Risk Management

Daiwa Securities Group recognize the importance of identifying and evaluating the various risks associated with our business operations accurately, and controlling them effectively, while we pursues profitability and growth. We aim to maintain a sound financial base and profit structure by properly balancing risks and returns and appropriately control not only short-term risks but also risks that are likely to appear in the medium- to long-term, such as climate change risk. By doing so, we seek to achieve sustainable improvement in corporate value.

Risk management system

Based on its RAF, the Board of Directors of Daiwa Securities Group Inc. has approved the Rules for Risk Management. The rules define basic policies related to risk management, the types of risks that need to be managed, and the responsible executives and departments for each major risk. In order to establish an effective risk governance system, we have created a Guideline for Three Lines of Defense and maintain a comprehensive structure for risk management.

Basic policies as defined by the Rules for Risk Management Daiwa Securities Group

  1. 1. Management's proactive involvement of management in risk management
  2. 2. The structure of a risk management system that responds to features of the risks held by the Group
  3. 3. Understand overall risk based on integrated risk management, secure strong capital and the soundness of liquidity
  4. 4. Clarify the risk management process

Each of the Group companies conducts risk management that responds to the risk profile and size of each business in accordance with the abovementioned basic policies. The Risk Management Department and responsible departments for each risk within Daiwa Securities Group Inc. monitor Group companies, and report the risk exposures and issues concerning the risk management system to the Group Risk Management Committee. This is a sub-committee of the Executive Management Committee of Daiwa Securities Group Inc., and it undertakes discussions and makes decisions about reported issues. In addition, major Group companies regularly hold risk management meetings in order to strengthen their risk management systems.

Types of Risks to Be Managed / Managing Major Risks

Daiwa Securities Group faces various risks in the course of its business activities. The Group therefore believes that it is important to identify these based on business characteristics and risk profiles, and appropriately evaluate and manage those risks in order to maintain a sound financial base and earnings structure.

Risks that are particularly important for the Group are those that involve our key securities business. Because the Group utilizes its own accounts to temporarily hold product positions for sales purposes and to provide products to customers, the Group is subject to market risk due to market fluctuations, foreign currency and other liquidity risk, credit risk related to counterparties and issuers, and risk for which hedges do not function, as well as operational risk that naturally occurs through the execution of business. The Group utilizes stress tests*1 and top risk management*2 to manage risk on an integrated basis, including measuring the impact on capital and liquidity within the Group from a forward-looking perspective.

  1. *1 Stress tests are used for the integrated evaluation of impacts on capital, liquidity, and business systems based on probable stress scenarios that may have a major impact on the Group
  2. *2 Top risk management is used to select and manage those risk events that stand to have a significant impact on the Group, in the event that such risks should emerge, as top risks

(1) Market risk management

Market risk refers to the risk of incurring losses due to market fluctuations, which affect the value of stock prices, interest rates, foreign exchange rates, and commodity prices. In terms of the Group’s trading business, by providing market liquidity the Group acquires compensation while at the same time taking on market risk through the holding of a certain amount of financial assets. The Group implements suitable hedges to curtail fluctuations in profits and losses. However, as hedges may fail to function effectively in times of stress, the Group sets limits on Value at Risk (VaR)*1 and loss estimates under various types of stress test*2 to ensure that they are within the scope of equity capital after taking into consideration financial conditions and such factors as the business plans and budgets of subject departments. The Group also sets limits on such facets as position and sensitivity.

The departments in charge of the Group’s trading services calculate positions and sensitivity for the purpose of assessing their own market risk, and monitor such. Meanwhile, risk management departments also monitor the status of market risk, confirm whether risk falls within the established limits, and report on such to management on a daily basis.

  1. *1Value at Risk (VaR) represents the maximum possible loss of a given trading portfolio with a given probability over a given time horizon.
  2. *2Stress tests are used to calculate the Group’s maximum losses based on scenarios of the most significant market fluctuations of the past and due to scenarios based on hypothetical risk events.

(2) Credit risk management

Credit risk refers to the risk of losses caused in cases where a counterparty of a trade or the issuer of a financial product held by the Group suffers a default, or credibility deteriorates. The credit risk of the Group’s trading activities involves counterparty risk and issuer risk.

When the Group provides products and engages in asset management and investments, there exists a risk that its exposure to various products and transactions could be concentrated on specific counterparty groups. If the credit situation at such counterparty groups should worsen, large-scale losses could be generated. For this reason, the Group sets limits on its total exposure to individual counterparty groups and monitors this exposure regularly.

Supplier risk

The Group sets an upper limit on the amount of credit that can be accepted for a trading partner group and monitors it regularly.

Issuer risk

We also monitor the amount of credit risk of the issuers of financial instruments held as a result of our market making activities.

