2,767  

Private equity investments(3)

     —          —          33        —         33  

Japanese government securities

     1,782        —          —          —         1,782  

Japanese agency and municipal securities

     —          105        1        —         106  

Foreign government, agency and municipal securities

     3,540        1,673        7        —         5,220  

Bank and corporate debt securities and loans for trading purposes

     —          1,189        185        —         1,374  

Commercial mortgage-backed securities (“CMBS”)

     —          1        3        —         4  

Residential mortgage-backed securities (“RMBS”)

     —          3,904        25        —         3,929  

Real estate-backed securities

     —          —          68        —         68  

Collateralized debt obligations (“CDOs”) and other(4)

     —          49        16        —         65  

Investment trust funds and other

     358        40        0        —         398  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading assets and private equity investments

     7,440        7,953        353        —         15,746  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative assets(5)

             

Equity contracts

     1        721        40        —         762  

Interest rate contracts

     16        8,997        18        —         9,031  

Credit contracts

     1        427        34        —         462  

Foreign exchange contracts

     0        3,791        38        —         3,829  

Commodity contracts

     1        1        —          —         2  

Netting

     —          —          —          (13,145     (13,145
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative assets

     19        13,937        130        (13,145     941  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 7,459      ¥ 21,890      ¥ 483      ¥ (13,145   ¥ 16,687  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans and receivables(6)

     —          596        223        —         819  

Collateralized agreements(7)

     —          528        15        —         543  

Other assets

             

Non-trading debt securities

     122        344        —          —         466  

Other(2)(3)

     455        121        168        —         744  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 8,036      ¥ 23,479      ¥ 889      ¥ (13,145   ¥ 19,259  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities:

             

Trading liabilities

             

Equities

   ¥ 1,664      ¥ 187      ¥ 0      ¥ —       ¥ 1,851  

Japanese government securities

     963        —          —          —         963  

Japanese agency and municipal securities

     —          1        —          —         1  

Foreign government, agency and municipal securities

     3,333        1,077        0        —         4,410  

Bank and corporate debt securities

     —          268        0        —         268  

Residential mortgage-backed securities (“RMBS”)

     —          1        —          —         1  

Collateralized debt obligations (“CDOs”) and other(4)

     —          1        —          —         1  

Investment trust funds and other

     267        24        0        —         291  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total trading liabilities

     6,227        1,559        0        —         7,786  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Derivative liabilities(5)

             

Equity contracts

     1        925        31        —         957  

Interest rate contracts

     9        8,410        62        —         8,481  

Credit contracts

     1        433        58        —         492  

Foreign exchange contracts

     0        3,719        25        —         3,744  

Commodity contracts

     3        1        0        —         4  

Netting

     —          —          —          (12,838     (12,838
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total derivative liabilities

     14        13,488        176        (12,838     840  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal

   ¥ 6,241      ¥ 15,047      ¥ 176      ¥ (12,838   ¥ 8,626  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Short-term borrowings(8)

     —          378        41        —         419  

Payables and deposits(9)

     —          9        2        —         11  

Collateralized financing(7)

     —          249        —          —         249  

Long-term borrowings(8)(10)(11)

     3        3,363        546        —         3,912  

Other liabilities(12)

     324        132        2        —         458  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   ¥ 6,568      ¥ 19,178      ¥ 767      ¥ (12,838   ¥ 13,675  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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, 2019 and December 31, 2019, the fair values of these investments which are included in Trading assets and private equity investments were ¥36 billion and ¥25 billion, respectively. As of March 31, 2019 and December 31, 2019, the fair values of these investments which are included in Other assets—Others were ¥2 billion and ¥4 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)

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

(5)

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.

(6)

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

(7)

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

(8)

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

(9)

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

(10)

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

(11)

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.

(12)

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, 2019 and December 31, 2019, respectively. The fair value of unlisted equity securities is determined using the same methodology as private equity 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 investments—The determination of fair value of unlisted private equity investments requires significant management judgment because the investments, by their nature, have little or no price transparency. Private equity 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 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 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 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.

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.

 

43


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, 2019 and December 31, 2019. 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.

