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
To manage risks for the entire Group based on the Risk Appetite Framework(RAF), the Board of Directors of Daiwa Securities Group Inc. has approved the Risk Appetite Statement (RAS), which expresses the RAF in writing, and the Rules for Risk Management. The rules mainly 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. Based on the RAS and the Rules for Risk Management, the Board of Directors and the Audit Committee oversee risk management for the entire Group. 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. Management's proactive involvement of management in risk management
- 2. The structure of a risk management system that responds to features of the risks held by the Group
- 3. Understand overall risk based on integrated risk management, secure strong capital and the soundness of liquidity
- 4. Clarify the risk management process
Each of the Group companies conducts risk management suited to the risk profile and size of each business in accordance with the basic policies related to risk management. The Risk Management Department and responsible departments for each risk within Daiwa Securities Group Inc. monitor the risk management systems and risk status of Group companies. The risk status of Group companies grasped through such monitoring, as well as their risk management issues, is reported as necessary to the CRO, who is appointed from among the executive officers. The CRO gives directions to address the risk management system, risk status, and other risk issues for each company, verifies the effectiveness of risk management systems, and conducts reviews as necessary according to the business scale and characteristics and risk status of each company.
The CRO is in charge of reporting risk to the CEO and does not concurrently serve as the person responsible for internal audits or as a member of the Audit Committee.
The risk status and other risk issues of Group companies are reported to the Group Risk Management Committee, which is a sub-committee of the Executive Management Committee of Daiwa Securities Group Inc. The committee deliberates and decides on policies on risk management and specific measures. Risk management processes are also discussed and reviewed by the Group Risk Management Committee. The Group Risk Management Committee is structured separate from the Audit Committee, but the content of its meetings is also reported to the Audit Committee. The Board of Directors also verifies the effectiveness of risk management systems and processes through deliberation and decisions on matters related to the RAF, top risks, and so on. The risk management process is also discussed by the Group Risk Management Committee, and is reviewed based on suggestions and directions from executive officers. 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.
The Group utilizes its own accounts to temporarily hold product positions for sales purposes and to provide products to customers. Accordingly, the Group is subject to various risks, such as market risk due to market fluctuations and ineffective hedging, foreign currency and other liquidity risk, credit risk related to counterparties and issuers, operational risk that naturally occurs through the execution of business, and model risk resulting from using models for decision making. In addition, following the implementation of growth investment based on hybrid strategies, investment risk occurs as a result of deterioration in the business performance and credit status of investee companies, and changes in the market environment. Therefore, the Group utilizes stress tests*1 and top risk management to manage risk on an integrated basis, including measuring the impact on capital and liquidity within the Group from a forward-looking perspective.
- *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
Top Risks
Risk events that require special attention in light of our business characteristics are selected and managed as top risks. Top risks are selected by management. A framework is in place enabling management to recognize and discuss a wide range of risks during the selection process. Specifically, in order to comprehensively visualize a wide range of risk events, risk events are organized and extracted based on risk events collected internally and externally, and these are designated as candidates for top risks. The company’s directors and executive officers then select the top risks from among the candidates by making a forward-looking evaluation based on the degree of impact on the Group’s business performance and the likelihood of the risk event occurring.
Climate change in particular is considered one of our top risks. Scenarios are analyzed utilizing stress tests and the results are reported to management and disclosed.
Managing Climate Change Risks
List of top risks
| Risk event | Specific example |
|---|---|
| Worsening of international dispute and conflict | Intensifying war between Russia and Ukraine, U.S.-China conflict, etc. |
| Inflation concern and interest hike in U.S. | - |
| Increased awareness of social contribution (ESG) | Damage to the Group's reputation resulting from its ESG responses and disclosure being viewed as inadequate |
| Rapid spread of digital transformation (DX) | Decline in competitiveness due to inadequate DX responses |
| Climate change | Decline in value of assets under management and decrease in opportunities for sales due to climate change |
| Large-scale earthquakes and floods | Increase in various costs following disasters |
| Deteriorated performance and impaired asset values at investees | - |
| Cyberattacks | - |
| System failure | - |
| Compliance risk | Inappropriate act, etc. by officers and employees, including money laundering and insider trading |
| Information security risk | Leak of material information, etc. |
(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.
- *1Value at Risk (VaR) represents the maximum possible loss of a given trading portfolio with a given probability over a given time horizon.
- *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.
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)
| 20/6 | 20/9 | 20/12 | 21/3 | 21/6 | 21/9 | 21/12 | 22/3 | |
|---|---|---|---|---|---|---|---|---|
| VaR (Month-end) | 0.99 | 1.21 | 1.20 | 1.18 | 1.59 | 1.74 | 1.95 | 1.92 |
| Quarter | ||||||||
| High | 1.43 | 1.43 | 1.89 | 1.62 | 1.83 | 2.07 | 2.58 | 2.37 |
| Low | 0.75 | 0.90 | 0.94 | 1.05 | 0.82 | 1.35 | 1.43 | 1.55 |
| Average | 1.08 | 1.11 | 1.35 | 1.35 | 1.37 | 1.64 | 1.90 | 1.90 |
| By risk factor (Month-end) | ||||||||
| Equity | 0.21 | 0.33 | 0.37 | 0.40 | 0.25 | 0.41 | 0.24 | 0.40 |
| Interest | 1.25 | 0.97 | 1.16 | 1.22 | 0.66 | 1.28 | 1.29 | 1.20 |
| Currency | 0.24 | 0.29 | 0.41 | 0.31 | 0.45 | 0.49 | 0.48 | 0.51 |
| Commodities | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
(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.
(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 and the consolidated net stable funding 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 |
| Systems 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) Model risk management
Model risk refers to the risk that the Group will suffer direct and indirect losses resulting from errors in the development and implementation of models, or from their misuse.
In order to effectively manage model risk, the Group has clarified the roles and responsibilities of those involved in the models, and has established a mechanism to systematically manage models throughout their lifecycle. Specifically, the Group has prepared model verification and approval processes to manage models prior to use and during updating, and conducts monitoring and regular checks to manage models during use.
(6) Investment risk management
Investment risk refers to the risk that the value of an investment made by the Group will be damaged, or that additional funding will be required, and to the risk that the return on investment will be lower than expected due to deterioration of the business performance and credit status of the investee, and to changes in the market environment. This risk is managed at the portfolio level and at the individual investment level.
In terms of portfolio level management, the Group has set Group-wide risk limits on a per industry basis in order to appropriately manage the investment concentration condition, and regularly monitors this situation. In terms of individual investment level management, along with verifying risk prior to making the investment based on a certain standard, the Group monitors the risk condition following investment on an ongoing basis.
(7) 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.
(8) 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.
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. Carrying out securities transactions traded in the markets and yet to be settled
- 2. Payment to our customers
- 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.