Daiwa Securities Group (Consolidated) Value at Risk

Range and Assumption of VaR

  • Scope: Trading accounts
  • Confidence level: 99% (one-side test), Holding period: 1 day
  • Adjusted for price correlation between products

(Billions of yen)

  18/6 18/9 18/12 19/3 19/6 19/9 19/12 20/3
VaR (Month-end) 1.34 1.39 1.76 1.06 1.33 1.42 0.94 1.22
Quarter
High 1.80 1.67 1.87 2.29 1.68 1.55 1.61 1.77
Low 1.16 1.15 0.95 0.86 0.74 1.02 0.94 0.87
Average 1.40 1.36 1.34 1.45 1.18 1.27 1.28 1.18
By risk factor (Month-end)
Equity 0.65 0.51 0.40 0.29 0.38 0.39 0.34 0.19
Interest 1.21 1.23 1.68 1.06 1.16 1.35 1.21 1.12
Currency 0.16 0.17 0.24 0.18 0.21 0.24 0.20 0.20
Commodities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Note: Management of market risk and credit risk unrelated to the trading business

Besides the trading business, the Group also owns operational investment securities related to the investment business, loans and securities related to the banking business, and investment securities that are held for the purpose of maintaining business relationships. Those assets are also exposed to market and credit risks, and risk management is conducted according to the risks that are unique to each line of business.

(3) Liquidity risk management

Liquidity risk refers to the risk of suffering losses due to cash management difficulties or having to finance at markedly higher costs than usual as a result of a change in market conditions or a deterioration of Group companies' finance.

Basic Policy on Fund Procurement

The Group conducts securities-related operations using a variety of financial assets and liabilities, and makes investments and loans that contribute to providing new value as an integrated securities group with a hybrid business model. In order to prevent market fluctuations from affecting the continuation of our business activities, the Group is constantly striving to secure the stability of fund procurement. Additionally, with the anticipation that financial crises may make it difficult to procure new funds and reacquire existing funds, the Group diversifies repayment periods and fund sources.

Liquidity management system using Liquidity Management Indicators

Daiwa Securities Group Inc. has established a liquidity management system that utilizes the regulatory consolidated liquidity coverage ratio as well as its own liquidity management indicators.

The Group performs daily checks to ascertain that the liquidity portfolios in place are sufficient to cover the repayment of unsecured short-term funds due within a certain time period as well as the estimated outflow of funds under stress in an appropriate time frame—here a number of stress scenarios are adopted. These efforts are made to ensure the Group can continue its business operations even when it becomes impossible to procure funds without collateral for a whole year.

Contingency Funding Plan

The Group recognizes the emergence of liquidity risks can have a direct impact that leads to the business failure of a financial institution. Accordingly, Daiwa Securities Group has put in place a contingency funding plan that predefines the required response methods, roles and authorities, and procedures, among others, in order to ensure that the Group responds appropriately as a unified entity at the time of a liquidity crisis. This plan states the basic policy concerning the reporting lines depending upon the urgency of stress internally originated, including a credit crunch, and externally originated including an abrupt change in the market environment, and the method of raising capital. The contingency plan enables the Group to prepare a system for securing liquidity through a swift response.

(4) Operational risk management

Operational risk is the risk of losses that occur when internal processes, people, and systems do not perform adequately or do not function; it can also arise from external events.

Definitions of Principal Operational Risks

Type Definition
Operations Risk The risk of suffering losses due to the neglect of proper operations by employees and executives or due to accidents or impropriety
System Risk The risk of suffering losses due to computer systems going down, malfunctioning, or experiencing system inadequacies, and the risk of suffering losses due to the inappropriate use of computers
Information Security Risk The risk that a threat to information assets could materialize, preventing information security (confidentiality, completeness, or continued availability) from being assured
Compliance Risk The risk of suffering losses due to the failure of employees and executives to comply with corporate ethics or laws and regulations, and the risk of suffering losses due to lawsuits with customers and other parties in Japan
Legal Risk The risk of suffering losses due to the inappropriate conclusion of contracts, breaches of contract, or lawsuits with customers or other parties in relation to overseas offices
Human Resources Risk The risk of suffering losses due to problems in labor management or from the standpoint of workplace safety, and the risk of being unable to secure necessary human resources
Tangible Fixed Asset Risk The risk of suffering losses due to damage to tangible fixed assets as the result of natural disasters or external factors, or to negligence on the part of executives and employees

The Group classifies operational risks into the seven categories listed in the above table and monitors them by assigning departments responsible for individual risks. As the Group’s business becomes more sophisticated, diversified, and systemized, the accompanying risks become more varied. As a result, the importance of managing operational risk has grown each year.