 

    March 31, 2019

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 investments

             

Equities

  ¥       13     DCF   Liquidity discounts   75.0%   75.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Private equity investments

    26    

Market

multiples

  EV/EBITDA ratios   7.7 x   7.7 x   Higher fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government, agency and municipal securities

    5     DCF   Credit spreads Recovery rates   0.0 – 9.1% 4.0 – 36.0%  

0.6%

31.6%

  Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt securities and loans for trading purposes

    160     DCF   Credit spreads Recovery rates  

0.0 – 15.0%

0.0 – 99.1%

 

4.1%

72.2%

  Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage backed securities (“RMBS”)

    3     DCF  

Yields

Prepayment rates

Loss severities

 

0.0 – 78.4%

6.5 – 15.0%

9.1 – 100.0%

  13.2% 10.5% 81.1%   Lower fair value Lower fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed securities

    69     DCF  

Yields

Loss severities

 

5.5 – 19.7%

0.0 – 55.2%

 

12.5%

6.6%

  Lower fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDOs”) and other

    19     DCF  

Yields

Prepayment rates Default probabilities Loss severities

 

2.7 – 19.0%

20.0%

1.0 – 2.0%

31.5 – 100.0%

 

13.1%

20.0%

2.0%

83.7%

  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
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

44


Table of Contents
    March 31, 2019

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

  ¥       (8)    

Option

models

  Dividend yield   0.0 – 8.0%   —     Higher fair value   No predictable interrelationship
    Volatilities   6.7 – 74.2%   —     Higher fair value
      Correlations   (0.80) – 0.98   —     Higher fair value  
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

    (54)    

DCF/

Option models

 

Interest rates Volatilities

Volatilities

Correlations

  0.0 – 2.4% 10.6 – 15.2% 24.2 – 66.8 bp (0.76) – 1.00  

—  

—  

—  

—  

  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

    (8)    

DCF/

Option models

 

Credit spreads

Recovery rates

Volatilities

Correlations

  0.0 – 21.4% 0.0 – 100.6% 16.2 – 83.0% 0.27 – 0.75  

—  

—  

—  

—  

  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

    20     Option models  

Interest rates

Volatilities

Volatilities

Correlations

  (0.4) – 2.4% 1.7 – 35.5% 209.0 – 245.0 bp (0.25) – 0.80  

—  

—  

—  

—  

  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Loans and receivables

    129     DCF   Credit spreads   0.0 – 12.3%   3.6%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized agreements

    33     DCF   Repo rate   3.5 – 8.4%   7.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Other assets

             

Other(6)

    166     DCF  

WACC

Growth rates

Liquidity discounts

 

10.2%

2.5%

10.0%

 

10.2%

2.5%

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

  4.7 – 13.8 x 8.9 – 32.4 x 0.3 – 2.7 x 10.0 – 50.0%  

8.2 x

15.5 x

0.8 x

30.6%

  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

    31    

DCF/

Option models

 

Volatilities

Correlations

  6.7 – 54.5% (0.75) – 0.91  

—  

—  

  Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

    535    

DCF/

Option models

 

Volatilities

Volatilities

Correlations

  6.7 – 54.5% 32.5 – 60.9 bp (0.75) – 0.98  

—  

—  

—  

  Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

45


Table of Contents
    December 31, 2019

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 investments

             

Equities

  ¥       15     DCF   Liquidity discounts   75.0%   75.0%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Private equity investments

    33     DCF  

WACC

Growth rates

Liquidity discounts

 

6.8 – 13.4%

0.8 – 1.0%

5.0 – 10.0%

 

9.2%

0.8%

6.8%

 

Lower fair value Higher fair value

Lower fair value

  No predictable interrelationship
   

 

 

 

 

 

 

 

 

 

 

 

    Market multiples   EV/EBITDA ratios Liquidity discounts  

5.1 – 11.9 x

5.0%

 

10.6 x

5.0%

  Higher fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign government, agency and municipal securities

    7     DCF   Credit spreads Recovery rates  

0.0 – 1.3%

1.0 – 21.0%

 

0.6%

9.1%

  Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Bank and corporate debt securities and loans for trading purposes

    185     DCF   Credit spreads Recovery rates   0.1 – 20.1% 0.0 –60.6%  

5.3%

35.3%

  Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage- backed securities (“CMBS”)

    3     DCF  

Yields

Loss severities

 

8.3 – 12.3%

13.5 – 45.0%

 

9.5%

22.0%

  Lower fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities (“RMBS”)

    25     DCF  

Yields

Prepayment rates

Loss severities

 

0.0 – 80.0% 6.7 –15.0%

0.8 – 100.0%

 

9.9%

9.1%

58.1%

  Lower fair value Lower fair value Lower fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Real estate-backed securities