Major Group companies control their operational risks appropriately by measures including risk control self-assessments (RCSAs), in accordance with rules on operational risk management set by Daiwa Securities Group Inc. In addition, the Group has taken other necessary measures, including the implementation of rigid rules concerning authority, the automation of office operations for reducing human errors, and the preparation of procedural manuals. Each Group company strives to reduce operational risk according to the nature of its own business.

  • *RCSA (Risk Control Self-Assessment) uses a predetermined assessment sheet to identify and assess operational risks, analyzes risks based on frequency of occurrence and impact, and evaluates and verifies efficacy of risk mitigation efforts.

(5) Reputational risk management

Reputational risk refers to the possibility of the Group sustaining unforeseen losses and the Group’s counterparties being adversely affected due to a deterioration of its reliability, reputation, and assessment caused by the spread of rumors or erroneous information. There are no uniform procedures for managing reputational risk because it can emanate from a variety of sources.

The Group has established various regulations under its Disclosure Policy, with particular emphasis on the management and provision of information. It has also set up the Disclosure Committee within Daiwa Securities Group Inc.
Each Group company is obligated to report information that could turn into reputational risk to the Disclosure Committee.
That way, Daiwa Securities Group Inc. can obtain and centrally manage information, and it disseminates accurate information in a prompt manner according to the decisions of the Disclosure Committee.

The Group strives to keep abreast of problems and occurrences that may affect its reputation so that if and when such problems occur, their impact on the Group can be minimized. It also acts to ensure that erroneous and inaccurate information is properly corrected, and that it responds appropriately to libel and other issues. The Group has public relations and investor relations systems in place to prevent and minimize risks regarding its reputation.

(6) Accounting and tax risk management

Accounting and tax risk is the risk of not conducting appropriate accounting treatment and disclosure in accordance with accounting or taxation standards, laws, and regulations, or of not filing or paying taxes appropriately, as well as the risk of losses arising as a result.

The Group strives to reduce accounting risk by operating in accordance with fundamental regulations related to internal controls on financial reporting, and by establishing, putting into practice, and striving to improve its internal controls on financial reporting.
In addition, by notifying principal Group companies of necessary reporting items related to tax risk management and receiving such items in a timely manner, the Group endeavors to appropriately determine the tax risk management status and risk conditions for the Group as a whole, thereby reducing its tax risk.

Tax Policy

The Daiwa Securities Group has enacted "Daiwa Securities Group Tax Policy" in aiming to develop corporate tax governance, and describes our code of conduct and standard of judgements in taxation.

Daiwa Securities Group Tax Policy

  1. 1. Daiwa Securities Group complies with laws and ordinances, and contributes to sustainable development of society through appropriate tax payments with high ethical standards.
  2. 2. Daiwa Securities Group rewards our shareholders by achieving sound profits based on proper and fair tax planning.
  3. 3. For cross border intra group transactions, Daiwa Securities Group sets an appropriate price, which can achieve adequate accountability under transfer price tax regulations.
  4. 4. The CFO, executive officer in charge of Finance, and Head of Finance Department of Daiwa Securities Group Inc. from time to time provide guidance and advice to subsidiaries and other departments within the Group as necessary, so that corporate governance over tax matters can be well shared and implemented throughout Daiwa Securities Group.

Business Continuity Plan (BCP)

To be prepared for disruptions of social infrastructures, we have drawn up a business continuity plan (BCP). The BCP prioritizes important operations to be restored or continued* in order to keep the financial markets open and protect customers’ economic activities. Disruptions of social infrastructure might make our head office functions, branches and data centers or other important facilities inoperative.

They can be caused by events such as earthquakes, fires, storms, floods, other extraordinary weather conditions, terrorism, large-scale power failures, and serious outbreaks of infectious diseases. In accordance with the BCP, we will not only ensure the safety of customers and our employees, and protect our assets, but will also strive to continue our vital operations in the financial markets where our business serves the public interest. For example, we boast Japan’s highest level backup center, and have established a system which enables us to easily switch to the alternate system in case of an emergency at headquarters. We can therefore continue vital operations through a substitute office location.

Prioritized operations to be restored or continued

  1. 1. Carrying out securities transactions traded in the markets and yet to be settled
  2. 2. Payment to our customers
  3. 3. New orders from customers to sell or cancel the following products and sell securities back to exit a long position in margin trading
    • Domestic listed shares, including closing long positions on margin transactions
    • MRF (money reserve funds)
    • Japanese government bonds for individual investors
    • Ordinary deposits

Measures to Address Disaster Risk by Region

Daiwa Securities has offices across Japan. As disaster risk differs amongst regions, it has formulated a disaster response plan for each sales branch and is preparing disaster relief supplies that reflect the disaster risk for each branch. The hazard maps created by the municipalities of respective regions are sent to branches and made available on our intranet.