    68     DCF   Loss severities   0.0 – 18.9%   6.1%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized debt obligations (“CDOs”) and other

          16     DCF  

Yields

Prepayment rates

Default probabilities

Loss severities

 

11.8 – 24.0% 20.0%

2.0%

21.0 – 99.3%

 

16.2%

20.0%

2.0%

70.4%

  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
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

46


Table of Contents
    December 31, 2019

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

  ¥         9     Option models  

Dividend yield Volatilities

Correlations

 

0.0 – 10.4%

11.2 – 85.6%

(0.85) – 0.98

 

—  

—  

—  

  Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

    (44)    

DCF/

Option models

 

Interest rates Volatilities

Volatilities

Correlations

 

(0.2) – 2.0%

9.6 – 13.6%

24.8 – 96.7 bp

(1.00) – 0.98

 

—  

—  

—  

—  

  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Credit contracts

    (24)    

DCF/

Option models

 

Credit spreads Recovery rates Volatilities

Correlations

 

0.0 – 13.8%

0.0 – 105.4%

38.0 – 50.0%

0.29 – 0.74

 

—  

—  

—  

—  

  Higher fair value Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

    13     Option models  

Interest rates Volatilities

Volatilities

Correlations

 

0.1 – 1.8%

1.0 – 24.6% 39.0 – 202.0 bp

(0.25) – 0.80

 

—  

—  

—  

—  

 

Higher fair value

Higher fair value Higher fair value Higher fair value

  No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Loans and receivables

    223     DCF   Credit spreads Recovery rates  

0.0 – 15.0%

98.0 – 100.0%

 

3.7%

98.8%

  Lower fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Collateralized agreements

    15     DCF   Repo rate   3.8 – 6.1%   4.8%   Lower fair value   Not applicable
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Other assets

             

Other(6)

    168     DCF  

WACC

Growth rates

Liquidity discounts

 

9.7%

2.0%

10.0%

 

9.7%

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

 

4.8 – 15.0 x

8.1 – 36.1 x

0.3 – 3.3 x

10.0 – 40.0%

 

7.8 x

14.6 x

0.8 x

30.1%

  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

    41     DCF/ Option models   Volatilities Correlations   11.2 – 63.5% (0.72) – 0.95  

—  

—  

  Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Long-term borrowings

    546    

DCF/

Option models

 

Volatilities

Volatilities

Correlations

 

9.6 – 63.5%

29.2 – 73.8 bp

(1.00) – 0.98

 

—  

—  

—  

  Higher fair value Higher fair value Higher fair value   No predictable interrelationship
 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Range information is provided in percentages, coefficients and multiples and represents the highest and lowest level significant unobservable valuation input used to value that type of financial instrument. A wide dispersion in the range does not necessarily reflect increased uncertainty or subjectivity in the valuation input and is typically just a consequence of the different characteristics of the financial instruments themselves.

(2)

Weighted average information for non-derivative instruments is calculated by weighting each valuation input by the fair value of the financial instrument.

(3)

The above table only considers the impact of an increase in each significant unobservable valuation input on the fair value measurement of the financial instrument. However, a decrease in the significant unobservable valuation input would have the opposite effect on the fair value measurement of the financial instrument. For example, if an increase in a significant unobservable valuation input would result in a lower fair value measurement, a decrease in the significant unobservable valuation input would result in a higher fair value measurement.

(4)

The impact of an increase in the significant unobservable input on the fair value measurement for a derivative assumes Nomura is long risk to the input e.g., long volatility. Where Nomura is short such risk, the impact of an increase would have a converse effect on the fair value measurement of the derivative.

(5)

Consideration of the interrelationships between significant unobservable inputs is only relevant where more than one unobservable valuation input is used to determine the fair value measurement of the financial instrument.

(6)

Valuation technique(s) and unobservable valuation inputs in respect of equity securities reported within Other assets in the consolidated balance sheets.

 

47


Table of Contents

Qualitative discussion of the ranges of significant unobservable inputs

The following comments present qualitative discussion about the significant unobservable valuation inputs used by Nomura for financial instruments classified in Level 3.

Derivatives—Equity contracts—The significant unobservable inputs are dividend yield, volatilities and correlations. The range of dividend yields varies as some companies do not pay any dividends, for example due to a lack of profits or as a policy during a growth period, and hence have a zero dividend yield while others may pay high dividends for example to return money to investors. The range of volatilities is wide as the volatilities of shorter-dated equity derivatives or those based on single equity securities can be higher than those of longer-dated instruments or those based on indices. Correlations represent the relationships between one input and another (“pairs”) and can either be positive or negative amounts. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships throughout the range.

Derivatives—Interest rate contracts—The significant unobservable inputs are interest rates, volatilities and correlations. The range of interest rates is due to interest rates in different countries/currencies being at different levels with some countries having extremely low levels and others being at levels that while still relatively low are less so. The range of volatilities is wide as volatilities can be higher when interest rates are at extremely low levels, and also because volatilities of shorter-dated interest rate derivatives are typically higher than those of longer-dated instruments. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships through the range. All significant unobservable inputs are spread across the ranges.

Derivatives—Credit contracts—The significant unobservable inputs are credit spreads, recovery rates, volatilities and correlations. The range of credit spreads reflects the different risk of default present within the portfolio. At the low end of the range, underlying reference names have a very limited risk of default whereas at the high end of the range, underlying reference names have a much greater risk of default. The range of recovery rates varies primarily due to the seniority of the underlying exposure with senior exposures having a higher recovery than subordinated exposures. The range of volatilities is wide as the volatilities of shorter-dated credit contracts are typically higher than those of longer-dated instruments. The correlation range is positive since credit spread moves are generally in the same direction. Highly positive correlations are those for which the movement is very closely related and in the same direction, with correlation falling as the relationship becomes less strong.

Derivatives—Foreign exchange contracts—The significant unobservable inputs are interest rates, volatilities and correlations. The range of interest rates is due to interest rates in different countries/currencies being at different levels with some countries having extremely low levels and others being at levels that while still relatively low are less so. The range of volatilities is mainly due to the lower end of the range arising from currencies that trade in narrow ranges e.g. versus the U.S. Dollar while the higher end comes from currencies with a greater range of movement such as emerging market currencies. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships through the range.

Short-term borrowings and Long-term borrowings—The significant unobservable inputs are yields, prepayment rates, default probabilities, loss severities, volatilities and correlations. The range of volatilities is wide as the volatilities of shorter-dated instruments are typically higher than those in longer-dated instruments. The range of correlations moves from positive to negative because the movement of some pairs is very closely related and in the same direction causing highly positive correlations while others generally move in opposite directions causing highly negative correlations with pairs that have differing relationships through the range.

 

48


Table of Contents

Movements in Level 3 financial instruments

The following tables present gains and losses as well as increases and decreases of financial instruments measured at fair value on a recurring basis which Nomura classified in Level 3 for the nine and three months ended December 31, 2018 and 2019. Financial instruments classified in Level 3 are often hedged with instruments within Level 1 or Level 2 of the fair value hierarchy. The gains or losses presented below do not reflect the offsetting gains or losses for these hedging instruments. Level 3 financial instruments are also measured using both observable and unobservable valuation inputs. Fair value changes presented below, therefore, reflect realized and unrealized gains and losses resulting from movements in both observable and unobservable valuation inputs.

For the nine months ended December 31, 2018 and 2019, gains and losses related to Level 3 assets and liabilities did not have a material impact on Nomura’s liquidity and capital resources management.

 

    Billions of yen  
    Nine months ended December 31, 2018  
    Beginning
balance as of
nine months
ended
December 31,

2018
    Total  gains
(losses)
recognized
in net
revenue(1)
    Total gains
(losses)
recognized in
other
comprehensive
income
    Purchases /
issues(2)
    Sales /
redemptions(2)
    Settlements     Foreign
exchange
movements
    Transfers
into
Level 3(4)(5)
    Transfers
out of
Level 3(5)
    Balance as of
nine months
ended
December 31,
2018
 

Assets:

                   

Trading assets and private equity investments

                   

Equities

  ¥ 21     ¥ (4   ¥ —       ¥ 5     ¥ (9   ¥ —       ¥ 0     ¥ 5     ¥ (2   ¥ 16  

Private equity
investments

    3       1       —         7       (2     —         0       —         —         9  

Japanese agency and municipal securities

    1       0       —         1       (1     —         —         —         —         1  

Foreign government, agency and municipal securities

    6       0       —         13       (13     —         0       2       (1     7  

Bank and corporate debt securities and loans
for trading purposes

    139       5       —         78       (61     —         4       40       (42     163  

Commercial mortgage-backed securities (“CMBS”)

    2       0       —         1       (2     —         0       0       —         1  

Residential mortgage-backed securities (“RMBS”)

    0       0       —         8       0       —         0       —         (6     2